Once and For All: IRC and ERISA Say Cannabis 401k Plans Can Exist

The cannabis industry is in dire need of proper guidance as to how to appropriately provide 401k and other employee benefits to its employees.

I write to clarify and educate about the legal authority regarding how and why cannabis 401k plans are legitimate. There continue to be doubts about how to coordinate the cannabis industry, 401k plans, the Employee Retirement Income Security Act (ERISA), and the Internal Revenue Code and its oft-cited 280E hammer.

Debate Over Cannabis 401k Plans Continues

In late May, 401k Specialist published “Cannabis Organizations Can Legally Offer Retirement Benefits,” a post by Kirsten Curry, Esq., president of Washington-based third party administrator and record keeper Leading Retirement Solutions.

In it, Curry cited what I have confirmed repeatedly: The Internal Revenue Code expressly permits cannabis employees to participate in a 401k plan just like other, non-cannabis employees.

Last week, Dick Billings, CPC, CEBS, RF, ERPA and Director of Marketing with Arizona-based Fiduciary Wise took issue with Curry’s post.

In his response, “Retirement Plans for Cannabis Companies? Not So Fast,” Billings raised concerns that “[s]o long as marijuana remains a Class 1 controlled substance, one cannot take a deduction for a plan sponsored by. . . a [cannabis] business.”

I think when dealing with the Internal Revenue Code and making references to Section 280E and how it works, it’s critical to be “not so fast” with criticism on how tax (and even ERISA) rules work to allow cannabis companies to have 401k plans.

Controlled Substances Act Doesn’t Render Cannabis 401k Plans Illegal Under Federal Law

Because cannabis is on Schedule I of the Controlled Substances Act, companies that traffic cannabis cannot deduct the associated ordinary business expenses from gross income under Section 280E of the Internal Revenue Code. I believe this is the genesis of Billings’ stated concern.

Nevertheless, while 280E restricts cannabis companies from the same deductions that non-cannabis businesses take, cannabis companies may take a cost of goods sold (COGS) adjustment through the application of Section 263A, which allows subtraction of the COGS from gross income.

The subtraction from gross income for cannabis companies lowers the resulting income subject to federal tax.

“Consequently,” as noted in The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance, Inspector General for Tax Administration, Reference Number 2020-30-017, March 30, 2020, “businesses that sell marijuana can reduce gross receipts by the cost of goods sold.”

Yes, A Cannabis Company can ‘Deduct’ its 401k Plan Costs

As for even more authority, one should examine the IRS Chief Counsel Advisory 201504011 (Jan 23, 2015) (CCA 201504011). There, the IRS confirms a cannabis company may take a COGS adjustment for direct and allocable indirect costs of cannabis produced or acquired for resale. Non-tax practitioners consider the COGS adjustment as giving a similar effect as a tax deduction and sometimes refer to a cannabis producer’s right to a COGS adjustment as a “deduction.”

Moreover, Treas. Reg. Section 1.263A-1(e)(3)(ii), excerpted below, provides examples of indirect costs (related to cannabis and non-cannabis). These examples include indirect labor costs; officers’ compensation; pension and other related costs; employee benefit expenses. Further down in the treasury regulation, Section 1.263A-1(e)(3)(ii)(C) provides that pension and other related costs include contributions paid to or made under any stock bonus, pension, profit-sharing, or annuity plan or other plan deferring the receipt of compensation whether the plan is tax-qualified or non-qualified:

I think the concern Billings expressed about cannabis companies “tripping over 280E” with respect to a 401k plan will not materialize with a good tax expert or accountant.

While a detailed discussion of these tax and accounting rules is outside of the scope of my response, Code Section 263A and its underlying Treasury Regulation, therefore, provide the express authority for a cannabis company to “deduct” production-related expenses (through COGS) that properly include employee deferral and employer matching contributions related to a 401k plan.

I discuss and allay certain concerns (for example, FINRA) that Billings raises in material I authored for Practical Law, published by Thomson Reuters, and within my own blog AllThingsERISA.

Thus, I direct any skeptics to review that material to read about our US Attorney General’s position re: non-enforcement over state-legal cannabis companies and SEC investigations that had nothing whatsoever to do with employee benefits for cannabis employees.

Indeed, none of the FINRA or SEC inquiries dealt with cannabis 401k plans or the retirement plan providers or vendors who service such plans.

‘The Devil is in the Details’

Billings’ comment that “vendors just see all the money (cash) being generated by cannabis providers and just want to make the sale” gives me pause. He ends with “Buyer beware.”

It is why I feel compelled to respond to the post that lacked underlying, supportive analysis on 280E and other concerns.  Unequivocally, cannabis companies can have their 401k plans. As Billings astutely notes, “the devil is in the details.” I have painstakingly traced through the laws—the details—regarding cannabis 401k plans. Again, I refer readers to materials I have published regarding cannabis, the Internal Revenue Service, the Department of Labor. I invite others to verify for themselves.

My response here is not for purposes of making a “sale.” It’s to help educate retirement plan advisors. It’s also a proper setting to lay out the legal authority so that the cannabis industry may access retirement plan benefits that, to date, have been unattainable because of scant understanding by those who claim to be fiduciary-wise.

I am not a retirement plan vendor. Rather, I am a practicing attorney whose specific expertise lies in making her way appropriately through the intersection of ERISA and the Internal Revenue Code. For any business whatsoever.

It is a logical extension to pivot that ERISA/tax expertise to the cannabis space, when that industry is in dire need of proper guidance as to how to appropriately provide 401k and other employee benefits to its employees.

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Jewell Lim Esposito, Esq. has practiced ERISA and Tax for almost three decades. She is a partner at the law firm FisherBroyles, LLP, and chairs her firm’s Cannabis Practice Group.  The information contained herein is provided for informational purposes only and should not be construed as legal advice on any subject matter.  

This article was originally published in 401k Specialist.