1. The California Retirement Mandate — Now Applies to Every Employer

The biggest compliance headline for 2026 is simple and sweeping: all California employers with at least one employee are now required by state law to offer workers access to a retirement savings plan. This is no longer a rule just for large companies. The final registration deadline for businesses with one to four employees passed on December 31, 2025, completing the multi-year rollout of California’s mandate.

The mandate gives employers two paths to compliance: enroll workers in the state-sponsored CalSavers program, or offer a qualifying employer-sponsored plan such as a 401(k), SEP IRA, or SIMPLE IRA. Neither path requires employers to contribute a single dollar of their own money — but employers who sponsor a 401(k) can choose to match, and those who do unlock significant tax advantages.

Who Is Exempt?

Sole proprietors and self-employed individuals with no employees other than themselves are excluded from the mandate. Religious organizations, tribal entities, and government organizations are also exempt. If your business qualifies, you must still formally claim your exemption through the CalSavers portal to stop receiving compliance notices.

2. 401(k) vs. CalSavers: Which Is Right for Your Business?

California employers have a genuine choice to make — and it is worth thinking through carefully. CalSavers offers a quick, low-effort path to compliance. A 401(k) demands more setup work but delivers substantially more value to employees and tax advantages to employers.

A 401(k) has the highest employee contribution limits — more than three times the CalSavers cap — making it a far more powerful retirement-savings vehicle. Employers who offer a company match can deduct those contributions from their federal and California state taxes, and may qualify for thousands of dollars in federal tax credits for setting up a new plan. CalSavers, by contrast, does not allow employer contributions of any kind and places most of the administrative burden on the employer.

3. 2026 401(k) Contribution Limits

The IRS raised retirement plan limits meaningfully for 2026. California employees enrolled in a 401(k) can now save significantly more — and employers offering matching contributions can deduct more than ever.

These increased limits are especially valuable in California, where the high cost of living makes retirement savings more critical. An employee in their 60s can now contribute up to $35,750 per year into a 401(k) by combining the $24,500 base limit with the $11,250 SECURE 2.0 age 60–63 catch-up limit.

4. SECURE 2.0 Act: Key Changes Hitting in 2026

The SECURE 2.0 Act, signed into law in late 2022, phases in its most significant changes over several years. Several important provisions become effective in 2026 that California employers must understand and implement.

Mandatory Roth Catch-Up for High Earners

Starting January 1, 2026, employees aged 50 and older who earned more than $150,000 in FICA wages in 2025 must make all catch-up contributions on a Roth (after-tax) basis. This means plan administrators need to verify prior-year wages for affected participants and ensure their payroll systems can route catch-up contributions to a Roth account. Employees below the $150,000 threshold can continue making pre-tax or Roth catch-up contributions as they choose.

Enhanced Catch-Up for Ages 60–63

Under SECURE 2.0, employees who turn 60, 61, 62, or 63 in 2026 are eligible for a higher catch-up limit of $11,250 — well above the standard $8,000 catch-up for those aged 50 and older. This provision is designed to let late-career workers accelerate their retirement savings. California employers should update their plan documents and communicate this benefit to eligible employees.

Auto-Enrollment and Auto-Escalation Requirements

New 401(k) plans established after December 29, 2022 are generally required to include automatic enrollment of eligible employees and automatic escalation of contributions under SECURE 2.0. If you are setting up a new plan in 2026, work with your plan provider to ensure these features are built in — they can also help boost participation rates and strengthen nondiscrimination testing results.

Pension-Linked Emergency Savings Accounts (PLESAs)

SECURE 2.0 permits employers to offer Pension-Linked Emergency Savings Accounts attached to their 401(k) plans. These allow non-highly compensated employees to contribute up to a designated limit in Roth after-tax dollars that can be withdrawn penalty-free for emergencies. This is an optional feature but can be a compelling employee benefit in California’s high-cost environment.

5. ERISA Requirements for California 401(k) Sponsors

Any employer that sponsors a 401(k) plan — rather than simply participating in CalSavers — takes on fiduciary responsibilities under the federal Employee Retirement Income Security Act (ERISA). These obligations exist regardless of plan size and apply to all California businesses.

Core Fiduciary Duties

As a plan fiduciary, you must act solely in the interest of plan participants, select and monitor investment options prudently, ensure plan fees are reasonable, and avoid conflicts of interest. Failing to meet these standards can expose business owners to personal liability.

Required Plan Documents

Every 401(k) plan must have a written plan document and a Summary Plan Description (SPD) that is distributed to participants. Plans with 100 or more participants generally must file an annual Form 5500 with the IRS and the Department of Labor.

Nondiscrimination Testing

Traditional 401(k) plans must pass annual nondiscrimination tests (ADP/ACP tests) to ensure the plan does not disproportionately benefit highly compensated employees. Many small California businesses choose a Safe Harbor 401(k) design to automatically satisfy these tests, in exchange for a mandatory employer contribution that is immediately vested.

6. Penalties for Non-Compliance

California does not treat retirement plan non-compliance lightly. If an employer fails to offer a qualifying plan or enroll employees in CalSavers, financial penalties escalate quickly with time.

Penalties are per-employee, so costs compound quickly for businesses with even a handful of workers. A company with 10 employees that ignores enforcement for over 180 days could face an immediate $7,500 in fines, followed by ongoing annual exposure. The California Franchise Tax Board can enforce these penalties.

7. Federal Tax Credits for Setting Up a 401(k)

One of the most compelling reasons for small California businesses to choose a 401(k) over CalSavers is the availability of substantial federal tax credits under SECURE 2.0. These credits can offset a significant portion — or in some cases, all — of the cost of launching a new plan.

Start-Up Credit

Employers with 50 or fewer employees may claim a tax credit of up to $5,000 per year for three years (totaling up to $15,000) for the ordinary and necessary costs of establishing and administering a new qualified retirement plan. The credit equals 100% of eligible startup costs for employers with 50 or fewer employees, and is reduced for those with 51–100 employees.

Auto-Enrollment Credit

New plans that include an automatic enrollment feature can claim an additional $500 per year for three years. When combined with the startup credit, eligible small employers could receive up to $16,500 in total federal tax credits over the first three years of the plan.

Employer Contribution Credit

Under SECURE 2.0, employers with 50 or fewer employees who make matching or nonelective contributions to a new plan may also qualify for a credit on those employer contributions — up to a per-employee cap — during the first five years of the plan. This credit is phased out for employers with 51–100 employees.

8. 2026 Employer Compliance Checklist

Use this checklist to ensure your California business is fully compliant with state and federal retirement plan requirements in 2026.

• Determine whether your business is subject to the CalSavers mandate (one or more California-based employees who are not owners).
• If you already offer a 401(k), SEP, SIMPLE IRA, or other qualified plan — register your exemption on the CalSavers employer portal immediately.
• If you do not yet offer a plan, decide between CalSavers enrollment and establishing a private 401(k) or other qualified plan.
• If establishing a new 401(k), confirm SECURE 2.0 auto-enrollment and auto-escalation requirements apply and build them into your plan design.
• Update your payroll system to reflect the 2026 contribution limits: $24,500 employee deferral limit, $8,000 catch-up for ages 50+, $11,250 catch-up for ages 60–63.
• Identify employees aged 50+ who earned over $150,000 in 2025 FICA wages — their 2026 catch-up contributions must be designated as Roth contributions.
• Review and update plan documents, Summary Plan Descriptions, and participant notices to reflect 2026 limits and SECURE 2.0 provisions.
• Enroll new hires in CalSavers (or your qualified plan) within 30 days of their hire date — failure to do so triggers the same penalties as not offering a plan at all.
• Consult with your plan provider or ERISA attorney about whether a Safe Harbor 401(k) design could benefit your business and simplify annual testing.
• Claim available federal tax credits if you established a new qualified plan within the last three years.

9. Frequently Asked Questions

Do California employers have to contribute to a 401(k)?

No. Employer contributions to a 401(k) are optional unless you adopt a Safe Harbor plan design, which requires a mandatory employer contribution (typically 3–4% of employee pay) in exchange for simplified compliance. Many employers choose to offer a match because it helps attract and retain talent and is fully tax-deductible, but there is no legal requirement to do so under federal or California law.

Can a sole proprietor in California be exempt from the CalSavers mandate?

Yes. Sole proprietors and self-employed individuals who have no employees other than themselves are excluded from the mandate. However, they may voluntarily enroll in CalSavers or establish their own Solo 401(k) to save for their own retirement.

What is the difference between a 401(k) and CalSavers?

CalSavers is a Roth IRA sponsored by the state of California with a 2026 contribution limit of $7,500 ($8,600 for those 50 and over). A 401(k) is a private employer plan with a 2026 limit of $24,500 plus catch-up contributions, allows employer matching, and gives employers tax deductions. A 401(k) is far more flexible and powerful for both employees and employers, but it requires more setup.

What happens if an employee opts out of CalSavers?

Employee participation in CalSavers is voluntary. Employees are automatically enrolled at a default 5% payroll deduction but can opt out at any time. Employers must still facilitate the enrollment process; they cannot opt employees out on their behalf.

Is there a deadline for enrolling new hires?

Yes. Employers participating in CalSavers must enroll new eligible employees within 30 days of their hire date. Employers with a private qualified plan like a 401(k) must follow the plan’s own eligibility rules, which must comply with federal ERISA requirements.

What are the early withdrawal penalties in California?

If a 401(k) participant withdraws funds before age 59½, they typically face the standard 10% federal early withdrawal penalty. In California, the distribution is also subject to state income tax, effectively adding another layer of cost. California does not offer an exemption matching the federal 10% penalty — making early withdrawals especially costly for Golden State residents.