California's Retirement Mandate: What Businesses Need to Know for 2025

Small businesses have until December 31, 2025 to comply with California's retirement mandate.

California continues its aggressive push to ensure all workers have access to a retirement savings plan. As 2025 approaches, the state's CalSavers program and other retirement plan mandates are entering their final phase of implementation, bringing new requirements for even the smallest businesses. Employers across the Golden State must be aware of these obligations to avoid significant penalties.

The CalSavers Mandate: A Closer Look

The cornerstone of California's retirement savings initiative is the CalSavers Retirement Savings Program. This state-sponsored program offers a simple, accessible way for employees to save for retirement through a Roth IRA. The key takeaway for businesses in 2025 is that nearly all California employers with one or more employees will be required to either register with CalSavers or offer a qualified private retirement plan.

Here's a breakdown of the deadlines and who is affected:

• Employers with 5 or more employees: The deadlines for these businesses have already passed (June 30, 2022, for 5+ employees; earlier for larger employers). If you fall into this category and are not yet compliant, immediate action is crucial to avoid escalating penalties.

• Employers with 1-4 employees: This is the critical group for 2025. Businesses with an average of 1 to 4 California-based employees in the preceding calendar year must register with CalSavers or provide a qualified alternative by December 31, 2025. Early notifications for this group began in February 2025.

Exemptions: While the mandate is broad, certain businesses are exempt:

• Businesses that already offer a qualified retirement plan (e.g., 401(k), SIMPLE IRA, SEP IRA).

• Businesses with no employees other than the owner(s).

• Government entities, religious organizations, and tribal organizations.

  
  

Retirement planning can help combat inflation, prepare for rising health care costs and provide for financial security and independence.

What Does California's Retirement Mandate Mean for Employers?

For businesses that don't currently offer a retirement plan and are not exempt, compliance with CalSavers involves a few key steps:

1. Registration: Employers must register their business through the CalSavers portal, using their Federal Employer Identification Number (EIN/TIN) and California payroll tax number.

2. Employee Roster Submission: Once registered, employers are required to submit a roster of eligible employees within 30 days.

3. Payroll Deductions: Employers facilitate the program by deducting contributions from participating employees' paychecks and remitting them to CalSavers. The default contribution rate is 5% of gross pay, automatically increasing by 1% annually up to 8%, unless the employee opts out or changes their rate.

4. Neutrality: Employers must remain neutral when discussing CalSavers with their employees, providing information without advocating for or against participation.

5. Ongoing Maintenance: Employers are responsible for adding new eligible employees within 30 days of their hire date and processing any opt-out requests or changes to contribution rates.

   
   

Important Note for Employers: CalSavers is designed to minimize employer responsibility. Employers are not required to make contributions to employee accounts, nor do they bear any fiduciary liability for the program's investment performance.

Penalties for Non-Compliance

California is serious about enforcing this mandate. Businesses that fail to comply after receiving notice of non-compliance can face significant penalties:

• $250 per eligible employee if non-compliance extends 90 days or more after the notice.

• An additional $500 per eligible employee if non-compliance extends 180 days or more after the initial notice.

• Annual notices with additional $500 penalties per employee may be issued until compliance is achieved.

  
  

The absolute best time to start saving for retirement is now, and the second best time is today.

While CalSavers offers a convenient solution, businesses are not limited to the state-sponsored program. Many employers opt to establish their own qualified retirement plan, such as a 401(k) or SIMPLE IRA, which can offer several advantages:

• Greater Flexibility: Private plans often provide a broader range of investment options, allowing for more tailored choices for employees.

• Employer Contributions: Unlike CalSavers, private plans allow employers to make matching or profit-sharing contributions, which can be a powerful tool for attracting and retaining talent, and may offer tax benefits for the employer.

• Higher Contribution Limits: Qualified plans generally have higher contribution limits compared to Roth IRAs offered through CalSavers.

• Loan Provisions: Some private plans may allow employees to take loans from their retirement savings, which is not an option with CalSavers.

  
  

Businesses considering a private plan should consult with a retirement plan administrator to explore options that best fit their specific needs and employee demographics.

Federal Developments: SECURE 2.0 Act in 2025

Beyond the state mandates, California businesses should also be aware of relevant federal legislation, specifically the SECURE 2.0 Act of 2022, which introduces new provisions impacting retirement plans in 2025:

• Automatic Enrollment (for new plans): Starting January 1, 2025, new 401(k) and 403(b) plans generally must automatically enroll employees with a default contribution rate between 3% and 10% of pre-tax earnings, increasing annually. (Plans established before 2023, and businesses with 10 or fewer employees or those less than three years old, are exempt).

• Part-Time Employee Eligibility: The act reduces the eligibility period for part-time employees to participate in 401(k) plans to two consecutive years of working 500+ hours.

• "Super" Catch-Up Contributions: For employees aged 60-63, the annual catch-up contribution limit for 401(k) plans increases to $11,250 in 2025 (if the employer's plan allows for it).

  
  

These federal changes aim to expand access to retirement savings and encourage greater participation, requiring employers to review and potentially update their plan documents and enrollment processes.

Conclusion

2025 marks a crucial year for California businesses regarding retirement plan compliance. With the final phase of the CalSavers mandate taking effect for smaller employers, and the ongoing implementation of SECURE 2.0 at the federal level, staying informed and proactive is essential. Whether opting for CalSavers or a private retirement plan, ensuring compliance by the December 31, 2025 deadline will safeguard businesses from penalties and contribute to the financial well-being of California's workforce.

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