A Secret Benefit of Hiring Your Kids in California

California’s retirement plan mandate is one more regulation small business owners need to consider… but there’s a loophole.

Photo courtesy of Andrea Piacquadio

California business owners do a lot of groaning over all the regulations and additional requirements they need to meet compared to running a business in another state. Many of these become additional expenses that are especially difficult to cover for small business owners. It is one of the reasons many consider leaving the state, forgetting that all those taxes also pay for infrastructure, roads, tech, and worker welfare that make the state a safe and reliable place to do business.

As a business owner myself, I am fully aware of the expenses involved in running a business in California. That is why I look for any way I can either avoid, reallocate, or extend those costs so that they have less impact on my bottom line. One especially helpful way I’ve done this is by hiring my children as W2 employees. I wrote about the many ways that this has helped my bottom line in a previous article: The Absolute Best Tax Deduction for Small Businesses: Hiring Your Kids.

Since California already has better regulations and institutions for protecting children against labor abuse than many other states (your tax dollars at work!), the state allows small business owners to forgo several expenses that larger businesses are not exempt from. This does help small business owners, if (and this is a big if) they actually take advantage of them. Most small business owners either don’t know about them or do not take the time to implement them. If you are one of those, then read the article I wrote about it.

I thought I was compliant with every requirement, but then I heard about Senate Bill 1126, California’s Retirement Plan Mandate…

California’s Retirement Plan Requirements and CalSavers

It was at a holiday gathering with friends that someone scared the bejeesus out of me with this one. It stipulates that W2 employees must have employer-managed retirement plans. I had heard about this bill passing a few years ago, but that involved larger businesses with lots of employees so I ignored it – not my monkey, not my circus.

Well, that was only partially true. In their infinite wisdom (pun intended) and to reduce the shock that this would have on business in California, our legislators stipulated that this requirement would be phased in over time. So, in 2020 it only applied to businesses with 100 employees or more. Then in 2021 it became a requirement for businesses with 50 employees and in 2022 it applied to businesses with 5 employees. Are you starting to sweat already?

I only employ two of my children, so I was still good, right? Unfortunately, the other shoe is dropping and by December 31, 2025, it will be required for all employees, even businesses with just one employee to have a retirement plan implemented for them. Drats!

You might think that this is still a year away, but that’s not a complete picture. Business owners need to have this in place before the deadline in a year, but since registration is yearly, the time to set this up is now. You don’t want to be rushing to do this with all the other last-minute business owners just before it is due because, like standing in line at the DMV, getting things done through the state takes time.

What if you don’t register? Well, that can lead to all kinds of misery. First, you’ll be nagged by the Employment Development Department (EDD). Then you’ll receive fines of $250 per employee ($500 if you are out of compliance for more than three months). There is also the additional administrative work required to explain the delay, to register late, and to get the EDD off your back. This could very well require legal assistance too.

When you finally do register, you will also need to find a retirement program that meets all the requirements. Now the state has its own called CalSavers. Most HR/Payroll systems like ADP, Paychex, Gusto, and Quickbooks can work with CalSavers automatically. Yes, because that is another headache – the retirement program has to integrate with your existing payroll system – you should have one if you run a business with employees. I’ve been using Gusto, and getting it to work with CalSavers is just a few clicks.

Here’s the thing, CalSavers may not be the best fit for your business and may not be the least expensive. For example, if you already have a 401 or IRA savings plan through another retirement savings service like Fidelity or Vanguard, then CalSavers is likely not the best option. CalSavers fees are actually quite high, according to some reports. You will need to discuss this with your accountant and/or tax advisor to see which one would be best for your specific needs.

Well, you can imagine that as I was hearing this, I was thinking about how on earth I was going to get all this set up properly and in time. It all sounded rather ominous and I certainly didn’t want to run afoul of the EDD, the IRS, or the State Franchise Tax board. I was also adding up in my head how much this was all going to cost.

I could see from the look of the people at the party sharing this news that this was not my idea of a happy get-together conversation.

Doing My Own Research

The conversation at the party continued about how California is a horrible state to do business, that this will create another mass exodus, that this is all politics, blah blah blah. Yes. I was done with this bunch. However, it left me shaken up. Now I had to figure out how to get my kids who work for me another retirement plan and still keep my fledgling little business afloat. Argh!

When I came home, I immediately googled everything I could about this. The web being what it is, I quickly stumbled onto scary news stories about this impending doom. I also found quite a few law firm “info pages” with scary wording about how this is now impacting every business and offering to solve these problems... for a fee.

Defeated, I proceeded to log into my trusty Gusto account and started setting up retirement plans for my kids. Gusto recommended CalSavers. Apparently, CalSavers is the most popular for Gusto users like me. Now something about this gave me pause. I’m never one to blindly buy into something that the government is selling, so I decided to dig into CalSavers a bit.

Sure enough, several sites said that CalSavers wasn’t the least expensive option… hmmm, interesting. Now, some of this was from competitors like Fedelity, so I did take the info with a grain of salt. But just in case, instead of letting Gusto handle this, I decided to try tackling this from the other end. I thought I would first sign up with CalSavers.

Apparently, or perhaps suspiciously (?) they already have a database of all the businesses registered in the state that are likely to apply for their service and they receive this info from our friends at the Employment Development Department (EDD). The plot thickens… Now, when I tried to register myself as a business on CalSavers, I ran into a problem. They had no record of my business.

Now I know I am registered with EDD because this is tied to the Workers Compensation Insurance I already carry. So, I logged into EDD and sure enough, my business was listed there, including my two employees. So why didn’t they pass that onto CalSavers like every other business? After more digging, I came across an info page that said that employees need to be 18 years old to set up CalSavers.

Ding Ding Ding!

Sure enough, on the CalSavers FAQ page, it also said the following: “All employees of a participating employer are eligible if they are at least age eighteen and have the status of an employee under California law.” This begs the question: if CalSavers won’t accept minors, is this because California’s retirement plan mandate is not required at all for minors? Apparently so. It doesn’t matter whether a business opts for CalSavers, Fidelity, Vanguard or anyone else, because for minors a retirement plan is not required. I did some thorough Googling, and found several more sources that confirmed this.

All minors are exempt from Senate Bill 1126 / California’s Retirement Plan mandate!

Now I’m not one to sit on my hands with a juicy money-saving opportunity like this, so I also shot off emails to several people who are in the biz, including my accountant, my broker, and some bookkeepers I know. They all confirmed that all minors are indeed exempt from California’s Retirement Plan mandate. This is a big perk for small businesses because it’s a hassle to set up and it can be expensive for both the employer and the employee because of the fees.

Technically, this applies to any number of employees, too. So, if you have 5 kids under 18 working for you, then you do not need to set up retirement plans for any of them. Heck, if you have 50 kids under 18, then you really hit the jackpot! Although if you have 50 kids, I’m guessing you’ve got bigger fish to fry.

In all seriousness, this is one awesome perk, part of a long list of perks, that small business owners in California who hire their kids can benefit from.

Conclusion

First of all, I need to insert a disclaimer here. After a lot of searching, I found that this perk applies to my business and my specific situation. Your business may be different. So, do your own research, talk to your people, and confirm this for yourself. This is by no means financial or tax advice from me. I am not an expert. I am just a business owner who is taking advantage of this perk.

I should also mention that I had set up IRA accounts for my kids already to maximize the perks of hiring my own kids. I had completely forgotten about that when I had my initial freak-out about this. The way it was presented to me was that I had to set up CalSavers in addition to the IRA I had already set up – which turned out to be false. If you are hiring your kids, then you really should set up retirement accounts so that you too can maximize your perks – read my original article on this.

Any retirement account will meet California’s retirement plan mandate, so if you have that set up already, then you should be good. If they are minors now and you keep them on after they turn 18, then that retirement program will carry over to meet the requirements for adult employees. Again, do your research and talk to your people to confirm, but you should be all set, no matter their age.

Of course, if they are under 18, then you don’t need to worry about setting up a retirement account. See? Running a business in California isn’t all that bad; you just need to know what the loopholes are.

One more thing: if you’re not going to set up a retirement plan for your kids, then remember to fire them on their 18th birthday!