California has joined a growing list of states requiring employers to provide retirement savings options for their workers. The law was enacted to address the retirement savings gap in the U.S., where millions lack access to employer plans and Social Security faces long-term funding pressures. With compliance deadlines approaching, small businesses should understand their obligations and available choices.
The Mandate
Under California law, all non-exempt employers must offer employees a retirement savings option. This now includes businesses any number employees. Deadline for this mandate is December 31, 2025. Penalties for noncompliance are steep: is $250 per employee after 90 days, $500 per employee after 180 days.
Compliance Options
Employers have three ways to comply:
Enroll in CalSavers:
- State-sponsored Roth IRA program with automatic employee enrollment
- Deadline: December 31, 2025, for businesses with 1–4 employees
- Employers handle payroll deductions and administration
Establish a Qualified Retirement Plan (e.g., 401(k))
- Professionally administered, with higher contribution limits and potential for employer matches
- Eligible for SECURE Act tax credits to offset start-up costs
- Provides more flexibility and benefits compared to CalSavers
Register for an Exemption
- Applies if the business already has a qualified plan, is closed/sold, or falls into exempt categories (e.g., sole proprietors, government entities, religious or tribal organizations)
401(k) Advantages
Beyond compliance, 401(k) plans offer strategic advantages:
- Higher savings potential for both employees and business owners
- Employer match and profit-sharing options that aid in recruitment and retention
- SECURE Act credits worth up to $16,500 over three years for new plans with auto-enrollment
- Deductible employer contributions and long-term tax savings
Comparing CalSavers vs. 401(k)
- Contribution limits: $7,000 for IRAs vs. $23,500 for 401(k)s in 2025
- Catch-up contributions (50+): $1,000 vs. $7,500
- Employer matching: Available with 401(k), not with CalSavers
- Tax benefits: Employer contributions are deductible with 401(k) and eligible for start-up credits under the SECURE Act
- Investment choice: Broader with 401(k); CalSavers selects investments
Key Takeaway
By December 31, 2025, even the smallest California employers must comply with the state retirement mandate. While CalSavers offers a simple, state-run option, many businesses may benefit more from a professionally administered 401(k), particularly given tax incentives and the potential to better support employees.