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Rollover as Business Startup – 5 Steps for Compliancy

rollover as business startup compliancy

Rollover as Business Startup compliancy is a complex topic for many entrepreneurs who have employed the ROBS structure. In this article, we explain how to stay complain in five steps. These steps are not simple, which is why anyone who has established the ROBS structure should seek consultation from a professional.

What is a ROBS plan?

Rollover as Business Startup (ROBS) is a structure that allows entrepreneurs to remove funds from a 401(k) or IRA to purchase/fund a new/existing business or franchise. The arrangement often involves rolling over a prior IRA or 401(k) plan into a newly established 401(k). A C corporation business must sponsor the new 401(k). This structure is IRS and ERISA approved.

The ongoing legal requirements of the Rollover as Business Startup structure make it difficult to ensure ROBS compliancy with the IRS. While the IRS does state that the ROBS solution is legal, it is important to receive proper legal guidance from a tax professional. The IRS has witnessed multiple instances where entrepreneurs have not been in full compliance with the IRS and ERISA rules and procedures.

Rollover as Business Startup Compliancy

5 Steps to Keep Your ROBS Structure Compliant

Now that you have established the Rollover as Business Startup, you can use your retirement funds to acquire or finance a business. However, it is imperative that you keep your structure fully IRS compliant. We provide five steps to ensure complete rollover as business startup compliancy.

Step 1 – Fidelity Bond

Acquire a fiduciary bond as trustee of the 401(k) plan. An ERISA fidelity bond is a form of insurance protection. In general, a fidelity bond will insure your business against losses caused by acts of fraud or dishonesty by your employees. It will protect you, as the employer, from any crimes committed by the employee.

Step 2 – Payroll

You must be an employee of the business when using 401(k) plan funds to purchase corporate stock. Your next step is to secure a payroll company to make automatic 401(k) plan contributions. Payroll companies include Paychex for HR and payroll solutions, and ADP for payroll, HR and tax services.

Step 3: Offer 401(k) Plan Benefits

If your employees are full-time (work greater than 1,000 hours/year), they should be eligible to receive 401(k) plan benefits. Depending on the features of the 401(k) plan, your company may have to make safe harbor matching contributions to eligible participants.

A Safe Harbor match is a type of 401(k) with an employer annual contribution match. With the Safe Harbor match, you will avoid most annual compliance tests. The employer will make a contribution on behalf of the employee, which is immediately vested. Contact IRA Financial about your company’s Safe Harbor requirements.

Step 4: Year-End Company Valuation

Each year, you must file IRS Form 5500 for the 401(k) plan and report the value of the 401(k) plan. This is a requirement. The C corporation stock (qualifying employer securities) is owned by the 401(k) plan and typically makes up a large portion of the value of the 401(k) plan, therefore the C corporation stock must also be valued.

Consult with a qualified and independent specialist or firm to prepare the annual company fair market valuation for your company.

Step 5: Tax Returns (and other requirements)

  • You must file federal and state tax returns for your C corporation by March 15. 
  • The annual company valuation as of 12/31 must be ready by May 1 of the following year.
  •  You must be on payroll and treated as an employee of the 401(k) plan and you must provide all employees with a W-2 Form.
  • As trustee of the 401(k) plan, make sure you have your fidelity bond.
  • Check with the state your C corporation was formed regarding annual report/fee requirements. A C corp. is a taxable entity which means you must file Form 1120.
  • Have quarterly corporate board meetings and keep proper documentation of the meetings.

Compliancy for Rollover as Business Startup – We’re Here to Help

The Rollover a Business Startups Solution may have a few basic steps to get started, but don’t let this trick you into thinking it is a simple structure to navigate. It is highly complex to operate prior to getting started and after you have employed the structure.

IRA Financial is always available to help guide you throughout the process and maintain Rollover as Business Startup compliancy. Don’t hesitate to contact us with any questions regarding the structure. Contact via form or directly at 800-472-0646.

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