At least three-quarters of Colorado’s cannabis industry workers have some kind of health insurance, yet most have to pay for it themselves. Their employers don’t generally provide it, because they’re not eligible for tax deductions when they do.
For any other federally regulated business in America, employer-paid health insurance premiums are exempt from federal income and payroll taxes. The portion paid by employees is typically exempt as well. But because marijuana is still considered a controlled substance by the federal government, cannabis growers and distributors can’t claim any federal tax deductions. They still must pay taxes, but they don’t receive any tax breaks in return.
This is due to a section of the U.S. Internal Revenue Code that was enacted before any U.S. state decriminalized the sale or use of marijuana. Section 280e states that “no deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business, if such trade or business consists of trafficking in controlled substances.”
Since banks and other financial services firms are prohibited from doing business with firms dealing in illegal substances, many cannabis-related companies are forced to operate as cash-only businesses, according to Chris Wolpert, managing member of Group Benefit Solutions in Tacoma, Wash. This, he notes, is a major impediment to completing transactions such as sponsoring health plans for employees.
Further, in Washington state, cannabis businesses are required to pay a 37% excise tax, inducing their owners to eschew paying for benefits and roll what profits they make back into their companies. Says Wolpert, “The owners running these businesses are saying that the excise tax is taking the top third of their revenue. Given their federal tax issues and a state law that’s constantly in flux, it becomes difficult to expand benefit offerings.”
But whether cannabis employers want to or not, many are still required to offer healthcare to their employees under the Affordable Care Act’s employer shared responsibility provision. To ensure that some form of healthcare is available to their employees, many are offering base plans that provide minimal coverage and which their employees must pay for themselves.
“These are very high deductible plans,” Wolpert explains. “However, since the employee population at these companies generally consists of young healthy millennials, they receive relatively low rates.”
Some cannabis firms are going further and finding ways to avoid the ACA’s employer mandate altogether. Under the stipulations put in place by the IRS, the mandate only applies to employers that had an average of at least 50 full-time or full-time equivalent employees during the preceding calendar year. Employers that keep their full-time staff below 50 can sidestep offering any form of healthcare—a stratagem that employers in other industries are making use of as well.
“Employee benefits are the top two or three lines on an employer’s profit and loss statements,” Wolpert observes, “and they will try and hold that down for as long as they can in order to not be subjected to the mandate.”
Most companies in the cannabis industry are less than five years-old and have around 20 employees, according to a Work and Well-being study conducted by the University of Colorado Denver. Mike Patton, a partner at Quandary Insurance in Denver, says he doesn’t know of any that intentionally keep their full-time employees below 50 to avoid providing benefits, but he adds that it’s not unheard of.
Prior to the passage of the Tax Cuts and Jobs Act of 2017, there were some legislative attempts to put the cannabis industry on par with other federally regulated businesses. Legislation proposed by senators Rand Paul (R-Ky.), Ron Wyden (D-Ore.) and Cory Gardner (R-Colo.), for instance, would have cleared the way for these employers to write-off business expenses such as healthcare.
But none of those earlier bills made their way through Congress, the 2017 legislation did not address the issue and no new proposals are on the horizon. For the industry’s tax status to change, “It has to be in a federal tax bill,” notes Patton, “and I doubt another one will pass anytime soon.”