Cannabis 401(k) Plans: Here’s Where We Stand Now

Originally Published on by Jewell Esposito esq.

Happy 420 Day!

Here’s where we stand re: Cannabis and the 401(k) plans that can provide competitive compensation and retirement savings ability to the 300,000+ employees in the fastest-growing industry in the United States.  

* * Note:  I base this post below in large part on the just-distributed article I authored for Thomson Reuters’ PRACTICAL LAW, for itsEMPLOYEE BENEFITS & EXECUTIVE COMPENSATION and CANNABIS sections.  You can try this link for access, or contact me by email with “Cannabis 401(k)” in the subject line. * * 

Cannabis is Legal Across 80% of Our Country.  

As of April 2020, only eight states treat marijuana as fully illegal.  See this interactive map (updated this week to include Virginia’s Governor approving legislation to decriminalize marijuana in that state).  The map color codes the 50 states and Washington, D.C. to indicate levels of legalization. 

Cannabis 401(k) Plans — Legal Under Federal Law.  

The Internal Revenue Code and ERISA.

The federal laws of the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA) indisputably allow cannabis companies to participate in 401(k) plans.  See my post at “Cannabis 401(k) — How the Tax Code Provides the Authority” that traces through the laws and authorities; see also the Department of Labor’s confirmation that trade associations can continue to sponsor 401(k) plans for its members (with the SECURE ACT allowing more and similar structures very soon, explained simply here).  

The legal right for a cannabis company to sponsor a 401(k) plan exists (moreover, it has always existed under the Internal Revenue Code and ERISA)), even if the manufacturing, distribution, and dispensing of cannabis is illegal under the federal law of the Controlled Substances Act. 

IRS Audit Priorities Not Tied to Cannabis 401(k) Plans.

In the very recent  March 30, 2020, release from the Treasury Inspector General for Tax Administration, there are suggestions where and how the Internal Revenue Service can increase tax compliance and facilitate education for the cannabis industry.  Even the IRS agreed, in response, that it must consider providing guidance onthe application of Section 471(c) of the Internal Revenue Code, in conjunction with Section 280E.  For quick background, it is those sections that allow the cost of goods sold (COGS) adjustments permitted for 401(k) contributions and related costs. 

This COGS concept is absolutely critical to the cannabis industry because it allows a producer, processor, wholesaler, or retail establishment of cannabis to adjust its gross income, despite Section 280E’s ostensible blanket prohibition.  See my post at “Cannabis and 401(k) Participation” for further explanation and legal authorities.  Those needing assistance on COGS (and what is called absorption accounting) should connect with a competent accountant.

No DOJ Prosecution Re: 401(k) Plans.  

Of its 63 press releases involving marijuana since 2018 (through the present), the Department of Justice has not prosecuted any cannabis company nor any retirement plan service provider (financial advisor, third party administrator, record keeper, custodian) regarding a 401(k) plan in which a cannabis company participates.  

It appears the DOJ has ceased investigations of those cannabis companies compliant with their state laws on legalization (and not in violation of any of the eight Cole Memo concerns).  

Moreover, it appears that  retirement service providers to those cannabis companies were similarly left untouched.  Of course, this is consistent with our Attorney General’s softened approach to federal investigation of cannabis companies when they follow their states’ laws.

No FINRA or SEC Investigation of Financial Advisors of 401(k) Plans.  

Financial institutions and advisors must have strong Bank Secrecy Act and Anti-Money Laundering practices, and those practices must allow them to confirm that cannabis companies conform to legal state laws and that such companies’ operations do not implicate Cole Memo prohibitions.  With practices like that, it appears that the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have decided to limit their enforcement activities to whether there are proper disclosures to equity investors in marijuana businesses.

It is important to note that FINRA and the SEC are not investigating (that is, they are unconcerned about) the cannabis company or whether a cannabis business can sponsor a legitimate 401(k) plan.  Similarly, they are not investigating advisors who consult on 401(k) plans to those businesses.

What’s Making It Tough for Cannabis Companies to Access 401(k) Plans?   

It’s the retirement plan service providers themselves. They’re rightfully hesitant (as companies once were with alcohol and tobacco, way back when).  When they make the business decision to delve into this cannabis industry, however, there are ways to maneuver legally around all the layered laws.  

Editorial Staff

The CannaBizCentral Editorial Team is dedicated to providing a professional, unbiased source for legal cannabis business resource news. With over a decade of experience reporting on the latest cannabis news, we’re committed to meeting the high demand for honest, up-to-date information from the nation’s fastest-growing industry - legal cannabis.

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