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Understanding Retirement Plan Tax Credits for Small Businesses & California CalSavers

Offering a retirement plan is one of the strongest ways a small business can support employees and stay competitive. The federal government provides valuable tax credits that reduce the cost of starting and funding these plans, and California has its own retirement savings mandate that employers must follow by the end of 2025.

Below is a clear overview of the federal credits available and what California employers need to know about CalSavers.

1. Federal Startup Costs Credit (Up to $5,000 per Year)

To help small businesses establish a new qualified retirement plan—such as a 401(k), SEP IRA, or SIMPLE IRA—the IRS offers a Startup Costs Credit. This incentive reduces the cost of launching a plan by covering 50% of eligible expenses, up to:

• $5,000 per year

• For the first three years of the plan

Eligible expenses include:

• Plan setup and installation fees

• Recordkeeping and administrative costs

• Employee education about the new plan

For first-time plan sponsors, this credit can significantly reduce the upfront investment of starting a retirement plan.

2. Federal Employer Contributions Credit (Up to $1,000 per Employee)

Eligible small businesses may also qualify for a second credit based on employer contributions made to employees’ retirement accounts.

How the employer contributions credit works:

• Years 1–2: Claim 100% of employer contributions, up to $1,000 per employee.

• Years 3–5: The credit phases down by 25% each year.

This credit helps offset the cost of funding a retirement plan in its early years, when participation is growing and cash flow may still be tight.

3. California’s CalSavers Requirement by the End of 2025

California requires employers to make a retirement savings option available for their workers. Under state law:

By the close of 2025, every California employer with one or more employees aged 18 or older must either:

• Offer a qualified retirement plan (such as a 401(k)), or

• Enroll in the CalSavers program.

What is CalSavers?

• A state-run retirement savings program

• Provides automatic enrollment into an IRA-based account

• Defaults to a Roth IRA (employees may opt for a Traditional IRA)

• Designed as an easy, low-administration option for employers without their own plan

CalSavers is a compliance solution, but it does not provide the same level of customization, contribution limits, or employer benefits that a full 401(k) plan can offer.

4. Why Many Businesses Choose a 401(k) Instead of CalSavers

While CalSavers is straightforward, many employers opt to implement their own retirement plan instead. A well-designed 401(k) can:

• Allow higher employee and employer contribution limits than IRA-based programs

• Qualify for the federal startup and employer contribution tax credits

• Offer features such as matching contributions, safe harbor options, and profit-sharing

• Serve as a powerful recruitment, retention, and employee engagement tool

5. Next Steps for California Employers

With the CalSavers deadline approaching, now is the ideal time to evaluate your options and determine the best fit for your business.

• Review whether your business qualifies for the federal startup cost and employer contribution credits.

• Compare the long-term impact of adopting a 401(k) versus defaulting into CalSavers.

• Decide on a plan structure that aligns with your budget, staffing, and growth goals.

• Coordinate with a tax professional to calculate credit amounts and ensure proper filing.

6. Contact Tandy Consulting to Set Up a 401(k) Plan Today

If you’re a small business owner in Fullerton or anywhere in Orange County and you’re ready to explore a 401(k) or profit-sharing plan, Tandy Consulting Inc. can help you evaluate options, coordinate with plan providers, and understand how the federal tax credits apply to your situation.

Tandy Consulting Inc.
Retirement Plan & 401(k) Advisory Support
Email: ttandy@tandyconsulting.com

401(k) & Profit-Sharing Services Email Tandy Consulting

This article is for general informational purposes only and is not tax or legal advice. Employers should consult a qualified tax professional to determine eligibility and to maximize the benefits of federal tax credits.