A 401(k) is an employer-sponsored retirement savings plan established by the federal government. It enables employees to save and invest money on a tax-deferred basis, meaning they pay no taxes until distributions are made from their accounts. Employees can make regular contributions to their 401(k) accounts, which are then invested in various assets such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs), depending on risk tolerance. Businesses can also make matching or profit-sharing contributions to their employees' accounts. These contributions are generally made as a percentage of salary deferral, annual salary, or other criteria set by the employer. If offered, workers in California are encouraged to participate in their companies' 401(k) plans because of the various benefits. The sooner an employee saves for retirement and invests in a 401(k), the bigger the potential for financial gain. A 401(k) plan is a great way for companies to help their workers prepare for retirement. Aside from that, consider the following advantages: Offering a 401(k) plan can help you attract top talent. Potential employees are drawn to companies with a competitive benefits package, and a 401(k) plan is considered an attractive benefit option. It also impacts worker retention. Sponsoring a 401(k) plan shows your employees that you care about their financial future, increasing overall morale and job satisfaction. Additionally, your company can be given tax credits to cover the costs of setting up a 401(k) plan. Making matching or profit-sharing contributions can be considered part of your business expenses, qualifying you for tax deductions. There also sustainable 401(k) portfolio options that employers can offer their employees to give them the ability to invest in climate-friendly portfolios. You should also note that business owners and key employees may also participate in the 401(k) plan, allowing you another avenue to secure your financial future.What Is a 401(k) In California?
Benefits of a 401(k) in California
For Employers
For Employees
When contributing to a 401(k) plan, your employees can lower their taxable income. That means more of their money goes into the 401(k), and less is taxed by the Internal Revenue Service (IRS), leading to greater savings.
Employees also control their 401(k) account, meaning they can choose how much they want to contribute as salary deferrals up to a certain limit and how they want their money to be invested based on their personal financial goals and risk tolerance.
For 2023, the IRS set maximum employee 401(k) contributions to $22,500, with catch-up options of up to $7,500 for employees aged 50 or older.
Lastly, while early withdrawals are generally charged a 10% penalty, certain hardship distributions can be made penalty-free before age 59 ½, including qualified medical or educational expenses, some home repairs, rent, and funeral costs, among others.
A 401(k) plan provides employees access to funds in case of an emergency, which can be a major financial security blanket.
Penalties for Noncompliance With California 401(k) Laws
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You must comply with all state and federal regulations when creating and managing a 401(k) plan in California. As an employer, you must ensure that your plan complies with the Employee Retirement Income Security Act (ERISA).
ERISA places fiduciary duties on you to ensure that only qualified investments are made, employee contributions are reported accurately, and all necessary paperwork is filed in a timely manner.
If you fail to comply with ERISA regulations, you could be liable for civil or criminal penalties. Any losses resulting from fiduciary breaches are also the responsibility of the employer, who can be held financially liable for any damages.
Specifically, in California, private companies must offer retirement plans to their employees, be it a 401(k) or any other plan. Companies without retirement plans are mandated to enroll their employees under the CalSavers Program.
Failure to offer a 401(k), CalSavers, or other retirement plans can result in fines of $250 per employee for the first 90 days and an additional $500 per employee after 180 days.
Other Retirement Plans in California
Besides a 401(k) plan, there are other retirement options you can offer to your employees in California. Consider the following:
CalSavers
It is a state-run program created to increase worker participation in retirement savings plans. California requires all companies with at least one employee to enroll their workers in the CalSavers program if they do not yet sponsor their own company retirement plan.
Under CalSavers, employees are automatically enrolled in a retirement savings account. It is set up like a Roth individual retirement account (IRA) with contribution limits at a maximum of $6,500 with additional $1,000 catch-up for employees 50 or older.
Employees can control their salary deferrals up to the set limits and opt out of CalSavers anytime.
To help employers, CalSavers entails no startup costs. Since it is state-run, employers are also free from administrative costs and fiduciary responsibility. Companies that fail to enroll in CalSavers can be charged fines of up to $250 to $500 per employee.
SIMPLE IRA
Savings Incentive Match Plan for Employees (SIMPLE) IRA is the best choice for small employers. It provides an easy way for employees to set aside pre-tax income for retirement.
Employers must match employee contributions up to 3% of their salary or make a 2% contribution on behalf of all eligible employees, regardless of whether they make salary deferrals.
The contribution limit for SIMPLE IRAs is $15,500 in 2023 and an additional $3,500 if an employee is age 50 or older.
SEP Plan
Simplified Employee Pension Plans allow you to make contributions for your employees. These are intended for self-employed and small business owners who want to provide retirement benefits without maintaining a more complicated plan.
Unlike other types of plans, employees cannot make their own contributions to a SEP plan. The employer can contribute up to 25% of a worker’s salary or up to a maximum of $66,000, whichever is less.
Comparing 401(k) and Other Retirement Options in California
Look how 401(k) plans compare with CalSavers, SIMPLE IRA, and SEP plans.
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From the above data, it is clear that a small business 401(k) plan has the highest possibility of initial savings, especially if an employer provides matching or profit-sharing contributions. It can be very attractive to current and potential employees.
SEP Plan also offers potentially higher contributions, but your company must bear such. It might be feasible only for self-employed and small business owners for their own retirement savings.
SIMPLE IRA provides simple management, especially compared to 401(k) plans. It offers modest contribution limits, which may be easier for your company to provide while ensuring retirement savings for your employees.
CalSavers offers the lowest savings possible but is also the simplest and easiest to manage. Your company incurs no startup and administrative costs since it is the State of California that will take care of its management.
The Bottom Line
A 401(k) is a retirement savings plan that allows employees to set aside money from their paychecks before taxes. The funds placed in a 401(k) grow tax-deferred, meaning the employee does not pay taxes on the gains until they withdraw the money at retirement.
All private companies with at least one employee must offer a retirement savings plan under California law. Employers may offer 401(k)s or any other type of qualified retirement plan, such as SEP plans, SIMPLE IRA, or the state's own CalSavers program.
Failure to offer employees any retirement plan can make your company liable to pay fines of up to $250 to $500 per worker. California law also allows employees to opt out of these retirement plans.
If your company operates in California, it is best to consult a financial advisor or attorney, and schedule a call with Carbon Collective to compare the benefits of different retirement plans. Consider factors such as employer contributions, fees, administrative costs, and investment options when choosing.
What Employers Should Know About the 401(k) Law in California FAQs
What is the law for 401k in California?
In California, 401(k) plans are subject to the same federal laws that apply to all 401(k) plans nationwide. The Employee Retirement Income Security Act (ERISA) regulates 401(k) plans in California and sets the standards for plan design, administration, disclosure, and funding.
Is there a minimum amount you need to contribute to a 401(k) plan in CA?
There is no minimum amount. However, California follows the annual limits set by the Internal Revenue Service, which is at $22,500 in 2023. Employees 50 and older are also allowed a catch-up contribution of up to $7,500.
Who is eligible for a California 401(k) plan?
Any employee who works in California and earns a salary is eligible for a 401(k) plan.
What are the penalties for noncompliance with California 401(k) laws?
Employers can be penalized for failing to comply with federal and state 401(k) regulations. Penalties may include fines, civil penalties, and criminal prosecution. Additionally, private companies with 5 or more employees who fail to enroll their workers in any retirement plan will be fined $250 to $500 per employee.
Do employers need to offer 401k in California?
Employers need to offer any retirement plan, not necessarily just 401(k). They may offer SIMPLE IRAs or SEP plans. California also runs CalSavers.
