Yikes! Who knew?! Soon, ALMOST ALL California cannabis companies will have to offer a retirement plan of sorts (for ease of reference, the author refers to a 401(k) plan, but there are other types of plans). Cal. Code Regs. Tit. 10 § 10001. In fact, the deadline for cannabis companies with more than 100 employees is September 30, 2020.
In California, cannabis companies with more than 100 employees are mandated to have some type of retirement plan in place by SEPTEMBER 30, 2020. . .
For cannabis employers with more than 50 employees, the deadline is June 30, 2021; for cannabis employers with five or more employees, June 30, 2022.
To help its employers comply with this mandate, the state of California has its CalSavers program. The program is a retirement vehicle, allowing employees — through their employer — to direct automatically a portion of their pay into investments
The CalSavers Retirement Savings Board, an independent government agency that oversees the program, selects the investment options, including the default investment options. Through an open bidding process, the Board selected State Street Global Advisors to help manage the funds. Employees will also have access to an ESG (Environmental, Social, and Governance) fund on the CalSavers platform.
Under this individual retirement account (“IRA”) program, a cannabis company won’t be able to match employee contributions or give any profit sharing contribution. As for employees, the contribution limit is $6,000 (in 2020), which is intended to equal the limit of what the Internal Revenue Service allows one to contribute to an IRA (irrespective of and without the California mandate on employers).
Aren’t Cannabis Companies Exempt From California’s Mandatory Retirement Law?
Nope. A quick “Control F” search for the word “cannabis” or “marijuana” in the text of the law will show clearly that such companies are not exempt from having to facilitate the CalSavers IRA program (else, they must offer a retirement plan):
What Happens if Cannabis Companies Don’t Register With CalSavers?
Big time penalties.
Penalties for non-compliance by a cannabis company can be up to $750 per eligible employee — $250 per eligible employee upon the first official penalty notice from the state of California — and an additional $500 per eligible employee for continued noncompliance 90 days after the first penalty notice.
To avoid the penalty, however, and to comply with the California mandate for retirement, a cannabis company can adopt a 401(k) plan prior to the relevant deadline. In that way, the cannabis avoids having to register with the CalSavers IRA program to enroll their workers. As you can see with the above deadlines, large cannabis companies — those with more than 100 employees — have just until the end of this month!
Is a 401(k) Plan a Good Alternative to CalSavers?
Is a 401(k) plan a good alternative to the CalSavers IRA for a cannabis company? It is. While there are other retirement plans (e.g., 401(a) and 403(b) plans, Simplified Employer Plans, SIMPLE IRAs, etc.), the very common 401(k) plan is a good retirement plan choice for cannabis companies trying to comply with California’s mandate and to offer one that most employees readily recognize. A 401(k) plan allows a cannabis company input in designing the terms of the plan (eligibility, age of participating, length of minimum service, vesting, employer contributions, etc.). For example, a cannabis company might want to match employee contributions.
Does the new California regarding mandatory retirement programs apply to cannabis companies?
YES, it does.
As another example, maybe the cannabis company might want to allow profit sharing. Or, the cannabis company might want to help select the investments into which its employees will put their money. Consequently, a 401(k) plan might be more suitable for a cannabis company who wants to have control in the design of its ultimate retirement plan.
Can Cannabis Companies Participate in a 401(k) Plan?
While cannabis remains illegal under the federal law of the Controlled Substances Act, under the federal laws of the Internal Revenue Code (through which the Department of Treasury enforces its federal laws) and the Employee Retirement Income Security Act (“ERISA,” through which the Department of Labor enforces its federal laws), cannabis companies can sponsor and/or participate in 401(k) plans. For an exploration through those federal laws and how cannabis companies can have 401(k) plans, see “Once and For All: Internal Revenue Code and ERISA Say Cannabis 401k Plans Can Exist” and “Issues for Cannabis Companies to Consider When Sponsoring Retirement Plans.”
What Are the Benefits of a Cannabis Company Starting Its Own 401(k) Plan?
Cannabis companies are allowed to have 401(k) plans
There are federal tax credits available to a cannabis company that starts its own 401(k) plan
Last year, President Trump signed the Further Consolidated Appropriations Act, 2020 into law on December 20, 2019. That law provides comprehensive retirement plan legislation in over a decade: the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Most relevant to any company starting a 401(k) or other retirement plan is the federal tax credit that the SECURE ACT offers.
Remember: A federal tax credit reduces tax liability dollar for dollar, whereas a federal tax deduction reduces the amount of taxable income. Taxable income, in turn, is used to calculate tax liability. Tax credits are generally more valuable because they reduce federal tax liability (i.e., the amount owed to the federal government). Tax deductions, on the other hand, reduce tax liability by the tax rate for every dollar of the deduction.
A cannabis company can take advantage of what could be a federal tax credit of $5500/year (for three years) for its 401(k) retirement plan.
Under the SECURE ACT, any company — including a cannabis company — can get up to $5,000 annually in a federal tax credit in starting or participating in a new 401(k) plan. Moreover, if the 401(k) plan has an automatic enrollment feature (where employees are put right into the 401(k) plan, unless and until they opt out), then there is another $500 annual federal tax credit.
Thus, a cannabis company could be entitled to $16,500 in federal tax credits over a three-year period for offering a retirement plan to its employees.
There are HR benefits for a cannabis company to have a 401(k) plan
In all industries, whether cannabis or non-cannabis, 401(k) plans are known to help with recruiting, hiring, and retention of employees. It is a nice perk to have, and one that can be put into place to keep a cannabis company competitive with overall compensation packages.
Moreover, subject to Section 280E, a cannabis company’s contribution of employee money and match to a 401(k) plan are “deductible.” That is, contributions are permissible “costs of goods” sold adjustments. Treas. Reg. Section 1.263A-1(e)(3)(ii). [The Editor recommends a good tax accountant familiar with inventory accounting.] Further, amounts get to grow income-tax free inside of a trust, and the trust pays no income taxes itself.
As for the 401(k) trust (where assets are held separate from the cannabis company’s business assets), company creditors — even with the cannabis company in bankruptcy — cannot make a successful claim on retirement plan assets. See U.S. Department of Labor, “FAQs about Retirement Plans and ERISA,” p. 13, June 1, 2020.
Finally, if the cannabis company ever terminates its 401(k) plan or if an employee terminates employment, rules under the Internal Revenue Code and ERISA permit the employee to rollover the account balance into another retirement plan or IRA.
California’s Mandatory Retirement Rule is Forcing Cannabis Companies to Act
With September 30th right around the corner for large companies, and smaller companies swept up into the California retirement plan mandate within just two years, it is really time for the state’s cannabis companies to consider how a specifically-tailored 401(k) plan can help their employees with savings.