Category Archives: State Auto-IRA Programs

CalSavers: Employers Should Remain Compliance-Ready, Despite Court Challenges

Effective June 30, 2020, California employers with 100 or more employees, that do not maintain or contribute to a retirement plan, must participate in the CalSavers Program, by forwarding salary deferral contributions to the Program on behalf of most employees.  The CalSavers Program expands to employers with between 50 and 99 employees on June 30, 2021, and to employers with 5 or more employees on June 30, 2022, again presuming that the employer does not have a retirement plan in place  Employers of any size may voluntarily participate in CalSavers at the current time, and self-employed individuals, including those in the gig economy, may enroll effective September 1, 2019.

How do business owners count employees in order to determine their applicable CalSavers effective date?  What is the impact, if any, of being part of a “controlled group” of businesses, or of using a staffing or payroll agency?  What about out-of-state employers, or California-based employers with out-of-state employees? Below we do a “deep dive” on these and other CalSavers employer coverage issues.  For more information, you can also check our prior post on CalSavers.

Before we get to the details, CalSavers has not cleared all legal obstacles in its path as of this writing. The U.S. Department of Justice has stated that it is considering intervening in the federal court case over whether ERISA preempts CalSavers, and has asked for additional time, to September 13, 2019, to make its decision. CalSavers earlier survived a preemption challenge brought by the Howard Jarvis Taxpayers Association, succeeding in having the complaint dismissed, but the Association filed an amended complaint. The court’s decision on the amended complaint was pending when the Department of Justice got involved. We will continue to track the pending court challenge to CalSavers and update you on future developments.

  1. How do I count employees to determine when my business is subject to CalSavers? To determine employee headcount, take the average number of employees that your business reported to EDD for the quarter ending December 31 and the previous three quarters, counting full- and part-time employees.  California Code of Regulations Title 10, § 1001(a) (2019). So, for example, if you reported over 100 employees to EDD for the quarter ending December 31, 2019 and the previous three quarters, combined, you would need to register your business with CalSavers on June 30, 2020.
  2. What if my business is part of a controlled group of corporations? The CalSavers regulations do not address this issue. They appear to require each business with a separate federal EIN/California payroll tax account number to register or opt-out of the program.   So, for example, if your business has 25 employees but you are part of a controlled group that includes over 100 employees, and there is no controlled group plan in place, you would not need to register with CalSavers on June 30, 2020. This would also be the case if your business is part of a group of trades or businesses under common control (e.g. business types other than corporations), or an affiliated service group.
  3. What if my business contributes to a controlled group 401(k) plan or other retirement plan? Does my business qualify for the CalSavers exemption? If your business is part of a controlled group and contributes to the controlled group retirement plan on behalf of its employees the CalSavers exemption should apply, as it includes businesses that either “maintain” or “contribute to” a retirement plan. Cal. Code Regs. tit. 10, § 1000(m) (2019). The answer is the same if you are part of a group of trades or businesses under common control, or affiliated service group, that sponsors the retirement plan.
  4. What if my business is part of a controlled group, and the controlled group maintains a plan, but the plan excludes my business and my employees cannot participate? CalSavers personnel have informally stated that the CalSavers exemption applies even in this situation, because the business is still part of a controlled group that maintains a plan. Businesses that maintain their own plan, but that exclude a subset of employees from the plan (within the requirements of minimum coverage and nondiscrimination testing), even a majority of employees, are also exempt, per informal CalSavers commentary.  In such situations, an exempt employer cannot enroll their business in CalSavers voluntarily but can forward employee contributions on behalf of employees who have established a CalSavers account through prior employment.
  5. How do I do the employee headcount if my business uses a staffing agency or payroll company? Whether the staffing agency/payroll company or its “client” – your business – is the employer for headcount purposes depends upon what type of agency is involved. The CalSavers regulations refer to a“Tri-Party Employment Relationship,” which means that the employer enters into a service contract with a third-party entity for services including, but not limited to, payroll, staffing (both temporary and non-temporary), human resources, and employer compliance with laws and regulations. That category is further sub-divided into four categories.
  6. What categories of staffing/payroll companies do the CalSavers rules identify? The CalSavers rules refer to the following: Temporary Agencies, Leasing Agencies, Professional Employer Organizations or PEOs, and Motion Picture Payroll Services Companies. The basic rule is that the agency is the employer if you use a temporary agency or leasing agency, but your business is the employer for CalSavers headcount purposes if you use a PEO or Motion Picture Payroll Services Company. However, conditions apply! More details are provided in following questions.

Important Note: the Tri-Party Employment Relationship categories overlap to some degree, but not entirely, with federal rules governing who an employer is under ERISA employment benefit plans. The discussion here applies only to determining coverage under the CalSavers Program. For more information on ERISA benefit plan coverage issues raised by staffing agency and payroll company workers, see S. Derrin Watson’s treatise, Who’s the Employer esource, chapters 3, 5, and 6.

  1. What is a temporary agency or leasing agency for purposes of the CalSavers rules? California Unemployment Insurance Code § 606.5 (b) defines a temporary services employer or leasing employer as a business that does all of the following:
  • Negotiates with clients or customers for such matters as time, place, type of work, working conditions, quality, and price of the services.
  • Determines assignments or reassignments of workers, even though workers retain the right to refuse specific assignments.
  • Retains the authority to assign or reassign a worker to other clients or customers when a worker is determined unacceptable by a specific client or customer.
  • Assigns or reassigns the worker to perform services for a client or customer.
  • Sets the rate of pay of the worker, whether or not through negotiation.
  • Pays the worker from its own account or accounts.
  • Retains the right to hire and terminate workers.

If your business uses a temporary or leasing agency you should review the terms of your services agreement with them and confirm that it meets all of these requirements. If it does not, please see the response to Question 10.

  1. What is a PEO for purposes of the CalSavers rules? The CalSavers rule incorporate the definition found in Section 7705(e)(2) under the Internal Revenue Code, which describes a PEO as a business that does all of the following:
  • assumes responsibility for payment of wages to such individual, without regard to the receipt or adequacy of payment from the customer for such services,
  • assumes responsibility for reporting, withholding, and paying any applicable taxes [ . . . ] with respect to such individual’s wages, without regard to the receipt or adequacy of payment from the customer for such services,
  • assumes responsibility for any employee benefits which the service contract may require the certified professional employer organization to provide, without regard to the receipt or adequacy of payment from the customer for such benefits,
  • assumes responsibility for recruiting, hiring, and firing workers in addition to the customer’s responsibility for recruiting, hiring, and firing workers,
  • maintains employee records relating to such individual, and
  • agrees to be treated as a certified professional employer organization for purposes of section 3511 with respect to such individual.

If your business uses a PEO you should review the terms of your services agreement with them and confirm that it meets all of these requirements. If it does not, please see the response to Question 10.

  1. What is a Motion Picture Payroll Services Company for purposes of the CalSavers rules? If a payroll services company in the motion picture industry meets all of the following criteria as set forth in California U.I. Code § 679(f)(4), then the “employer” is the client motion picture production company:
  • Contractually provides the services of motion picture production workers to a motion picture production company or to an allied motion picture services company.
  • Is a signatory to a collective bargaining agreement for one or more of its clients.
  • Controls the payment of wages to the motion picture production workers and pays those wages from its own account or accounts.
  • Is contractually obligated to pay wages to the motion picture production workers without regard to payment or reimbursement by the motion picture production company or allied motion picture services company.
  • At least 80 percent of the wages paid by the motion picture payroll services company each calendar year are paid to workers associated between contracts with motion picture production companies and motion picture payroll services companies.

If your business uses a motion picture payroll services company you should review the terms of your services agreement with them and confirm that it meets all of these requirements. If it does not, please the response to Question 10.

  1. What if my business uses a third party staffing or payroll arrangement that does not fall within any of those definitions? In such instance, your business will be considered the employer for California payroll tax purposes per California Unemployment Insurance Code § 606.5(c), and likely for CalSavers employer coverage (employee headcount) purposes. The cited Unemployment Insurance Code section clarifies that the staffing or payroll company is considered a mere agent of your business in such instances, and is not a separate employing entity for payroll tax purposes.
  2. Does CalSavers apply to out-of-state employers? An employer’s eligibility is based on the number of California employees it employs. Eligible employees are any individuals who have the status of an employee under California law, who receive wages subject to California taxes, and who are at least 18 years old. If an out-of-state employer has more than 100 employees meeting that description, then as of June 30, 2020 it would need to either sponsor a retirement plan, or register for CalSavers.
  3. Does CalSavers apply to businesses located in California, with workers who perform services out of state? Yes, if the employer is not otherwise exempt, and if they have a sufficient number of employees who have the status of an employee under California law, who receive wages subject to California taxes, and who are at least 18 years old.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  (c) 2019 Christine P. Roberts, all rights reserved.

2 Comments

Filed under Affiliated Service Groups, CalSavers Program, Common Control Issues, Controlled Groups, Gig Economy, Payroll Issues, Payroll Services, Professional Employer Organizations, Staffing Agencies, State Auto-IRA Programs

California Employers: Get Ready for the CalSavers Program

Beginning on July 1, 2019, California private employers with 5 or more employees, who do not already sponsor a retirement plan, may enroll in the CalSavers Retirement Savings Program (CalSavers).   Mandated employers must enroll in CalSavers according to the following schedule:

  • Over 100 employees – June 30, 2020
  • 50-99 employees – June 30, 2021
  • 5-49 more employees – June 30, 2022

Below, we describe the key features of the CalSavers program.

  • CalSavers is the byproduct of California Senate Bill 1234, which Governor Brown signed into law in 2016. It is codified in Title 21 of the Government Code and in applicable regulations. It creates a state board tasked with developing a workplace retirement savings program for employers with at least 5 employees that do not sponsor their own retirement plans (“Eligible Employers”). This may mean a 401(k) plan, a 403(b) plan, a SEP or SIMPLE plan, or a multiple employer (union) plan.
  • CalSavers applies to private for-profit and non-profit employers, but not to federal or state governmental entities.
  • CalSavers calls for employees aged at least 18, and receiving a Form W-2 from an eligible employer, to be automatically enrolled in the CalSavers program after a 30 day period, during which they may either opt out, or customize their contribution level and investment choices.
  • The default is an employee contribution of 5% of their wages subject to income tax withholding, automatically increasing each year by 1% to a maximum contribution level of 8%. Employer contributions currently are prohibited, but may be allowed at a later date.
  • Prior to their mandatory participation date, Eligible Employers will receive a notice from the CalSavers program containing an access code, and a written notice that may be forwarded to employees. Eligible Employers must log on to the CalSavers site to either register online, or certify their exemption from Calsavers by stating that their business already maintains a retirement plan. The link to do so is here. To do either, you will need your federal tax ID number and your California payroll tax number, as well as the access code provided in the CalSavers Notice.
  • Eligible Employers who enroll in CalSavers will provide some basic employee roster information to CalSavers. CalSavers will then contact employees directly to notify them of the program and to instruct them about how to enroll or opt-out online. Those who enroll will have an online account which they can access in order to change their contribution levels or investment selections.
  • Once an Eligible Employer has enrolled in CalSavers, their subsequent obligations are limited to deducting and remitting each enrolled employee’s contributions each pay period, and to adding new eligible employees within 30 days of hire (or of attaining eligibility by turning age 18, if later).
  • Eligible employers may delegate their third party payroll provider to fulfill these functions, if the payroll provider agrees and is equipped to do so.
  • Eligible Employers are shielded from fiduciary liability to employees that might otherwise arise regarding investment performance or other aspects of participation in the CalSavers program.
  • There are employer penalties for noncompliance. The penalty is $250 per eligible employee for failure to comply after 90 days of receiving the CalSavers notification, and $500 per eligible employee if noncompliance extends to 180 days or more after the notice.
  • Eligible Employers must remain neutral about the CalSavers program and may not encourage employees to participate, or discourage them from doing so. They should refer employees with questions about CalSavers to the CalSavers website or to Client Services at 855-650-6918 or clientservices@calsavers.com.

The CalSavers program was challenged in court by a California taxpayer association, on the grounds that it was preempted by ERISA as a consequence of the automatic enrollment feature.[1] On March 29, 2019, a federal court judge concluded that ERISA did not prevent operation of the CalSavers program, because the program only applies to employers who do not have retirement plans governed by ERISA.  The taxpayer association is deciding whether to amend their complaint by May 25, 2019, or appeal the decision to the Ninth Circuit.  Therefore, further litigation may ensue, but after this important early victory the timely rollout of CalSavers seems likely, and employers should act accordingly.  (Programs similar to CalSavers are up and running in Oregon and Illinois, and have been proposed in a handful of other states.)

Employers reviewing this information should pause to re-examine their earlier decisions against maintaining a retirement plan for employees. The benefit of sponsoring your own plan is that it will bear the “brand” of your business and will serve to attract and retain quality employees.  Further, the administrative functions you must fulfill in order to participate in CalSavers are comparable to those required by a SEP or SIMPLE plan, both of which offer larger contribution limits and an employer deduction to boot.  If mandatory participation in CalSavers is bearing down on your business, now is a good time to talk to a retirement plan consultant, or your CPA or attorney, to determine whether you can leverage the time investment CalSavers will require, into a retirement arrangement that offers considerably more to your business and your employees.

In the meantime, here are some online resources for Eligible Employers:

  • Employer checklist – a punchlist to help you prepare for enrollment.
  • CalSavers Program Disclosure Booklet – this goes into significant detail about the way CalSavers contributions will be invested; notably the cost of these investments (consisting of an underlying fund fee, a state fee, and a program administration fee), will range at launch between $0.83 to $0.95 for every $100 invested, which is approximately twice the cost load for typical 401(k) investments.  It is expected that the fees will drop as the assets in the program grow, according to a breakpoint schedule approved by the CalSavers board and program administrator.
  • Online FAQ

 

[1] A Department of Labor “safe harbor” dating back to 1975 excludes “completely voluntary” programs with limited employer involvement from the definition of an ERISA plan.  29 C.F.R. § 2510.3-2(d).  The Obama administration finalized regulations in 2016 that would have expressly permitted state programs like CalSavers as exempt from ERISA coverage. However, Congress passed legislation in 2017 that repealed those regulations.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2019 Christine P. Roberts, all rights reserved.

2 Comments

Filed under 401(k) Plans, 403(b) Plans, CalSavers Program, ERISA, IRA Issues, Profit Sharing Plan, State Auto-IRA Programs

State Auto-IRA Programs: What Employers Need to Know

pelskgra2nu-fabian-blank

California and four other states (Connecticut, Illinois, Maryland and Oregon) have passed legislation requiring employers that do not sponsor employee retirement plans to automatically withhold funds from employees’ pay, and forward them to IRAs maintained under state-run investment programs. Provided that these auto-IRA programs meet safe harbor requirements recently defined by the Department of Labor in final regulations, the programs will be exempt from ERISA and employers cannot be held liable for investment selection or outcome.  The DOL has also finalized regulations that would permit large cities and other political subdivisions to sponsor such programs where no statewide mandate exists; New York City has proposed its own such program, tentatively dubbed the New York City Nest Egg Plan.

In light of this growing trend, what do employers need to know about auto-IRA programs?   Some key points are listed below:

  1. Some Lead Time Exists. Even for state auto-IRA programs that become effective January 1, 2017 (e.g., in California and Oregon), actual implementation of employee contributions is pushed out to July 1, 2017 (in Oregon) and, in California, enrollment must wait until regulations governing the program are adopted. The California program, titled the California Secure Choice Retirement Savings Program, also phases in participation based on employer size. Employers with 100 or more employees must participate within 12 months after the program opens for enrollment, those with 50 or more within 24 months, and employers with fewer than 50 employees must participate within 36 months. These deadlines may be extended, but at present the earliest round of enrollment is anticipated to occur in 2019.
  2. Employer Involvement is Strictly Limited. The DOL safe harbor prohibits employer contributions to auto-IRAs and requires that employers fulfill only the following “ministerial” (clerical) tasks:
    • forwarding employee salary deferrals to the program
    • providing notice of the program to the employees and maintaining contribution records
    • providing information to the state as required, and
    • distributing state program information to employees.  Note that in California, the Employment Development Department will develop enrollment materials for employers to distribute, and in addition a state-selected third party administrator will collect and invest contributions, effectively limiting the employer role to forwarding salary deferrals.
  3. Employers Always Have the Option of Maintaining their Own Plan. Generally the state auto-IRA programs established to date exempt employers that maintain or establish any retirement plan (401(k), pension, SEP, or SIMPLE), even plans with no auto-enrollment feature or employer match used to encourage employee salary deferrals. Therefore employers need not be significantly out of pocket (other than for administrative fees) to avoid a state auto-IRA mandate. Employers should bear in mind that an employer-sponsored retirement program, even if only a SEP or SIMPLE IRA, helps to attract and retain valued staff, and should consider establishing their own plan in advance of auto-IRA program effective dates for that reason.
  4. Penalties May Apply. California’s auto-IRA program imposes a financial penalty on employers that fail to participate.   The penalty is equal to $250 per eligible employee if employer failure to comply lasts 90 or more days after receipt of a compliance notice; this increases to $500 per employee if noncompliance extends 180 or more days after notification. The Illinois auto-IRA program imposes a similar penalty.
  5. Voluntary Participation in Auto-IRA Program May Create an ERISA Plan. One of the requirements of the DOL safe harbor is that employer participation in auto-IRA programs (referred to as “State payroll deduction savings programs” be compulsory under state law. If participation is voluntary, an employer will be deemed to have established an ERISA plan. In theory, this rule could be triggered when an employer that was mandated to participate later drops below the number of employees needed to trigger the applicable state mandate (for instance, a California employer that drops below 5 employees), but continues to participate. The DOL leaves it to the states to determine whether participation remains compulsory for employers despite reductions in the number of employees.   The DOL also notes that, under an earlier safe harbor regulation from 1975, an employer that is not subject to state mandated auto-IRA programs can forward employees’ salary deferrals to IRAs on their behalf without triggering ERISA, provided that the employee salary deferrals are voluntary and not automatic.   The DOL final regulations can be read to suggest that a payroll-to-IRA forwarding arrangement that is voluntary and that meets the other requirements of the 1975 safe harbor will constitute a pre-existing workplace savings arrangement for purposes of exempting an employer from a state-mandated auto-IRA program.
  6. The Trump Administration Will Likely Support Auto-IRA Programs. Early and necessarily tentative conclusions are that the Trump Administration will continue to support the DOL’s safe harbor regulation exempting auto-IRA programs from ERISA, as well as other state-based efforts to address the significant savings gap now known to confront much of the country’s workforce.   One unknown variable is the degree to which the Trump Administration will be influenced by opposition to the programs mounted by the financial industry. Until the direction of the Trump Administration becomes clearer, employers that do not currently maintain a retirement plan should track auto-IRA legislation in their state or city and otherwise prepare to comply with a state or more local program in the near future, ideally by adopting their own retirement plan for employees.

 

Leave a comment

Filed under 401(k) Plans, 403(b) Plans, California Secure Choice Retirement Savings Program, ERISA, Fiduciary Issues, Payroll Issues, State Auto-IRA Programs