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.
