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Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Minnesota is representative of a common question on mergers and acquisitions.
To answer the question, it is important to know more about CalSavers, for example, what type of plan is it? States that sponsor plans for private-sector employees vary.
Calsavers is a retirement savings program sponsored and administered by the State of California. Currently, California law mandates that employers with five or more employees participate in CalSavers if they do not offer their own retirement plan [such as a 401(k) plan or savings incentive match plan for employee (SIMPLE) IRA plan]. Beginning January 1, 2026, California employers of all sizes are subject to the mandate. Certain types of organizations, such as church and government organizations, are exempt from this mandate. Affected employers must register with the state or claim an exemption.
Once an employer sets up the contribution process, employees of participating employers are automatically enrolled in CalSavers unless they affirmatively choose to opt-out. Under the program, a Roth individual retirement account (IRA) is established for each participating employee. Unless they elect otherwise, employees are enrolled at an initial deferral percentage of 5%, which is increased annually by 1% to a maximum of 8%. Employer contributions are not permitted.
In the M&A scenario outlined above, it is not currently possible to transfer the CalSavers Roth IRA accounts of the seller’s employees to the 401(k) plan of the buyer. The CalSavers accounts cannot be merged into the buyer’s plan, as they are Roth IRAs. Current law does not permit the rollover of a Roth IRA to a 401(k) plan, even one that has a designated Roth account.
The same result applies outside the M&A context, such as where a small employer that participates in CalSavers grows and eventually adopts a 401(k) plan to fit its needs better. Employees with CalSavers Roth IRAs cannot rollover their accounts to the employer’s new 401(k) plan.
At this point, Roth IRAs of any origin are not eligible to be rolled over to a 401(k) plan. Proposed legislation was introduced in the House of Representatives to change this result. H.R. 6757 would amend the Internal Revenue Code (IRC) to permit direct rollovers from Roth IRAs to 401(k) plans with designated Roth accounts. However, there has been no progress to date on the bill since it was initially introduced in 2023.
Conclusion
An increasing number of states are establishing state-sponsored retirement savings programs. Like CalSavers, many programs utilize Roth IRAs as the default retirement account for employees. However, unless legislation is passed to amend the IRC, most employees who participate in these programs will face limited portability of their retirement savings.