CalSavers vs 401(k): Which Is Better for California Small Business Owners?

If you own a business in California with one or more employees, you’ve likely heard about CalSavers — California’s state-mandated retirement savings program. But here’s the question most employers aren’t asking: Is CalSavers actually the best option for your business?

The short answer: for most California small businesses, a private 401(k) beats CalSavers hands down — and SECURE 2.0 Act tax credits can make it essentially free.

What Is CalSavers?

CalSavers is California’s auto-enrollment IRA program for employees whose employers don’t offer a retirement plan. As of 2022, ALL California employers with 1+ employees must either enroll in CalSavers or certify they already offer a qualifying private retirement plan.

Penalties for non-compliance: $250 per eligible employee after 90 days of notice, escalating to $500 per employee after 180 days. The California Franchise Tax Board is actively issuing these fines.

CalSavers: The Pros and Cons

Pros:

• Free for employers to administer
• No employer contributions required
• Easy setup through the state portal

Cons:

• No tax deduction for employer contributions (because there are none)
• Employees own Roth IRA accounts — not tied to your business
• No SECURE 2.0 tax credits (those only apply to private plans)
• Limited investment options
• Doesn’t help with employee retention as much as a 401(k)

Private 401(k): The Pros and Cons

Pros:

• Exempts you from CalSavers entirely
• Up to $5,000/year × 3 years in SECURE 2.0 startup cost credits
• Additional $1,000/employee/year employer contribution credit
• Higher contribution limits ($23,500 in 2025 + $7,500 catch-up)
• Employer contributions are tax-deductible business expenses
• Powerful employee retention and recruiting tool

Cons:

• Slightly more administrative work to set up
• Requires a third-party administrator (TPA) — but SECURE 2.0 credits cover this

The Math: CalSavers vs 401(k) for a 25-Employee California Business

Let’s run the numbers for a Los Angeles small business with 25 employees:

CalSavers route:
Cost to employer: $0/year
Tax credits earned: $0
Net cost: $0

401(k) route:
Annual plan cost: ~$3,000–$5,000/year
SECURE 2.0 Year 1 credit: up to $5,000
SECURE 2.0 Year 2 credit: up to $5,000
SECURE 2.0 Year 3 credit: up to $5,000
Net result: $15,000 in credits vs ~$12,000 in costs = you come out AHEAD

Plus you can contribute up to $23,500 to your own retirement account — tax-deferred. CalSavers doesn’t give you that.

Who Should Choose CalSavers?

CalSavers makes sense if you’re a very small employer (1-4 employees) with tight cash flow and no desire to make employer contributions. It’s a low-effort compliance solution.

Who Should Choose a Private 401(k)?

A private plan is better if you:

• Have 5+ employees
• Want to maximize your own retirement savings
• Want to use benefits to attract and retain talent
• Are profitable and want to reduce your tax bill

The Bottom Line for California Employers

CalSavers fulfills the mandate — but a private 401(k) does everything CalSavers does and earns you up to $15,000 in tax credits, reduces your taxable income, and builds loyalty with your team.

For most California small business owners, the private plan is the better financial decision. The SECURE 2.0 Act essentially subsidizes the switch.

Want to know which option is right for your California business? We offer a free 15-minute compliance audit for employers in Los Angeles, San Francisco, San Diego, Sacramento, and all of California. Book your free audit here →