Employers in California should be ready for a big change in the retirement law to take effect over the next three years. This change comes in the form of a new California program called CalSavers (formerly known as Secure Choice). CalSavers is a state-sponsored individual retirement account (“IRA”) program similar to existing programs in Oregon and Illinois.

CalSavers applies to any employer in California with at least five employees. The law requires California employers to either offer their employees a “qualified” retirement plan or facilitate their employees’ enrollment in a state-sponsored payroll-deduction plan. Qualified plans are those governed by the Employee Retirement Income Security Act (“ERISA”), the federal law designed to protect private-sector pensions. These plans can range from 401(k) plans to automatic payroll-deduction IRAs.

Employers who do not provide a qualified plan for their employees must facilitate their employees’ enrollment in the state-sponsored plan. This plan differs from a traditional 401(k) based on the level of employer involvement it allows. For example, employers do not have the option of matching an employee’s contributions under the state-sponsored plan. An employee’s enrollment in the state-sponsored plan will come at no cost to employers beyond the time invested in facilitating enrollment.  An employer must also enable employees to make a direct payroll contribution to their CalSavers account and transmit the contribution to a third party, known as an administrator, or designate their payroll services provider to facilitate on their behalf. Beyond that, the employer’s responsibilities under the state-sponsored plan consist primarily of providing information about the program to their employees.

Notably, CalSavers also has a number of safeguards in place to limit employers’ liabilities and responsibilities. For example, employers will not have any liability for an employee’s decision to participate in or opt-out of the CalSavers program. Furthermore, employers will not be fiduciaries of the program or have any liability for the investment decisions of participating employees. Finally, employers will not be responsible for the administration, investment performance, or payment of benefits earned by participating employees.

California employers should prepare to comply with CalSavers. Employers without a qualified retirement plan who do not facilitate the payroll-deduction could be fined as much as $500 per eligible employee. CalSavers will be open to all eligible employers starting July 1, 2019. After that, the employer mandate to comply will take effect on a rolling basis based on the size of the employer.

Size of employer Deadline
Over 100 employees June 30, 2020
Over 50 employees June 30, 2021
Five or more employees June 30, 2022

Hogan Lovells is prepared to help California employers comply with CalSavers. For more information or for any other employment matter impacting your business, please contact the authors of this article or the attorney you regularly work with at Hogan Lovells.

 

The new draft tax bill, unveiled last week by the Trump administration has many provisions which would significantly affect many businesses in the United States. This post does not focus on all of the implications for the draft tax bill for companies, but highlights two provisions, which, if enacted, will turn the world of executive compensation for both public and private companies upside down.

Repeal of 409A/Replacement with 409B (Title III, Subtitle I, Sec.3801)

Section 409A would be repealed and replaced by 409B, which effectively would end most deferred compensation.  Under 409B, an employee would be taxed on non-qualified compensation as soon as there is no substantial risk of forfeiture with regard to that compensation.  The only substantial risk of forfeiture would be performance of services (i.e., time-based vesting).  Performance vesting and covenants not to compete would not be considered a substantial risk of forfeiture.  It also would apply to equity compensation such as RSUs, PSUs, SARs and stock options as well as to severance payments.  Section 409B would be effective for amounts attributable to services performed after 2017. Current law would apply to existing non-qualified deferred compensation arrangements until the last tax year beginning before 2026, when such arrangements would become subject to the new provision.

Changes to 162(m) (Title III, Subtitle I, Sec.3802)

Section 162(m) would be amended in two important ways.  First, the exceptions to the $1 million deduction limitation under 162(m) for commissions and performance-based compensation would be repealed. Thus, performance based compensation and options/SARs no longer would be exempt.  Second, the definition of “covered employee” would be revised to include the CEO, the CFO and the three other highest paid employees (instead of the CEO and the next four highest compensated officers).  Once an individual qualifies under the definition, the deduction limitation would apply for federal tax purposes so long as the corporation pays remuneration to that person or his or her beneficiaries. These changes would be effective for tax years beginning after 2017.

While of course this is proposed legislation, and one doesn’t know where this will go or if it will be revised along the way, it is important for employers to understand the possible impact of these provisions. As was the case when 409A was first enacted, there will likely be frustration and confusion along the way. Employers should keep an eye on this draft bill, and, if the bill becomes law, it would be prudent to seek out executive compensation and employment lawyers for guidance. Stay tuned, this could get very interesting…