401(k) plans are employer-sponsored retirement savings plans that allow employees to set aside a portion of their paycheck before taxes into an investment account. In California, 401(k) plans are not mandatory for employers to offer. However, employers who do offer 401(k) plans must comply with certain federal and state laws, including those relating to employee contributions, investment options, and distributions. Employees who participate in 401(k) plans have the opportunity to save for retirement on a tax-advantaged basis and may also receive matching contributions from their employer.
California 401(k) Contribution Limits
In California, employees have the option to contribute to a 401(k) plan, which allows them to save for retirement on a tax-advantaged basis. The amount that an employee can contribute to their 401(k) plan each year is limited by the Internal Revenue Service (IRS). For 2023, the contribution limits for California 401(k) plans are as follows:
- Employee elective deferral limit: $22,500
- Employer matching contribution limit: $66,000
- Total annual contribution limit: $66,000 (plus catch-up contributions for participants age 50 or older)
In addition to the employee elective deferral limit and the employer matching contribution limit, there is also a catch-up contribution limit for participants who are age 50 or older. For 2023, the catch-up contribution limit is $7,500.
| Contribution Type | California 401(k) Contribution Limits |
|---|---|
| Employee elective deferral limit | $22,500 |
| Employer matching contribution limit | $66,000 |
| Total annual contribution limit | $66,000 (plus catch-up contributions for participants age 50 or older) |
| Catch-up contribution limit (age 50 or older) | $7,500 |
Exceptions to 401(k) Mandatory Contributions
As discussed, employers with 5 or more employees in California are required to offer a 401(k) plan. However, there are a few exceptions to this rule:
- Government employers, including state and local governments, are not subject to the 401(k) mandate.
- Churches and other religious organizations are exempt from the 401(k) mandate.
- Businesses with fewer than 5 employees are not required to offer a 401(k) plan.
- Employers that offer a comparable retirement plan, such as a defined benefit plan, are exempt from the 401(k) mandate.
If you are an employer that meets one of these exceptions, you are not required to offer a 401(k) plan to your employees.
Contribution Requirements
For employers that are required to offer a 401(k) plan, the following contribution requirements apply:
| Contribution Type | Minimum Contribution |
|---|---|
| Employee Elective Deferrals | Up to 100% of compensation, subject to annual limits |
| Employer Matching Contributions | At least 50% of employee elective deferrals, up to 3% of compensation |
| Profit-Sharing Contributions | At least 2% of compensation for all eligible employees |
Employers are also required to make a top-up contribution to the 401(k) plan for employees who are not highly compensated. The top-up contribution is equal to 0.5% of compensation, up to a maximum of $255.
Employer Responsibilities for 401(k) Plans
In California, employers are not legally obligated to offer a 401(k) plan to their employees. However, if an employer chooses to offer a 401(k) plan, they must comply with the following responsibilities:
- Establish the plan. This involves creating a plan document and obtaining a determination letter from the IRS.
- Administer the plan. This includes enrolling employees, collecting contributions, and investing the assets.
- Provide information to employees. Employers must provide employees with information about the plan’s features, benefits, and risks.
- Comply with ERISA. The Employee Retirement Income Security Act (ERISA) sets minimum standards for retirement plans. Employers must comply with ERISA’s requirements for fiduciary duty, reporting, and disclosure.
Failure to comply with these responsibilities can result in penalties and fines. Employers should work with a qualified retirement plan advisor to ensure that they are meeting their obligations.
California Retirement Savings Programs
California has taken significant steps to encourage retirement savings through various programs, including but not limited to the following:
CalSavers Retirement Savings Program
CalSavers is a state-sponsored retirement savings program designed for private-sector employees who do not have access to an employer-sponsored retirement plan. Employees can make voluntary contributions from their paychecks, and the state provides matching contributions for low-income earners:
- Employees are automatically enrolled in CalSavers unless they opt out.
- Employers are required to facilitate employee participation in CalSavers.
- Contributions are made through payroll deductions, with no fees for contributions or account maintenance.
California Secure Choice Retirement Savings Trust Program
The California Secure Choice Retirement Savings Trust Program is an alternative retirement savings program for businesses with five or more employees. Employers can voluntarily offer the program to their employees, who can make voluntary contributions from their paychecks:
- Employees who participate in the program are automatically enrolled unless they opt out.
- Contributions are made through payroll deductions, with no fees for contributions or account maintenance.
- The program offers a default investment option with a target risk level based on the employee’s age.
401(k) Plans
401(k) plans are employer-sponsored retirement savings plans that allow employees to make pre-tax contributions from their paychecks. Employers may also make matching contributions. 401(k) plans are not mandatory in California, but many employers offer them as a benefit.
| Retirement Savings Program | Mandatory | Eligibility |
|---|---|---|
| CalSavers | Yes, for private-sector employees without employer-sponsored retirement plans | Private-sector employees |
| California Secure Choice Retirement Savings Trust Program | No (voluntary for employers) | Employees of businesses with five or more employees |
| 401(k) Plans | No (employer-sponsored) | Employees of employers who offer 401(k) plans |
Thanks, everyone, for sticking with me through this quick dive into the world of 401ks and California law. I know it’s not the most exciting topic, but it’s important stuff for all of us trying to secure our financial futures. If you have any more questions or want to explore this topic further, be sure to check out the resources I’ve linked throughout the article. And don’t forget to drop by again soon – I’ll be here, churning out more helpful and informative articles just for you. Take care!