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.