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Rollover as Business Startups FAQs

ROBS solution FAQ

Is it permitted to use my retirement funds to invest in a new or existing business?

If structured correctly, yes. IRC Section 4975(c) includes a list of transactions that the IRS deems “prohibited”. However, Internal Revenue Code Section 4975(d) lists a number of exemptions to the prohibited transaction rules. Specifically Internal Revenue Code Section 4975(d)(13) lists an exemption for any transaction which is exempt from section 406 of the Employee Retirement Income Security Act of 1974 (ERISA) by reason of section 408(e) of such Act.

Section 408(e) provides that section 406 shall not apply to the acquisition or sale by a plan of qualifying employer securities (as defined in section 407(d)(5), provided that: (1) the acquisition or sale is for adequate consideration; (2) no commission is charged with respect to the acquisition or sale; and (3) the plan is an eligible individual account plan (as defined in section 407(d)(3)). A 401(k) plan fits in to this definition.

Pursuant to ERISA Section 406, the acquisition or sale must be for “adequate consideration.” Except in the case of a “marketable obligation”, adequate consideration for this purpose means a price not less favorable than the price determined under ERISA § 3(18),subject to a requirement that the acquisition or sale must be for “adequate consideration.” An exchange of company stock between the plan and its employer-sponsor would be a prohibited transaction, unless the requirements of ERISA § 408(e) are met.

If this type of Structure is legal why did the IRS release the October 1, 2008 “Memorandum”?

After reviewing a number of business acquisition structures that have been promoted by our competitors, in 2008, the IRS became concerned that the structures were not being properly established from an IRS and ERISA compliance standpoint. While having these compliance concerns, the IRS has always maintained the position that this type of structure is perfectly legal and not considered an abusive tax avoidance transaction. In the “Memorandum”, the IRS highlighted a number of compliance areas, which they believed were not being adequately followed by the promoters implementing the structure at that time.

While our competitors were promoting this type of structure, which in many cases failed from a compliance standpoint, the IRA Financial Group’s in-house retirement tax professionals spent years reviewing IRS materials and guidance in order to develop the Business Acquisition Compliance and Support Structure, in conjunction with ROBS. It was designed to satisfy each non-compliance issue address by the IRS in the “Memorandum” in order to offer our clients an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax free!

What type of business can I purchase using my retirement funds?

With the Rollover Business Start-Up (“ROBS”) solution you are permitted to purchase almost any legal business or franchise. Whether you are starting a new business/franchise or buying an existing business, ROBS will allow you to accomplish your business goals tax-free and without penalty.

What type of Retirement Accounts can be used for the structure?

Traditional IRAs
401 (k) Plans
403 (b) Plans
457 Plans (for governmental agencies)
Annuity Plans
Defined Benefit Plans
Rollover Plans

Can I purchase personal assets using my retirement funds?

No. Internal Revenue Code Section 401 (a)(2) provides, in relevant part, that a plan is not qualified unless it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries, for any part of the corpus or income to be used for or diverted to purposes other than for the exclusive benefit of employees or their beneficiaries. For example, you will not be permitted to use this structure to purchase personal assets, like recreational vehicles.

Can I use a Self-Directed IRA to Buy a Business if I or a Disqualified Person will be Personally Involved in?

No. ERISA Section 408(e) provides that ERISA Section 406 shall not apply to the purchase by the Plan of qualifying employer securities (as defined in ERISA Section 407(d)(5)), provided that: (1) the acquisition or sale is for adequate consideration; (2) no commission is charged with respect to the acquisition or sale; and (3) the plan is an eligible individual account plan (as defined in ERISA Section 407(d)(3)). ERISA Section 407(d)(3) excludes IRAs from the definition of “eligible individual account plans.” A 401(k) plan fits in to this definition but not an IRA.

What type of business entity do I have to use?

The Internal Revenue Code and ERISA law require the use of a “C” Corporation for using retirement funds to acquire stock in a business. The reason for this is that Section 407(d)(1) of ERISA defines the term “employer security,” in part, to mean a security issued by an employer of employees by the plan, or by an affiliate of such employer. Under section 407(d)(5) of ERISA, the term “qualifying employer security” includes an employer security, which has been understood to mean stock. The term “stock” is not defined in Title I of ERISA, however, most tax commentators believe this to mean the stock of a corporation and not an interest in a limited liability company or partnership. The use of an S Corporation for this structure is not permitted because a qualified plan cannot be an S Corporation shareholder. Generally only individuals are permitted to be S Corporation shareholders.

What is a C Corporation?

A C Corporation is a business term that is used to distinguish this type of entity from others, as its profits are taxed separately from its owners under sub-chapter C of the Internal Revenue Code. A C corporation is owned by shareholders who must elect a board of directors to make business decisions and oversee policies. A C Corporation provides its shareholders with limited liability protection. Thus, the C Corporation’s shareholders would not stand personally liable for debts incurred by the C Corporation. They cannot be sued individually for corporate wrongdoings.

Will I pay more tax if my business is set-up as a C Corporation?

In general, a C corporation can be used to split the corporate profits among the owners and the corporation. This can result in overall tax savings. The 2017 Tax Cut & Jobs Act reduced the corporate tax rate to 21%. In addition, a C Corporation can deduct the cost of business expenses, such as salary, thus, further reducing the company’s taxable income. For example, the operators of the corporation may withdraw reasonable salaries, which are deductible by the corporation. These salaries are therefore free from tax at the corporate level (though the recipients will have to pay income tax, and both recipients and the business will have to pay FICA tax, on them). In some cases, the entire net profit of a C Corporation may be offset by salaries to the shareholders, so that no corporate income tax is due.

Do I need an independent appraisal for the purchase of the new corporation stock?

Yes. Pursuant to ERISA rules, a 401(k) Plan is permitted to acquire “qualified employer security” provided that the acquisition or sale is for adequate consideration. In the October 1, 2008 Memorandum, the IRS stated that an exchange of company stock between the plan and the new company sponsor would be a prohibited transaction, unless the requirements of ERISA Section 408(e) are met. Therefore, valuation of the capitalization of the new company is a relevant issue. Since the company is new, there could be a question of whether it is indeed worth the value of the tax-deferred assets for which it was exchanged. If the transaction has not been for adequate consideration, it would have to be corrected. On August 27, 2010, on the public phone forum, the IRS reaffirmed their position on the need for an independent appraisal to value the purchased corporate stock. IRA Financial Group will assist you in identifying an independent third-party business appraisal or CPA to help value the stock of the new or existing company.

If my new company will not have any full time employees other than myself can I still use the structure?

Yes. In fact, the administration of the Plan will be much easier if your business will have no employees other than yourself since you will not require the services of a third-party Plan Administrator or record-keeper. If you elect to purchase new company stock along with your new 401(k) Plan, as the sole employee of the Company, you could serve as the Plan’s trustee and administrator.

Can I serve as the company’s plan administrator and record-keeper?

It depends on whether your new business will have any employees other than yourself. If you will be a part owner of the business and the sole employee, you can serve as the Plan’s sole administrator and record-keeper just like you would in a Solo 401(k) Plan. However, if your business will have full time-employees, you can still serve as the plan administrator and then just hire a third-party record-keeper firm, like IRA Financial Group, to handle your plan administration.

If my new company will have full-time employees, is the company required to offer each full-time employee the right to participate in the company’s new 401(k) Plan?

Yes. In fact, under ERISA law, all employees of the company must be allowed to roll money into the Plan and must be given the same investment options. Internal Revenue Code Section 401(a)(4) provides that, under a qualified retirement plan, contributions or benefits provided under the plan must not discriminate in favor of highly compensated employees (HCEs). As a result, it is imperative that all employees of the new benefits are notified of the new 401(k) Plan and provided with the same contribution and investment options. In general, all employees that work at least 1000 hours during the year must be offered plan benefits.

Do I need to use a special financial institution to open the 401(k) Plan bank account?

No. You can use any bank (i.e. Wells Fargo) or traditional financial institution (i.e. Fidelity, American Funds, etc..) to open your new 401(k) Plan bank account. The IRA Financial Group has close working relationships with a number of the largest financial institutions, such as Wells Fargo and American Funds, to ensure that your new 401(k) Plan bank account bank is opened correctly and quickly. The retirement tax professionals at the IRA Financial Group will guide you through this process to assist you in opening your new 401(k) Plan bank account.

Do I have to maintain the 401(k) Plan once adopted?

Yes. Treasury Regulation Section 1.401-1(b)(1)(ii) provides that a profit sharing plan is established to enable employees or their beneficiaries to participate in the profits of the employer’s trade or business, or in the profits of an affiliated employer who is entitled to deduct his contributions to the plan under Internal Revenue Code Section 404(a)(3)(8), pursuant to a definite formula for allocating the contributions and for distributing the funds accumulated under the plan. Treasury Regulation Section 1.401-1(b)(2) requires that the plan be a permanent, as distinguished from temporary, arrangement, and provides a general rule that if a plan is discontinued within a few years after its adoption, there is a presumption that it was not intended as a permanent program from its inception, unless business necessity required the discontinuance, termination or partial termination.

As trustee of the new 401(k) Plan will I be required to purchase a fidelity bond?

In general, if your business will have full-time employees who are not also shareholders, the 401(k) Plan will be fall under the ERISA rules and as a result each trustee will be required to be bonded. The cost of acquiring a fidelity bond is approximately $100 per year and the IRA Financial Group will coordinate with the third-party Plan administrator to assist you in this regard.

Do I have to provide my employees with the option to purchase company stock with their 401(k) Plan contributions?

Yes – Internal Revenue Code Section 401 (a)(4) provides that, under a qualified retirement plan, contributions or benefits provided under the plan must not discriminate in favor of highly compensated employees (HCEs). The issue of discrimination could arise if the plan is designed in a manner that the Benefits, Rights, and Features (“BRF) is not made available to any non-highly compensated employees (“NHCEs”). Therefore, in order for the new 401(k) to not discriminate against certain employees, it is important that the employees are provided with the option to purchase company stock just as the owner did so that the BRFs of the plan are made available to all employees.

Can my new company pay me a salary?

Yes. In fact, as per IRS rules you will need to be an employee of your new business, providing a bona fide service. You may not earn compensation income before the company is actively engaged in a trade or business. In addition, your compensation must be derived from the revenues generated from your business ad not from the sale of corporate stock to the adopted 401(k) Plan.

What is the maximum amount of salary I can earn from the new company?

As an employee of your new company you are entitled to draw a fair and equitable wage. The compensation you earn must be “reasonable” and you are encouraged to survey similar businesses to determine market salary for your position or visit one of the salary evaluation sites available online. Our in-house retirement tax professionals will assist you in this regard to help you best determine “reasonable” compensation for the position you will be holding with the new company.

Can a family member or spouse co-invest or work for the business?

Yes – you or any family member may invest or work for the new company. The exemption to “prohibited transactions” found under Internal Revenue Code Section 4975(f)(6)(b)(2) permit ownership or investment in the new company by any family members, friends, or colleagues.

Can I borrow funds from a bank or third-party for my new business?

Yes. Just like any company, your new company will be able to borrow funds from any financial institution or third-party to help finance your business. The borrowing of funds will not trigger a prohibited transaction under Internal Revenue Code Section 4975.

Does the 401(k) Plan have to be sole owner of the new company?

No. You as well as your family and friends are permitted to own an interest in the new company.

Is the structure difficult to implement and administer?

Not at all. IRA Financial Group has developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Working directly with our in-house tax and ERISA professionals , your funds will be ready for investment into your new or existing business within 14-21 days.

What are the annual IRS reporting requirements for the 401(k) Plan?

Each year, the 401(k) Plan will be required to file the Form 5500 with the IRS. The purpose of Form 5500 is to provide the IRS with an annual valuation of the 401(k) Plan’s assets. The IRA Financial Group will help you complete the Form 5500. The Form 5500 must be filed by the last day of the 7th calendar month after the end of the plan year in question (not to exceed 12 months in length). Note – in the case of a Solo 401(k) Plan, which is a plan adopted by a business with no employees other than the owners or their spouses, IRS Form 5500-EZ must be filed only if the fair market value of the Plan assets does not exceed $250,000 as of 12/31.

Do I need to acquire an independent business appraisal each year?

Yes. In order to file the IRS Form 5500 each year, which provides the IRS with a value of the plan assets, it is crucial that the qualifying employer securities purchased by the 401(k) plan be valued. With a ROBS solution, in general, one of the 401(k) plan largest assets is the C corporation stock (“qualifying employer securities”) so it is vital tat the company be valued so one can determine how much the stock is worth.

What Services do you offer regarding the ROBS solution?

IRA Financial Group was founded by a group of top law firm tax and ERISA professionals who have worked at some of the largest law firms in the country, including White & Case LLP and Dewey & LeBoeuf LLP.
In developing our structure, our in-house retirement tax professionals have carefully examined and researched IRS and Department of Labor guidance to design a structure that is fully compliant with IRS and ERISA rules. Each client of the IRA Financial Group is assigned an individual retirement tax professional who will help customize a structure that satisfies his or her financial and retirement needs while ensuring the structure is developed in full compliance with IRS and ERISA rules and requirements. Our services include:

Establishment of “C” Corporation including Filing Fees;
Filing LLC Articles of Incorporation with the state;
Application for Corporation EIN;
Drafting all required initial corporate resolutions and minutes;
Drafting of customized Stock Purchase Agreement;
Drafting of customized Employee Stock Purchase Agreement;
Free consultation with in-house retirement tax professional on the ROBS structure;
Adoption of 401(k) Plan;
Basic Plan Document;
EGTRRA Amendment;
Summary Plan Description;
Trust Agreement;
Appointment of Trustee;
Beneficiary Designation;
Application for Plan trust EIN;
Assistance in the establishment of business and 401(k) Plan bank accounts;
Assistance with the transfer of funds to your new 401(k) Plan bank account;
Assistance in coordinating the completion of all IRS required information returns
Assistance in coordinating the acquisition of an independent business appraisal;
Free consultation with in-house retirement tax professionals on the ROBS structure;
Tax support on ROBS and the 401(k) Plan; and
Annual compliance review
Third-party plan annual record-keeping

We have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will typically be ready for investment into your new or existing business within 14-21 days.

Is there an annual fee?

In order to ensure the structure remains in compliance with IRS and ERISA rules and procedures, the IRA Financial Group suggests that each of its clients elect to use IRA Financial Group’s annual tax compliance & record-keeping services. Our low annual fee includes tax advice on the structure and the 401(k) Plan, as well as includes the delivery of new Plan documents in the case of a change in law. In addition, IRA Financial Group will work with you to help with ERISA plan testing, the filing of any IRS information returns, as well as the attainment of the annual business appraisal.

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