Opening a retirement savings plan for employees (including founders!) is often a low-priority issue for startups and small businesses, but several states, including California, are trying to change that.

In 2016, the Department of Labor finalized regulations creating a safe harbor for states and other governmental entities to sponsor savings programs without causing them to be treated as fiduciaries under ERISA.

California was the first state to take advantage of this safe harbor, and its savings plan, CalSavers, became effective on January 1, 2019. However, California coupled this opportunity with a legal requirement that all but the smallest employers either sponsor a 401(k)-type savings plan directly or register their employees for CalSavers. Currently, this requirement applies to any private employer with five (5) or more adult employees, including part-time and temporary workers. Effective in 2025, the requirement will extend to all private employers in California with one (1) adult employee or more, not counting business owners.

Enforcement of the California savings plan mandate is strict. In 2024, the CalSavers Retirement Savings Board and California Franchise Tax Board fined thousands of businesses for failing to either (i) register for CalSavers or (ii) sponsor a 401(k)-type savings plan. Fines begin at $250 per employee and increase sharply if the employer does not respond promptly to the State’s satisfaction. The State monitors how many employees an employer has by auditing quarterly payroll returns and then seeks enforcement.
Other states that have implemented or approved a savings plan mandate include Colorado, Connecticut, Illinois, Maryland, New Jersey, New Mexico and Oregon. Most of these states also offer a state-sponsored savings plan or are taking steps to make a similar program available.

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