In an industry where finding a banking partner can be difficult, it can be even more difficult for cannabis companies to offer retirement plans to their employees.
Federal laws can make it difficult for cannabis companies to get the financial and administrative support they require to operate their business as many financial institutions and 401k providers refuse to do business with cannabis providers.
Difficult or not, by June 2022, all cannabis companies located in California, regardless of size, must provide these traditional benefits.
Why Cannabis Companies Need to Offer Employees Retirement Accounts
There two major reasons cannabis companies need to start offering employees retirement benefits:
It’s the law.The CalSavers Retirement Savings Trust Act requires that California employers of all sizes, including cannabis companies, offer a retirement plan with automatic enrollment by June 2022. For companies with more than 50 employees, the deadline has already passed. Failing to offer a plan will cost penalties.
To attract and retain talent.Transamerica’s 18th annual retirement survey stated a retirement plan was an important benefit to them. 81% of the workers surveyed said they liked companies that automatically enroll employees in their retirement plan. According to Cowen, an investment banking firm specializing in the cannabis industry, recent legalization in US states and Canada, along with the recently House-approved SAFE Banking Act are priming the industry for exponential growth. But to fuel this growth, you need talent. And to get and keep talent, you have to give them what they want.
Retirement Plan Options for Cannabis Companies
If you’re one of the many cannabis businesses scrambling to offer retirement savings accounts to employees, here are your options:
An Icon IRA.The Icon retirement savings account is a payroll IRA, we take contributions from an employee’s paycheck and deposit them into a personalized investment portfolio based on the employee’s risk tolerence and financial situation. It’s low-cost for employers and employees alike. In fact, it’s one of the most affordable ways to offer a retirement benefit, which means it’s cheaper to hire people and the people you hire get to keep more of their savings. Our IRA also removes the fiduciary burden, compliance requirements, and regulatory headaches from the employer, and unlike a 401k, it’s quick and easy to set up. From the employees’ perspective Icon is easy to use, it offers personalized investing without the need for a ton of research, and it’s portable, so your employees have access to it even when they leave your company.
401k.There are a handful of 401ks being marketed to cannabis companies and since the 401k is considered the most traditional of the retirement investment accounts, this might be the first solution you considered. Here’s why 401ks are not so great for cannabis companies:
– Compliance risk. As a company whose operations may not be federally sanctioned, you already have to jump through legal hoops just to run your business. Setting up a 401k brings added complications. If you offer a 401k to employees, you take on a fiduciary responsibility to those employees. That means you must retain insurance, submit to annual auditing and ensure that all employees are equally benefitting from the account offering.
– Increased costs. Even for traditional companies, 401ks typically come with high fees for both the employer and employee (which significantly eats into their savings over the life of their account). For cannabis companies, the cost could be even higher because of the onerous vetting process you must complete.
– Lengthy set-up process. As retirement accounts go, 401ks are complicated to set up. They require lots of paperwork and legal work and can take months to set up. Add to this the lengthy vetting process all cannabis companies must complete, you might not have time to set up your 401k by the June 2022 deadline.
– Not portable. Employers sponsor 401k accounts so while the employee “owns” the account, the employer is the vehicle through which the employee has access to it. Once the employee leaves, they can no longer contribute to the account. The cannabis industry has a high turnover rate so this type of model doesn’t really work for those employees.
For California Companies: CalSavers.If you fail to set up another retirement savings account for your employees, you will have to enroll them in the state-run plan called CalSavers or risk paying a fine of $250 per employee. CalSavers is a Roth IRA, which means employee contributions are not tax deductible in the year they make them. Also, employees who make over $140,000 (single filers) or $208,000 (married, filing jointly) in 2021 aren’t eligible to contribute to a Roth IRA. And if they do by mistake, they will have to go through the complicated process of unwinding those contributions. Another drawback to the CalSavers program is that it’s hard for both employers and employees to use. Employers must spend a lot of time completing paperwork upfront and managing the plan and employees find the process of managing their account complicated.