We now turn our attention to the issues mentioned by the IRS in their 2008 ROBS Memo. In our last post, we looked at the steps taken by ROBS promoters at that time as scrutinized by the IRS. What did they not like about what they discovered? The two primary issues raised by the IRS were violations of nondiscrimination requirements, and prohibited transactions due to deficient valuations of stock.
IRS 2008 ROBS Memo Nondiscrimination Violations
401K plans are sponsored by employers for the benefit of all employees. While discriminatory plans do exist, none of those plans contain the qualified employer security exemption that is the legal basis for the ROBS transaction. Employers violate plan discrimination tests when they create benefits available through the plan to some employees and not others.
Two rules germane to this issue:
- Internal Revenue Code § 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), and
- Treas. Reg. § 1.401(a)(4)-1(b)(2) provides that in order to satisfy § 401 (a)(4), either the contributions or the benefits under a plan must be nondiscriminatory.
They observed ROBS arrangements designed to take advantage of a one-time only stock offering. The investment feature generally would not satisfy the effectively available benefit requirement. The IRS raised the discrimination issue because promoters designed plans such that the plan benefit of employer stock would not be available to other employees.
IRS 2008 ROBS Memo Stock Valuation Issues
After you sift through the revenue code sections and treasury regulations quoted you get to the real IRS 2008 ROBS Memo issue; businesses that don’t get started.