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Do I Need to Offer My Employees a 401(k)? What You Need to Know

Retirement plan with glasses, pen, and calculator; document is mock-up

Company-sponsored 401(k)s and retirement plans are the stuff of only multinational corporations, right? Not necessarily and in California they are more than a perk; they are now required of most employers.

A little over a year ago, the State of California mandated that all employers in the state with at least five W-2 employees must provide some sort of qualified retirement savings plan—Beyond the standard 401(k), they can choose from other options such as 401(a), 403(a), 403(b), 408(k), 408(p) and 457(b) plans. Earlier this month, the state updated those requirements to indicate that any business with one employee must now offer a 401(k) or other qualified retirement plan by the end of 2025. There are limited exemptions when it comes to sole proprietorships and businesses where the one employee is the owner, but in general, the rule applies to most companies in the state.

If the company does not offer a sponsored qualified retirement plan, then it has to enroll their employees in the state-run option, known as CalSavers. While it may seem like the CalSavers option is ideal for your business, it truly does not offer the flexibility and customization your business likely needs — often with inferior investment options.

One of the largest drawbacks of the CalSavers program is that the employees are enrolled into a Roth Individual Retirement Account (IRA), a post-tax investment vehicle which only allows up to $6,500 in annual contributions. Roth IRA contributions do nothing to lower an employee’s annual taxable income as these contributions are considered “post tax” and are then able to be withdrawn tax free upon retirement.

However, many employees likely prefer a pre-tax contribution option which lowers your overall taxable income. Setting up a 401(k) or other qualified plan can allow your employees to lower their tax burden, save more for retirement (401(k) plans have a much higher contribution limit) and open up more investment vehicles beyond some of the standard bond and index funds offered through CalSavers.

Through its partnership with Alkeme, Snapp & Associates is able to work with clients to create a retirement plan for your business and employees that not only meets all state mandates with competitive administrative costs, but also is reviewed and structured in such a way to minimize your liability. What many business owners fail to realize is that by being the ‘sponsor’ of the retirement plan, they become a fiduciary, meaning there is a legal responsibility to protect the financial interests of participants.

As the fiduciary for your company’s 401(k), you are responsible for ensuring you comply with all parts of the Employee Retirement Income Security Act (ERISA). This act includes provisions that state you must only place employee funds in qualified investments, complete all necessary reporting to both employees and state and federal agencies and file all paperwork in a timely manner. If you fail to do so, you could be subject to civil or even criminal penalties, with additional liability for potential financial compensation to employees for any damages.

For many business owners this is a daunting task and one that can be extremely costly if ignored. Failure to offer a 401(k) option or enrollment in CalSavers (or any other retirement plan) can generate hundreds of dollars in fines per employee after 90 days and 180 days of non-compliance. Working with an investment professional like the team at Alkeme through your Snapp broker offers peace of mind that you are creating a plan that is both in compliance and optimally beneficial for your employees as well.

Contact your Snapp & Associates agent or broker to arrange a complimentary review of your options, available plans and strategies to maximize your company’s overall retirement savings platform.

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