Find us at MJBiz 2024, Booth #7442. We are EXPERTS in this field, recruited to speak before the federal government, lawyers, accountants, financial institutions. We have published guidance on all this (just Google the names of Managers Jewell Lim Esposito and Robert Ellerbrock).
Canna company: Various states will penalize you if you don’t offer a retirement plan. Wondering how to get a 401k plan, with a team who has collaborated together for decades?
HR or payroll company: Consider offering a 401k plan to your current canna clients and future prospects?
Financial advisors: It’s a $5B possibility for retirement assets alone in 2024. We show you how to be a part of it.
We’ve got what has to now be dog years of experience with the intersection of the law/IRS/DOL and the canna industry. In fact, we pioneered perhaps the very first canna 401k plan for the industry way back in 2018, still in existence today — and producing clean audits for several years straight.
Trust those of us who have been stewards to the cannabis industry for the very necessary duration to have navigated all the nuances. Trust Integritas.
As a financial service provider, ensuring compliance with regulations like Know Your Customer (KYC), Anti-Money Laundering (AML), and the Office of Foreign Assets Control (OFAC) is critical when managing financial products and services, especially if you touch even a scintilla of money in the cannabis business. Whether you’re advising on retirement plans, managing banking transactions, or providing financial guidance, your role involves more than just administering these services—it also means ensuring compliance with federal standards to protect both your business and your clients from legal and financial risks arising from the cannabis industry’s strict regulations.
The Patriot Act and Bank Secrecy Act: How They Apply to 401(k)s & Cannabis
The Patriot Act and the Bank Secrecy Act (BSA) require financial institutions, including banks and advisors, to verify the identities of all customers and monitor financial transactions for suspicious activity. This practice is crucial when working with clients in or around the cannabis industry, as legal complexities between state legality and federal scrutiny can cause government agents to flag transactions as suspicious – potentially leading to penalties, asset freezes, or leaving you and your clients vulnerable to compliance risks.
Recently, the Financial Crimes Enforcement Network (FinCEN) expanded its rules under the BSA that has significant implications for financial service providers that deal with any money from the cannabis industry. Although financial service providers already face hefty regulatory challenges, these new rules make the cannabis sector ripe for FinCEN to continue to scrutinize financial practices.
The new rule, codified as 31 CFR 1010.100(t), expanded the definition of “financial institution” to include SEC-registered investment advisors (RIAs), which must now implement robust regulatory programs to detect and mitigate risks tied to money laundering and illicit activities and report suspicious activity to FinCEN directly – particularly when transactions suggest attempts to bypass regulatory scrutiny.
The cannabis sector remains high-risk due to federal prohibitions, cash-heavy operations, and limited access to banking. Investment advisers must now ensure they scrutinize any funds tied to the cannabis industry.
With FinCEN increasing oversight, advisers must proactively address these risks associated with the BSA.
KYC: Are You Sure You Know Your Employees?
For banks and financial advisors, KYC goes beyond knowing a client’s name and address – it means thoroughly verifying the legitimacy of their financial activities. Any misstep in this process could expose both you and your clients to significant legal risk. Ensuring that every dollar in a 401(k) plan is compliant with federal law is especially crucial. Failure to do so could result in your institution being held liable for not performing adequate due diligence – even if you aren’t directly involved in 401(k) offerings.
AML and OFAC: Are You Monitoring Every Contribution?
Under AML and OFAC regulations, financial service providers must monitor all financial transactions for suspicious or illicit activity. If you’re providing services to businesses operating in high-risk or heavily regulated sectors, such as cannabis or international trade, these monitoring efforts become even more complex. The ownership structure of businesses and the sources of their financial contributions must be carefully scrutinized to avoid violations. Non-compliance with OFAC can lead to civil penalties, asset forfeitures, or even criminal prosecution.
How Trust Integritas Can Help
As part of Trust Integritas’s review process, we ensure that financial service providers are relieved of the increasing pressure to comply with KYC, AML, and OFAC regulations – especially when working in the cannabis industry. These rules can be difficult to navigate, but non-compliance could threaten your reputation, clients’ trust, and your business’s long-term stability. Trust Integritas can help by providing expert guidance and compliance solutions tailored to your specific needs, ensuring that your services and your clients are fully protected from regulatory risks.
Come hear Jewell Lim Esposito explain how Trust Integritas and its staff have put together teams that include national, household retirement plan service provider names (investment advisors, mutual funds, custodians) who openly support the Cannabis Industry and 401(k) plans for the industry’s employees. She’ll be speaking at the PBC Conference September 4-5, 2024, in Washington, DC. Stay tuned for more information!
Managing Member Robert Ellerbrock takes a look at the recent news coming from the U.S. Drug Enforcement Administration (“DEA”).
The DEA has stated that it will move to reclassify cannabis from a Schedule I to a Schedule III substance under the Controlled Substances Act. The DEA will take public comments prior to publishing a final rule but only after the Office of Management and Budget (“OMB”) reviews the proposal and approves reclassification. The proposal would recognize the medical uses of cannabis, but it wouldn’t legalize it for recreational use. Specifically, the proposal aims to move marijuana from the “Schedule I” group to the less tightly regulated “Schedule III”. Here is what this reclassification means and its implications:
Schedule I substances are considered to have no accepted medical use and a high potential for abuse. The proposal seeks to reclassify marijuana to Schedule III. This would mark a historic shift in federal policy. Schedule III drugs include substances like ketamine, anabolic steroids, and certain acetaminophen-codeine combinations. Unlike Schedule I, Schedule III drugs have some medical uses and are subject to various rules. However, they are still controlled substances.
The reclassification to Schedule III would be a monumental shift for the cannabis industry. The move to Schedule III would relieve companies in the industry from Section 280E of the Internal Revenue Code, which forbids cannabis businesses from deducting otherwise ordinary expenses (rent, payroll, etc.) from gross income associated with the “trafficking” of Schedule I or II substances. In addition, the change to Schedule III may allow cannabis companies list their stock from the OTC markets to the U.S. stock exchanges. Additionally, credit card processors, banks, and financial institutions will be less averse to doing business with cannabis companies, which could result in easier and more commercially reasonable access to credit and capital.
In regard to Cannabis 401(k) plans, the shift to cannabis being classified as a Schedule III may allow companies to take advantage of potential tax credits of up to $5,500 per year for the first 3 years.The reclassification may also allow for potential employer contribution credit of $1,000 (maximum) per employee. Nonetheless, not having access to credits doesn’t prevent a cannabis company from participating in a 401(k) plan right now.
While the DEA’s proposal is exciting for the cannabis industry, it is still a long way of implementation, as it must still go through OMB review, the public comment period, and the rule making, which will need to make its way through the never quick bureaucratic process.
Even though it may be a while, the DEA’s decision to reclassify cannabis from Schedule I to Schedule III is undoubtedly a watershed moment for the cannabis industry.
Managing Member Jewell Lim Esposito discusses the state of affairs for cannabis 401(k) plans.
Background re: the Tension Between Cannabis and 401(k) Access
About 8-9 years ago, the leadership of Trust Integritas, LLC, started structuring retirement plans (401(k) plans among them) for cannabis companies in the United States for a couple of reasons:
Cannabis employees (of cannabis producers/distributers, hemp producers/sellers) should have similar access to retirement savings as their non-cannabis employee counterparts; and
States were starting to mandate that businesses with as few as one employee had to have a retirement plan or else participate in the state-run plan (whose trustees or custodians would not always take cannabis retirement plan money, despite the state mandate and even when those who did not have a retirement plan or who did not participate in the state-run plan could be subject to costly penalties).
Importantly, the Internal Revenue Code and ERISA permit cannabis companies to sponsor a 401(k).
Further and interestingly, under the Code and ERISA, typically (and just generally) a controlled group member who provides 401(k) perks to its non-cannabis employees must also extend similar 401(k) perks to cannabis employees, yet advisors to the non-cannabis employees refused to (and did not know how to) help with what really is a Code or ERISA fiduciary breach for not giving the same 401(k) benefits to cannabis employees.
Thus, we needed to come up with acceptable solutions for cannabis companies to offer retirement plan benefits to their employees. In so doing, we structured some 75+ plans, for about 8000-9000 401(k) participants.
Certain Financial Institutions Have Expelled Cannabis 401(k) Plans Off Their Platforms
Last year, we heard murmurings that various financial institutions were going to eject cannabis 401(k) plans from their platforms. We had our suspicions that the ejections would start sometime in 2024. Consequently, in late summer 2023, we chose to be proactive once again and to pivot to prepare these 401(k) plans for transfer onto other financial institutions’ platforms. We wanted to step in where we could assist with transfers of what we know is above $75 million (at least with the plans we had structured).
Conservatively speaking, we believe there are some 600,000 cannabis and hemp full- and part-time employees eligible to receive a retirement benefit. That market translates to a possible $5 billion in 401(k) assets for 2024 alone.
As we expected, the ejections started coming, often with just a few months’ notice. These cannabis companies and their 401(k) plans are under a time crunch. Right now. Some were told that they had to exit by June 30th; many others, by July 31st. Anecdotally, we hear some companies are being handed a check that equals the total dollar amount in their 401(k) plans (forcing those companies to consider the impact of what may be a forced termination of a plan).
As we said, though, we had started exploring solutions in 2023. Because we had engineered retirement solutions previously, we knew we could and should tap our wherewithal and to leverage the retirement plan service providers out there to address both the ejection and state mandate issues.
Much of the time from 2023 to now has been each of us, retirement plan service providers, apprising one another regarding very drilled-down technicalities: the intersection of ERISA/Tax/Cannabis retirement, operations, payroll movement, reconciliation of funds, investment options, custodying of mutual fund shares and dollars, and the thoroughness of vetting to prevent financial crimes/money laundering (“AML” or “anti-money laundering” reviews) and ensuring that those working with 401(k) funds know with whom they are transacting (“KYC” and “KYB” – “know your customer” and “know your business” reviews that include delving into social security numbers, the “OFAC” (Office of Foreign Asset Control) and “SDN” (specially designated national and blocked person) lists).
We had been doing this very intensive and ongoing (online) AML, etc. review since our very first cannabis 401(k) plan. In identifying options for those cannabis 401(k) plans that were being ejected, we had to assure those retirement plan service providers with whom we were structuring solutions regarding the transfer issue that our AML, etc. procedures were comprehensive.
We then solved for issues regarding who would serve as fiduciaries of these plans. Many of the financial institutions we interviewed regarding any possible acceptance of a transfer of cannabis 401(k) assets wanted to ensure that those overseeing a cannabis retirement plan had the requisite and substantive experience. The leadership of Trust Integritas had that, and we were taken to task, probed, and thoroughly scrutinized by various providers (and their executives and in-house counsel).
Finally, Approved Solutions for Cannabis 401(k) Plans
Subsequently, because of our long-standing presence in the ERISA/Tax/Cannabis space, we knew we had to weave together teams (a representative 3(38) who had confirmed that any investment option the 3(38) was putting into a plan would indeed accept cannabis money into that mutual fund, collective investment trust, etc.; a third party administrator; a record keeper; an auditor; a custodian; a bank; a knowledgeable corporate trustee; and investment fund managers and their trustees) whom we knew were top quality and who had already made the business decision to be in the cannabis space.
