Business financing with a 401k plan (ROBS solution) allows you to tap into your retirement funds to start or fund an existing business you will personally be involved in. In fact, it is the only way to invest in a business you will take part in without triggering the IRS prohibited transactions. Of course, there is the Solo 401k loan, which allows participants to borrow $50,000 for any purpose. But if your business venture requires more than the Solo 401k can offer, you can turn to the Rollover for Business Startups (ROBS) solution.
When utilizing the ROBS solution, you use funds from an eligible retirement account to invest in an existing/new business or franchise. The legality behind this structure is based on an exception to the prohibited transaction rules found under IRC section 4975(d)(13). This allows a 401k plan to buy corporate stock. You can establish the ROBS solution and stay IRS compliant with IRA Financial in four steps:
- The business is operated as a C Corporation
- The business has adopted a 401(k) plan
- The plan participant has rolled over IRA or 401(k) plan funds into the 401(k) plan
- The 401(k) plan purchases stock in the C Corporation in return for the cash invested from the 401(k) plan.
The ongoing legal requirements of the ROBS solution not only makes it a complex structure, but creates challenges to remain IRS compliant. However, if you work with qualified specialists, like the team at IRA Financial, you will receive the necessary guidance to remain IRS compliant.
Considerations – ROBS Solution
The Rollover for Business Startups Solution certainly is not right for everyone. Investors who wish to employ the ROBS solution must have enough funds in their retirement account to purchase or fund a business. Additionally, you will need a fail-proof business plan before putting a majority of your retirement funds in a business. Finally, the ROBS solution is truly designed for the investor who may also see himself as a “risk-taker.” According to Adam Bergman, tax attorney and President of IRA Financial, “The ROBS solution should be looked at as a last resort when there are no other options available.”
“No other options” is what many entrepreneurs face, which is also why the Rollover for Business Startups Solution can be a highly advantageous plan for individuals who want to launch or fund a business.
Now that you have employed the structure, you must beware of the IRS compliancy issues regarding the ROBS solution.
Common IRS Compliance Issues with the ROBS Solution
After entrepreneurs employ this unique structure, the common problem they face is remaining IRS and DOL (department of labor) compliant. Here are a few ways to stay compliant in the most nuanced areas.
1. Employee-Sponsored Retirement Plan
This is a question we addressed in our recent article on the ROBS solution. Many business owners think only the owners of the company should have a retirement plan. Oftentimes, owners ask us if they must offer a retirement plan to their employees. This is not an uncommon question, and the answer is yes. You must give your employees the opportunity to participate in an employer-sponsored retirement plan, as required by federal law. The retirement plan that you used to employ the ROBS solution must be available to all eligible employees. The employee does not have to participate, but you will need to prove to the IRS that you provided the opportunity to participate.
If you only provided a retirement plan to the business owners, you must immediately correct this with the help of a professional. If you do not, it can lead to IRS compliancy issues regarding the ROBS solution and result in steep taxes and penalties.
Employee Notification on Retirement Plan Eligibility
When employees become eligible for the retirement plan, federal regulations require that you notify eligible employees that the retirement plan exists and they can enroll. Additionally, you must offer a summary of the retirement plan benefits and inform them as to when they can participate.
2. Reporting IRS Form 5500
It is not unusual for business owners not to file IRS Form 5500. In fact, some owners are not aware that they have to file at all because the assets in their plan do not exceed $250,000, or because they have no employees, excluding themselves, a business partner or spouse who is active in the business. If you have engaged in the ROBS solution, you must file IRS form 5500 on July 1st each year.
There are no exceptions. Failure to do so will result in a hefty late penalty.
Reporting of IRS Form 5500 is a great example that business owners should not move forward with the ROBS solution on their own and should turn to specialists who understand the regulations of the ROBS structure.
3. Maintain Status as a C Corporation
When you employ the Rollover for Business Startups Solution, the business must maintain its status as a C corporation. Some business owners may receive advice to convert their business from a C corporation to an S corporation, but this is not possible if your 401k plan is a shareholder in the company. If you change the status of your C corporation, the funds you rolled into the business from your 401k plan will be seen as an early withdrawal and can result in an early withdrawal penalty.
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Interested in the ROBS solution? Learn more about it. Download the free IRA Financial ROBS Solution info kit.