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Operating a cannabis business is inherently complex: navigating compliance with IRC Section 280E, securing banking partners willing to work with you, managing high employee turnover, and keeping day-to-day operations running in an industry that evolves rapidly.

So, when you receive a notice from your state about a “mandatory retirement plan,” it’s understandable if you’re confused or even frustrated.

However, this is not mere bureaucratic noise, it is a legal obligation. Failure to comply can result in substantial financial penalties.

This post aims to clarify why cannabis businesses are subject to these mandates, outline the consequences of non-compliance, and detail viable options for safeguarding your license, finances, and workforce.

Cannabis Legal Status and State-Mandated Retirement Plans

Understanding where cannabis is legal and which states require retirement plans helps cannabis businesses navigate compliance.

State	Cannabis Legal Status	State-Mandated Retirement Plan?
Alabama	Medicinal only	No
Alaska	Fully legal	Considering Mandate
Arizona	Fully legal	Considering Mandate
Arkansas	Medicinal only	Considering Mandate
California	Fully legal	Yes
Colorado	Fully legal	Yes
Connecticut	Fully legal	Yes
Delaware	Fully legal	Yes
Florida	Medicinal only	No
Georgia	Medicinal only	No
Hawaii	Medicinal only	In Development
Idaho	Illegal	Considering Mandate
Illinois	Fully legal	Yes
Indiana	Illegal	Considering Mandate
Iowa	Medicinal only	Considering Mandate
Kansas	Illegal	Considering Mandate
Kentucky	Medicinal only	Considering Mandate
Louisiana	Medicinal only	Considering Mandate
Maine	Fully legal	Yes
Maryland	Fully legal	Yes
Massachusetts	Fully legal	No
Michigan	Fully legal	Considering Mandate
Minnesota	Fully legal	In Development
Mississippi	Medicinal only	Considering Mandate
Missouri	Medicinal only	No
Montana	Fully legal	Considering Mandate
Nebraska	Illegal	Considering Mandate
Nevada	Fully legal	In Development
New Hampshire	Medicinal only	Considering Mandate
New Jersey	Fully legal	Yes
New Mexico	Fully legal	No
New York	Fully legal	In Development
North Carolina	Illegal	Considering Mandate
North Dakota	Medicinal only	Considering Mandate
Ohio	Fully legal	In Development
Oklahoma	Medicinal only	Considering Mandate
Oregon	Fully legal	Yes
Pennsylvania	Medicinal only	In Development
Rhode Island	Fully legal	In Development
South Carolina	Illegal	Considering Mandate
South Dakota	Medicinal only	No
Tennessee	Illegal	Considering Mandate
Texas	Medicinal only	Considering Mandate
Utah	Medicinal only	Considering Mandate
Vermont	Fully legal	Yes
Virginia	Fully legal	Yes
Washington	Fully legal	In Development
West Virginia	Medicinal only	Considering Mandate
Wisconsin	Illegal	Considering Mandate
Wyoming	Illegal	Considering Mandate

State-Mandated Retirement Plans: What Are They?

Increasingly, states are requiring employers to either establish qualified retirement plans (such as 401(k) plans) or register with state-run retirement savings programs—often Roth IRAs administered via state portals. These programs typically feature automatic payroll deductions for employees, unless they opt out.

The intent is to promote retirement savings among workers, especially in sectors like cannabis where employer-sponsored retirement benefits have historically been scarce.

The rules are relatively clear: if your business meets the employee threshold and does not offer a private plan, registration with the state program is mandatory. Employers must process payroll deductions and maintain opt-out records.

This might sound straightforward, unless you operate in cannabis.

Cannabis Businesses Are Not Exempt

Despite the industry’s federal legal ambiguities and often “off the grid” perception, state retirement mandates apply uniformly across industries.

Whether you run a dispensary with five or more employees, operate a cultivation facility, manage a manufacturing site, or provide ancillary cannabis services, compliance is required.

No carve-outs. No grace periods. No exceptions.

State regulators in California, Illinois, and Oregon have already begun issuing notices to cannabis businesses. Colorado is anticipated to follow suit shortly.

Penalties Are Real and Escalate Quickly

Many operators underestimate financial exposure. Non-compliance is far costlier than delayed deadlines or minor fines.

Take California’s CalSavers program as a case study: failure to register within 90 days of the deadline results in a $250 fine per eligible employee. After 180 days, that fine increases by an additional $500 per employee.

For a business with ten employees, that equates to $5,000 in penalties.

Other states enforce similar regimes:

• Colorado: $100 per employee annually, up to $5,000
• Connecticut: TBD
• Delaware: $250 per employee annually; capped at $5,000
• Illinois: $250 per employee annually
• Maryland: No direct fines; forfeiture of $300 annual state fee waiver
• Maine: $20 per employee from July 1, 2025, to July 30, 2026; $50 per employee from July 1, 2026, to July 30, 2027; $100 per employee on or after July 1, 2027
• New Jersey: Year 1: written warning; Year 2: $100 per employee; Years 3-4: $250 per employee; Years 5+: $500 per employee
• Oregon: $100 per employee annually; capped at $5,000
• Vermont: Up to $10 per employee before October 1, 2025; Up to $20 per employee from October 1, 2025 to September 30, 2026; Up to $75 per employee after October 1, 2026
• Virginia: Up to $200 per eligible employee

These are not theoretical figures; cannabis operators have incurred fines exceeding $20,000 due to non-compliance or assumptions of exemption.

Why Cannabis Businesses Are Particularly Vulnerable

In 2024, the cannabis industry faced a significant disruption as several major custodial providers unexpectedly exited the market, triggering a wave of 401(k) plan terminations. This sudden shift left many cannabis employers racing against the clock to secure new providers and protect their employees’ retirement savings.

Even with a growing workforce of over 440,000, cannabis businesses still struggle to access basic financial services, including 401(k) plans. Currently, only about 7% of cannabis employees participate in retirement savings programs, compared to 52% across other sectors. This stark disparity underscores both the challenges and the untapped potential for cannabis employers in 2025 to strengthen their benefits and workforce stability.

Operating in the cannabis industry already entails heightened scrutiny from state regulators, financial institutions, and tax authorities. Failure to comply with retirement plan mandates risks being interpreted as negligence by banks or licensing boards. Moreover, non-compliance can jeopardize license renewals, particularly as states increasingly incorporate labor and payroll compliance into their audit frameworks. Additionally, neglecting retirement benefits sends a discouraging message to employees about the company’s commitment to their long-term welfare.

Your Two Main Compliance Options

Option 1: Register for Your State’s Retirement Program

This is the fastest path to compliance, designed for small businesses without dedicated HR or payroll teams.

The process involves business registration, automatic employee enrollment, and payroll deduction facilitation without employer matching.

Advantages:

• Low or no direct cost to the employer.
• Simple to register.
• No employer contribution obligations.
• Quick compliance.

Drawbacks:

• Roth IRA contribution limits are lower than those for 401(k)s.
• No employer matching is allowed.
• Not all state programs are cannabis-friendly; some may reject cannabis payroll funds.

Option 2: Establish a Private, Cannabis-Compliant 401(k) Plan

This option provides greater control and benefits, including employer matching, customized plan design, and enhanced employee retention and recruitment.

It also signals to regulators and financial institutions a commitment to robust compliance and operational seriousness.

Advantages:

• Employer matching permitted.
• Higher contribution limits.
• Flexible plan structures.
• Positive impact on workplace culture and retention.

Drawbacks:

• Higher initial and ongoing costs (approximately $1,200–$3,500 annually).
• Requires a provider willing to accept cannabis-related payroll funds.
• Longer setup timeframe.

What About IRC Section 280E?

Many cannabis businesses encounter complications due to IRC Section 280E, which disallows federal tax deductions for employer retirement contributions in cannabis-related businesses.

While employer matching is not tax-deductible federally, its retention value often outweighs this drawback. Several clients report that modest employer matches reduce rehiring and training expenses by tens of thousands annually.

Ancillary businesses not directly handling cannabis plants may still deduct retirement contributions.

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.

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!

Potential Good News for Canna Companies.

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:

1. Cannabis employees (of cannabis producers/distributers, hemp producers/sellers) should have similar access to retirement savings as their non-cannabis employee counterparts; and
   
   
2. 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 31^st.  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.