The Rollover for Business Startups, or ROBS, is a popular method that uses retirement funds to start your own business. What happens when you no longer have that business? You may have sold it for a nice profit or it just never caught steam and had to close the doors (we hope it’s the former!). When it comes time to exit the ROBS structure, you must follow all procedures or be subject to large fines from the IRS. Winding down the 401(k) plan used for the business is crucial. In the following, we will talk about everything you need to know about exiting the ROBS structure.
ROBS 401(k) Refresher
If you are reading about how to exit the ROBS structure, you probably already know how it works. However, for those that don’t, here’s a quick synopsis of what the ROBS structure is. Essentially, you roll over funds from your current retirement plan, such as an IRA or 401(k), into a new plan intended to finance a business. A C Corporation is formed, and a new 401(k) plan is created for the business. The money from your previous retirement plan is then used to fund the new 401(k). Finally, the funds in the 401(k) are used to purchase stock in the C Corporation. Selling the stocks gives you capital to either start a new business or invest in a current one.
It’s a strategy many people use when they’re short on capital to get their business off and running. Obviously, it does come with risks. If your business fails, not only does it cost you in the present, but your retirement is put in serious jeopardy. You should only implement the ROBS structure if you are 110% sure your business will succeed, or you have enough saved to cover the losses. Therefore, it’s imperative that you do your due diligence when researching your business and what the ROBS structure entails.
Related: Buying a Business with Your IRA
How to Exit the ROBS 401(k) Structure
Congrats! Your business is a huge hit and now it’s time to sell for a big profit. (Here at IRA Financial, we always think positive, so we won’t discuss the other reason you may need to exit the ROBS structure!) Not only do you have to deal with all the trivialities that comes with selling a business, but you need to dissolve your ROBS arrangement. To reiterate: failure to do so will lead to stiff penalties. Winding down the 401(k) should be near the top of your list of things to do.
The first thing you need to do is get in touch with your ROBS provider and notify them that you want to exit the ROBS structure. You should also contact your attorney and accountant to make sure everything is in order. There are several things your attorney will need to deal with:
- Adopt a Board resolution that will terminate the 401(k) plan
- Make sure all participants of the plan know that it will be terminating
- Make sure the plan is compliant with all amendments before terminating
- Determine if a Form 5310 needs to be filed
- Any additional requirements needed to correctly terminate the plan
Filing the Final Form 5500
IRS Form 5500 must be filed every year the 401(k) plan is in use. This form is used for information about your plan. It’s to ensure the plan adheres to all rules and regulations, what investments are being made and how much is in the plan.
It’s imperative you file Form 5500 even when you need to terminate your 401(k) plan. Failure to do so will lead to the plan not being considered terminated by the IRS and DOL. Generally, your ROBS provider will file this form on your behalf. Again, make sure you are on constant contact with them throughout this process.
Once the participants make their final distributions from the plan, IRS Form 1099 must be filed as well. This is another task that will be performed by your administrator.
Final Steps to Exiting the ROBS Structure
The day the funds are withdrawn from the plan is the final distribution date. Usually you have 30 days from this date to make sure everything is in order and all forms filed. Here’s a quick list of everything that needs to be given to your ROBS provider:
- You should have an adopted board resolution for when the plan was decided to be terminated
- You may need an IRS Determination Letter to ensure your plan is IRS-compliant before it is terminated
- A Copy of the 401(k) accounts (or bank accounts) that show all assets have been distributed and there is a zero balance in the plan
- If you need 1099 forms, you must provide the information of the participants and amounts withdrawn
- You also need a copy of the Corporate Stock Ledger that should the corporation has bought back all the stock the 401(k) purchased
- A Census Form that shows all employee information for the year
- A Year End Summary for the plan
One last thing to consider is any monthly fees your provider charges for plan administration. Once you exit the ROBS structure, you no longer need these services and shouldn’t be charged for them.
Related: Potential Drawbacks to using Rollover Business as Startups
Starting a business with your retirement funds is an exciting opportunity. Hopefully, exiting the ROBS structure is just as exciting. It’s time to reap the rewards for building a rewarding business. Unfortunately, if you business did happen to fail, you still need to follow the proper procedure to terminate the plan.
If you have any questions about how the ROBS structure works, or your need to exit your plan, please give us a call at @ 800.472.0646. You can also fill out a contact form and we’ll be in touch with you!