If your state requires you to offer employees a way to save for retirement, you generally have two choices: facilitate the state program or offer a qualifying retirement plan of your own.
For many profitable agency owners, setting up your own 401(k) deserves a serious look. The state program is usually simple and inexpensive for the employer, but a 401(k) provides much higher contribution limits, allows employer contributions, and may qualify for federal tax credits.
The right answer depends on your state, your team and what you're trying to accomplish.
I've been a CPA for more than 23 years, and my firm works with more than 70 marketing and advertising agency owners every month. The pattern I keep seeing is that the compliance notice gets treated like a form to file. It's usually the first time in years that an owner has been forced to look at the retirement question at all, which makes it worth more than ten minutes.
State retirement mandates have expanded quickly. Seventeen states have enacted mandatory auto-IRA programs, and 15 were fully open as of mid-2026, according to the Georgetown Center for Retirement Initiatives.
But the rules vary significantly.
California generally covers employers with at least one California employee if they don't already sponsor a qualifying retirement plan. Illinois generally applies at five Illinois employees, along with additional requirements including being in business for at least two years. New York generally applies at 10 or more employees and at least two years in business.
Deadlines, penalties, employee thresholds and exemption procedures also differ by state.
So don't assume a rule you've heard about California, New York or Illinois applies to you. Start with the rules where your employees actually work.
The biggest difference is what each option is designed to do.
A state auto-IRA gives employees a relatively simple way to save through payroll. Employers generally handle the administrative connection but don't contribute to the accounts.
A 401(k) is an employer-sponsored retirement plan. It takes more work to establish and maintain, but it also gives the owner considerably more flexibility.
For 2026, the federal IRA contribution limit is $7,500, plus a $1,100 catch-up for someone age 50 or older. The employee 401(k) deferral limit is $24,500, and total defined-contribution plan additions can reach $72,000 before applicable catch-up contributions, subject to compensation, plan design and other rules. Those figures come from the IRS announcement of the 2026 limits.
That's a major difference if you're a profitable owner trying to put meaningful dollars toward retirement.
This is another area where state programs differ.
Many state auto-IRA programs default employees into a Roth IRA. Roth IRAs have income eligibility limits. For 2026, the Roth IRA contribution phaseout is $153,000 to $168,000 for single filers and $242,000 to $252,000 for married couples filing jointly.
Some state programs provide alternatives, including Traditional IRA options, so high-income owners should check their specific state's rules rather than assuming they're excluded. Know what that alternative actually involves, though. In California, the traditional option runs through recharacterizing contributions on a printed form after each deposit, and it has to be redone every year. It's available. It isn't automatic.
A 401(k), by comparison, does not have the same Roth IRA income eligibility limit. Plan design and nondiscrimination rules can still affect how much an owner or highly compensated employee can contribute.
The appeal of a state program is easy to understand: for the employer, it's generally inexpensive and administratively simple.
But establishing your own plan can come with federal tax incentives.
Eligible small employers may qualify for a startup credit of as much as $5,000 per year for three years, although the actual limit depends in part on the number of eligible non-highly compensated employees. Additional credits may be available for automatic enrollment and qualifying employer contributions. The details are on the IRS retirement plans startup costs credit page, and our earlier piece on the credits that make retirement plans more affordable walks through how they stack.
So don't compare a free state program with the sticker price of a 401(k).
Compare the net cost after available tax credits.
The state option can be perfectly reasonable when:
The state programs aren't bad retirement plans. They're simply designed to solve a different problem.
A private 401(k) becomes more compelling when:
A 401(k) will generally satisfy a state auto-IRA requirement, although employers still need to follow their state's exemption or certification procedure.
Before registering for the state plan by default, answer three questions:
The state mandate isn't necessarily the problem. In many cases, it's simply the event that forces an owner to finally evaluate a retirement plan that should have been reviewed years ago.
If you'd like a second set of eyes on which approach fits your agency, Book a Free Tax Analysis. Or tell me what state you're in, how many humans are on payroll and what you're trying to accomplish, and let's talk it through.
Generally yes. State auto-IRA programs exempt employers who sponsor a qualifying retirement plan, which typically includes a 401(k), 403(b), SEP IRA or SIMPLE IRA. You still have to follow your state's exemption or certification procedure. Having the plan usually isn't enough on its own, you have to tell the state you have it.
No. Employer contributions generally aren't permitted in state auto-IRA programs. That's part of how the programs are structured. If you want to offer a match or a profit sharing contribution, that takes a plan of your own.
Your own plan is the straightforward answer, since the 401(k) deferral limit doesn't carry the Roth IRA income phaseout. Check whether your state program offers a Traditional IRA alternative before you rule it out, and ask what the mechanics actually are. Plan design and nondiscrimination rules still affect how much an owner can put in either way.
A SIMPLE IRA is generally a qualifying plan for exemption purposes and costs less to administer than a 401(k). The trade is the ceiling: the 2026 SIMPLE deferral limit is $17,000, well below the 401(k) deferral limit.
You're not locked in. If you later establish your own plan, you follow your state's exemption process and unwind the state enrollment. Accounts your employees already funded belong to them.