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3 Common Questions Regarding 401(k)s for Companies in the Cannabis Industry: Answers From the Experts

July 16, 2020

While the cannabis market continues to grow, the industry itself is still a controversial subject. The rules and regulations surrounding the implementation of retirement plans for cannabis companies are extremely complex. Over the years, various media sources have released false, out of context information, that has ultimately misled and confused viewers. As a result, cannabis owners and executives often struggle finding reliable resources and accurate information surrounding 401(k) plans for their companies. Leading Retirement Solutions (LRS) has a team of financial, legal, and retirement industry experts who have served cannabis companies for the past five years, providing cannabis industry leaders with retirement plans that best fit their needs. This article is designed to share expert insights on three of the most common questions regarding retirement plans for cannabis companies.

Is Sponsoring a Retirement Plan for Cannabis Companies Legal? 

Yes, in states where cannabis is legal, companies have the right to sponsor a retirement plan. In fact, several well-established cannabis companies such as Tilray and Canopy Growth, already offer various benefit packages to their employees.

“The Internal Revenue Code expressly permits cannabis employees to participate in a 401k plan just like other, non-cannabis employees.” -Jewell Lim Esposito, Esq., ERISA Partner with FisherBroyles, LLP

Over the past few decades, the cannabis industry has made tremendous strides towards changing policies involving the product. As of 2020, 66% of states have legalized cannabis to some capacity, and that number is projected to rise in the next few years. Unfortunately, the myth that it is illegal for cannabis companies to sponsor retirement plans stems largely from financial institutions and journalists who have diluted the dialog regarding what cannabis owners can and cannot do. In fact, as agents at the IRS and DOL have acknowledged, there is nothing in the Internal Revenue Code that prohibits cannabis enterprises form sponsoring a 401(k) Plan.

Can Cannabis Businesses that Sponsor a 401(k) Take Deductions or Claim Tax Credits? Is Sponsoring a 401(k) Worth it?

Yes, business owners operating in cannabis can take deductions and claim tax credits (up to $5,500 per year for the first 3 years) when sponsoring a 401(k) plan. While there is no denying that cannabis is an industry covered in red tape, and that business owners should take certain precautions when taking tax deductions from there 401(k)s, the myth that business owners operating in cannabis cannot take deduction when sponsoring a 401(k) plan is false and misleading. Sure, business owners cannot approach the tax deduction process the exact same way as non-cannabis companies, but alternative solutions do exist.

In a recent article published by 401k Specialist, Jewell Lim Esposito states “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.”

Sponsoring a 401(k) isn’t nearly as expensive to set up and maintain as many business owners believe. In fact most costs are offset as a business deduction, tax credit, and/or paid by the plan. Additionally, business owners can design a 401(k) plan that does not require the company to make contributions and only allows for contributions from employees. However, most companies prefer to make a matching contributions as it helps the company attract and retain top talent.

Will my Cannabis Company Face Federal Repercussions for Implementing a Retirement Plan?

No, cannabis companies operating in legal states do not have to worry about federal repercussions with regards to sponsoring a retirement plan. That said, cannabis owners should consult a third-party retirement plan administrator to ensure their plan is setup and implemented correctly. As with any retirement plan, full compliance with all government regulations is mandated.

Currently, there is no law specifically allowing or prohibiting banks from working with cannabis companies. Unfortunately, with these vague guidelines, the vast majority of banking institutions have chosen to avoid the cannabis industry. But why? If there is no law preventing interaction between these industries, then why would banks not take advantage of this extremely lucrative opportunity? The barrier is finding a custodian/banking institution that will accept payroll contributions while also having the technology and relationships to send those contributions off for investing. This can be an extremely complex process that many financial institutions are ultimately choosing not to allocate their time or resources towards.

However, a few companies that have been operating in the cannabis/retirement administration space for several years, like LRS, have managed to find viable solutions to these obstacles. LRS does the heavy lifting by finding above board solutions so clients operating in nontraditional industries, like cannabis, can enjoy the benefits. The team of experts at LRS have been working with cannabis companies for 6 years, and championing the Leading Cannabis 401(k)® Plan for the last 3. For more information on our retirement plan solutions for cannabis companies as well as industry related updates check out the articles listed below.

  1. 3 Reasons Why the ROBS Strategy for Business Financing Benefits the Cannabis Industry
  2. Cannabis Organizations Can Legally Offer Retirement Benefits
  3. With Millions Searching for “Essential” Jobs, Cannabis Companies need to Consider Employee Benefits NOW


For more tips and information regarding retirement plans, contact us.

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About The Author

Keyvan Khaki is a student at the University of Washington School of Business. He is a Brand Content and Marketing Intern at Leading Retirement Solutions. For more information on Keyvan and the work he is pursuing, be sure to check out his LinkedIn.

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