Is it permitted to use my retirement funds to invest in a new or existing business?
If structured correctly, yes. IRA Financial Group’s in-house retirement tax professionals have spent the last two years developing an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax free! Unlike our competitors who have been offering this type of structure for many years, the IRA Financial Group has patiently waited for clear IRS guidance in order to develop a structure that would be fully compliant with IRS and ERISA rules and procedures. The Business Acquisition Compliance and Support Structure (“BACSS”) was designed as an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax free! The Internal Revenue Code and ERISA law firmly establishes that the use of retirement funds to purchase stock of a sponsoring company is permitted as long as certain IRS and ERISA rules are followed. Based on IRS guidance, it is important that a qualified retirement plan be adopted by the new company and that it be used and operated as such. It is also required that the value of the stock being purchased by the new Plan be valued by an independent appraisal and that the qualified retirement plan be made available to all eligible company’s employees. Because the IRS has stressed the importance of compliance, it is crucial to work with a company that is operated by a team of in-house tax and ERISA professionals who have worked at some of the largest law firms in the United States, including White & Case LLP and Dewey & LeBoeuf LLP, to ensure the legality of the structure.
Does the IRS allow the use of retirement funds to purchase stock in a business I will be involved in?
Yes. The Internal Revenue Code and ERISA have firmly codified the ability to use retirement funds to invest in the stock of a sponsoring company as long as certain IRS and ERISA rules are followed.
Internal Revenue Code 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.
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)). 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 Section 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 Section 408(e) are met.
The exemptions in Internal Revenue Code 4975(d) shall not apply to items described in Internal Revenue Code Section 4975(f)(6). Internal Revenue Code Section 4975(f)(6)(A)) states that the exemption of Internal Revenue Code Section 4975(d) shall not apply i n the case of a trust described in Internal Revenue Code Section 401(a), which is part of a plan providing contributions or benefits for employees some or all of whom are owner-employees (other than paragraphs (9) and (12)) shall not apply to a transaction in which the plan directly or indirectly— (i) lends any part of the corpus or income of the plan to, (ii) pays any compensation for personal services rendered to the plan to, or ( iii) acquires for the plan any property from or sells any property to, any such owner-employee, a member of the family of any such owner-employee, or any corporation in which any such owner-employee owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. Therefore, since the Plan will be purchasing “qualified employer securities” directly from the newly formed corporation, the purchase of corporate stock will not be treated as a prohibited transaction pursuant to Internal Revenue Code Section 4975.
ERISA Section 407(b)(1) generally places limitations on the acquisition and holding of Qualifying Employer Securities (normally 10% of plan assets). However, the Section includes an exception for “eligible individual account plans” (ERISA 407(b)(1)). As set forth in ERISA Section 407(d)(3), a qualified profit sharing plan is included in the definition of “eligible individual account plans”. In addition, pursuant to ERISA Section 404(a)(2), these plans do not violate ERISA’s diversification and, to the extent it requires diversification, prudence requirements.
The IRA Financial Group’s retirement tax professionals will work with you directly to develop an IRS and ERISA fully compliant business acquisition or funding solution customized to your individual business, financial, and retirement needs.
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 the last two years reviewing IRS materials and guidance in order to develop the Business Acquisition Compliance and Support Structure (“BACSS”). BACSS 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 Business Acquisition & Compliance Solution Structure (“BACSS”) you are permitted to purchase almost any legal business or franchise. Whether you are starting a new business/franchise or buying an existing business, the BACSS 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)
- SIMPLE Plans
- Annuity Plans
- Defined Benefit Plans
- Rollover Plans