Newly Allowed 401(k)s Will Need Advisers

Advisers may shy away from helping hemp and CBD companies with their 401(k)s because they may find themselves crossing into advising for a cannabis company as well, but there are protections—and money to be made.

Art by Katherine Streeter

With the passage of the 2018 Farm Bill by President Donald Trump, hemp and Cannabidiol, or CBD, companies can sponsor 401(k) plans for employees and take advantage of the related tax deductions.

Josh Horn, partner and co-chair of Fox Rothschild’s Cannabis Law practice in Philadelphia, explains that hemp that has tetrahydrocannabinol, or THC, with a 0.3% dry weight, and CBD, which is derived from hemp, were taken off the controlled substance list by the Farm Bill. The bill also allows hemp farmers to apply for crop insurance, and, according to Horn, makes banking and finance systems available to these businesses.

Michael Nepveux, an economist with the American Farm Bureau Federation, said in an article, “Uncertainty still exists about how and when regulations in general will be implemented and what those regulations will look like,” adding that regulators indicated it will likely not be until the 2020 planting season that definitive rules will be in place.

Matthew Able, senior partner at law firm Cannabis Counsel PLC and executive director of Michigan NORMAL [National Organization for the Reform of Marijuana Laws], says he had a couple of clients call about the new law. Clients are usually individuals or smaller companies, and they are not yet thinking about offering a 401(k). “If they make a lot of money this year, there may be a lot more action on that next year,” he says.

When they do think about establishing a 401(k), hemp and CBD companies may face obstacles. According to a blog post from Jewell Lim Esposito, an attorney with FisherBroyles LLP in Washington, D.C., “The real obstacle to implementing 401(k) plans for otherwise legal marijuana producers are the industry retirement plan providers who are nervous and jittery about dealing with ‘traffickers.’ In fact, they’re more than nervous. They have dug in their heels, refusing to do business with cannabis companies technically engaged in trafficking under federal law.”

One issue, according to Esposito, stems from the controlled group rules under the Internal Revenue Code. If a cannabis company starts a hemp division, or if a parent company has both a cannabis business and a hemp business, these are deemed as a “single employer” under the Employee Retirement Income Security Act (ERISA) and the Tax Code. If only the hemp division employees participate in a 401(k), all employees of the controlled group are considered in ERISA-required coverage and non-discrimination testing, and the plan would likely fail these tests and be disqualified.

So, an adviser that agrees to serve a hemp or CBD company 401(k) may find itself crossing into advising for a cannabis company as well. Even hemp companies not engaged with cannabis businesses will run into trouble because people don’t understand the difference between hemp and cannabis, so companies may not do business with them, according to Horn. He says there is a big learning curve.

Esposito says advisers cannot afford to be wrong in their advice. Controlled groups failing the required annual coverage test is typical. “With the very automatic operation of applicable tax rules, a head-in-the-sand, this-is-too-taboo approach will underserve or misguide the very cannabis and hemp/CBD companies that yearn for guidance that only experts in the retirement industry can provide,” she says.

Providers are reluctant to do business with cannabis companies even though cannabis companies are legally able to adopt 401(k) plans, and U.S. Attorney General William Barr is on record with the stated intent to refrain from pursuing trafficking prosecutions against otherwise legally-operating cannabis companies, according to Esposito.

Horn says, “In a nutshell, the federal government has historically taken a hands-off approach to medical marijuana and has indirectly not touched recreational use unless there is a crime like transporting over state lines. The Department of Justice has defunded prosecution efforts. It creates an interesting dichotomy between medical and recreational uses and the juxtaposition between federal and state laws.”

Able says, “We will continue to have these issues as long as cannabis is a Schedule I controlled substance. The more trouble companies have, the better, because it will stimulate change. If everyone is fat and happy, there’s no reason to rock the boat.”

Advisers should consider this: 2018 New Frontier Data from the Hemp Business Journal shows the hemp industry is projected to grow to $1.3 billion by 2022, and CBD product sales are projected to increase to $430 million. For financial firms it’s a question of profits versus reputation.

Able believes it will be financial firms, not activists, that push cannabis off Schedule I because they want a piece of the pie.