Retirement Plan Dreams May Go Up in Smoke for Marijuana Companies

Companies in the medical and recreational marijuana industry continue to face an uphill battle for access to financial services.   Although a number of states have legalized the medicinal and/or recreational use of marijuana, marijuana remains classified as a Schedule I drug subject to the federal Controlled Substances Act.  As such, financial services companies that wish to serve the marijuana industry could find themselves subject to the Bank Secrecy Act and the criminal money laundering provisions.  Those challenges are well documented.  However, do the same types of challenges exist if a marijuana company wants to sponsor a qualified retirement plan for its employees?  The answer appears to be a resounding yes.  A number of recent articles have documented cases in which large financial services companies have refused to open accounts for marijuana companies wanting to sponsor a retirement plan or have terminated the relationship with a plan sponsor when it was discovered the plan sponsor was in the marijuana industry.  While some state regulated financial services companies may offer retirement plan services to marijuana companies, many major financial services companies that offer retirement plan services refuse to offer those services to companies in the marijuana industry.

As if the financial services issues facing the marijuana industry weren’t enough, the IRS also provides challenges for a marijuana company that wants to make tax-deductible contributions to a retirement plan for its employees.  Code Section 280E disallows any deduction in carrying on any trade or business if the trade or business consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).  Therefore, if a company is in the business of growing and/or selling marijuana (whether or not legal under State law), any deductions that relate to that trade or business, including the deduction for a contribution to a retirement plan, could be disallowed under Code Section 280E.  However, that result could depend on whether the marijuana company is a cash-basis taxpayer or an accrual-basis taxpayer using the applicable inventory-costing regulations.  See Chief Council Memorandum 201504011, (January 23, 2015) (discussing whether certain expenses can be included in the “Cost of Goods Sold” calculation as an adjustment to an entity’s gross receipts).  The rules under Code Section 280E (and the inventory-costing regulations under Code Section 471) are complex and, while there is room for interpretation, marijuana companies may face challenges in their efforts to make tax-deductible contributions to retirement plans.