California will now require most businesses to offer employees retirement savings plans, which could prove burdensome for some trucking companies.
That’s because motor carriers often experience a traditionally high driver turnover rate.
Businesses that don’t comply will be forced to participate in a state-run IRA program.
The state launched the pilot phase of its CalSavers program in November. For now, businesses can choose whether to participate. In 18 months, however, compliance deadlines start, beginning with companies with more than 100 employees. Two years after that — by June 30, 2022 — all trucking companies and businesses with five or more employees will have to comply.
Fines will be as high as $750 per employee if a company fails to show it has an employer-sponsored retirement savings plan or participates in the CalSavers IRA plan.
Trucking company concerns
Trucking companies will be forced to spend an unreasonable amount of time processing the new-employee paperwork because of the large amount of time spent bringing on new hires, said Ron Faulkner, president of Tulare, Calif.-based Faulkner Trucking.
“If people stuck around, it would be a no-brainer,” he said. “But it’s going to be cumbersome and worthless.”
Faulkner, who employs 60 people, said he is worried that workers will pull out the pretax money they contribute to their state-run CalSavers IRAs too early and incur IRS penalties.
Trucking companies in other states also face the new rules requiring an employer-sponsored retirement savings plan or participation in a state-run plan.
The plans are meant to address the reasons small businesses often cite for not offering retirement plans benefit on their own: It costs them more than large companies that have economies of scale. It also takes too much time to administer complicated plans. And small businesses don’t want to shoulder the fiduciary responsibility that the federal law requires for an employer-sponsored plan.
State-run IRA programs promise no out-of-pocket costs for employers, minimal paperwork and no fiduciary responsibility, which will be instead held by the state.
Shielding employers from fiduciary responsibility for the state-sponsored plans has been a key part of the rationale for allowing these mandatory IRA programs. The interpretation of federal law to allow this safe harbor has been in flux under the two recent administrations. Still, California and other states and some large cities are moving ahead with the plans.
Other states roll out IRA plans
Other states, which have fewer employers than California, are working faster to launch state-sponsored IRA savings programs.
Illinois rolled out the first wave of its Secure Choice plan in November. By November 2019, the final stage of the program will apply to trucking companies and other businesses that have 25 or more full-time or part-time employees and that have been operating in the state for at least two years. The state’s plan offers a Roth IRA, which means workers save after-tax dollars.
Oregon also launched its state-run Roth IRA program in waves. By May 15, 2020, all employers will have to comply with the new OregonSaves rules.
Washington created an online marketplace in which state-vetted vendors can sell basic retirement savings plans to small businesses and self-employed people. New Jersey originally created a similar plan but is now moving toward a state-sponsored IRA program.
Meanwhile, Connecticut and more than two dozen other states and some cities are considering, or close to implementing, similar IRA plans. The moves are in part efforts by state officials to head off future drains on state funds caused by impoverished retirees tapping tax payer-funded social services.
“Inadequate retirement savings affects not only the quality of life and physical health of individuals, but also significantly increases the burden on the state’s retirement income support programs,” said California officials in a November court filing seeking to dismiss the taxpayer association’s lawsuit challenging the legal basis of the state-run IRA program.
The state programs primarily target low- or middle-income workers at smaller companies that don’t offer workplace retirement savings plans. Larger companies typically do offer such plans. While most people can set up an IRA savings account on their own, research shows that a worker is much more likely to participate in a retirement savings plan at work.
In addition to the fiduciary safe-habor, the state plans rely on relatively recent changes to the laws to make the plans feasible. That includes allowing automatic worker payroll deductions for contributions to an employee’s retirement savings plan, including a state-run IRA. And it includes allowing automatic increases in deductions up to a set percentage of pay. The goal is to circumvent the inertia or inaction many employees exhibit when it comes to saving for retirement.
Employees automatically are enrolled in the plans, typically at 5 percent of their pay. That automatic enrollment means more workers participate, which makes the plan more cost-effective for the plan operator. Employees can opt out or change their contribution percentage, but early results show most don’t, according to an AARP report.