As cannabis is subject to state instead of federal regulation, rules and regulations for cannabis use and business differ depending on which state you are in. One of the biggest ways states with legal cannabis programs differ from one another is in their approach to retirement plan requirements.
While virtually all states with legal cannabis programs now require cannabis companies to offer their employees retirement plans, each state has its own process and timeline for satisfying these requirements.
As for California, companies with over 50 employees were required to either enroll in the state’s Calsavers plan, or seek out another retirement plan provider by June 30th, 2021. The same will be required of California-based cannabis companies with 50 or less employees by June 2022. As a penalty for non-compliance, companies are required to pay $250 per eligible employee if noncompliance extends 90 days or more after the notice, and an additional penalty of $500 per eligible employee if non-compliance extends 180 days or more after the notice.
With such hefty fines at stake, it may seem like an easy decision to just go with the Calsavers retirement plan to satisfy this state-mandated requirement. But, for cannabis companies, working with a provider that has industry-specific savvy promises to be a much smarter long-term move since they offer more benefit options, are more customizable, and in the end, more cost-effective.
401K Plans Offer More Options for Cannabis Businesses than Calsavers
In an effort to help employers comply with this mandate, California offers its Calsavers program, overseen by the Calsavers Retirement Savings Board, an independent government agency that selects the investment options. Essentially, the Calsavers program is a retirement vehicle that allows employees to put a portion of their pay into investments directly through payroll contributions with their employer.
The issue here is that these pre-selected investment options are limiting and don’t allow the companies to customize the terms of their plan—nor do they give companies many options to pick from. For instance, under this individual retirement account (“IRA”) Calsavers program, a cannabis company won’t be able to match employee contributions or give any profit sharing contributions—two 401(k) options that are really important to recruiting and retention because they fortify an employee’s saving power. On top of this, a custom 401(k) solution can adapt and grow alongside your business.
A 401(k) plan will not only satisfy the state requirement, but it allows you to customize the plan, including eligibility, age of participation, length of minimum service, vesting, employer contributions, and other factors that can make a big impact in the satisfaction—and retention—of your employees long-term, particularly for the millennials who fill the majority of cannabis jobs.
401(k)s Are More Cost-Effective for Cannabis Employers
On top of being more flexible, 401(k) plans offer more bang for the cannabis employer’s buck than Calsavers, because 401(k) contributions are pre-tax. In fact, Calsavers’ employers receive no tax benefit for opting into the plan, and they don’t qualify for additional tax deductions for matching employee contributions because the program doesn’t allow matching.
“Calsavers only offers after-tax contributions to a Roth IRA. Investment earnings within a Roth IRA are tax-deferred until withdrawn,” reports Betterment for Business.
But, thanks to the SECURE Act passed in 2019, when an employer opts for a 401(k) plan, which allows both pre-tax and post-tax payments, they are eligible for ample tax credits that reduce tax liability dollar for dollar. Under the SECURE ACT, any company — including a cannabis company — can get up to $5,000 annually in a federal tax credit for starting or participating in a new 401(k) plan. Plus, if the 401(k) plan has an automatic enrollment feature, then there is another $500 annual federal tax credit.
These substantial tax credits can help cut down the high costs of running a cannabis business in California, particularly if you’re a small start-up. As Cal Matters reports about small businesses attempting to enter and stay in the space, “The process is daunting: business plans, tax returns, seed money. Even with state programs designed to close the gap, experts and advocates say the cost of entry and long list of requirements are still keeping people of color and low-income applicants from entering the state’s lucrative legal market.”
That isn’t to say a tax credit wouldn’t be a boon for larger and more established cannabis corporations, too. After all, according to recent data, the average upfront investment to open just one dispensary in California is $80,000 to $250,000, and from there, ongoing operating expenses are between $30,000 and $70,000 per month. Henceforth, by opting into a 401(k) as opposed to the Calsavers plan, California’s new retirement plan mandate doesn’t have to add to a cannabis company’s financial overhead.
Ultimately, though the state-offered Calsavers program doesn’t offer many benefits to cannabis companies as compared to other benefit programs, opting into Calsavers before the state deadline is better than being slapped with non-compliance fines. But, if your company is in a position to shop around and look at options for 401(k)s, odds are you will find that these private plans offer more flexibility and cost-effectiveness, and that they fortify your cannabis business for the long-term.
For more tips and information regarding retirement plans, contact us.
