If you are considering creating a ROBS funded business, you need to be aware of the IRS issues with ROBS as raised in its Fall 2010 “Retirement News for Employers” bulletin and how to best address them.
IRS ROBS Project Findings
“Preliminary results from the ROBS Project indicate that, although there were a few success stories, most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy (business and personal), liens (business and personal), and corporate dissolutions by individual Secretaries of State. Some of the individuals who started ROBS plans lost not only the retirement assets they accumulated over many years, but also their dream of owning a business. As a result, much of the retirement savings invested in their unsuccessful ROBS plan was depleted or ‘lost,’ in many cases even before they had begun to offer their product or service to the public.
Many ROBS sponsors* did not understand that a qualified plan is a separate entity with its own set of requirements. Promoters incorrectly advised some sponsors they did not have an annual filing requirement because of a special exception in the Form 5500-EZ instructions. The exception applies when plan assets are less than a specified dollar amount and the plan covers only an individual, or an individual and his or her spouse, who wholly own a trade or business, whether incorporated or unincorporated. In a ROBS arrangement, however, the plan, through its company stock investments, rather than the individual, owns the trade or business. Therefore, this filing exception does not apply to a ROBS plan and the annual Form 5500 or 5500-EZ (5500-SF for filing electronically) is still required.”
* By ‘sponsor’, the IRS means your corporation. You can answer for yourself to what the extent the IRS is sympathetic with “I didn’t know!” as a reason for non-compliance.
Specific IRS Issues with ROBS
• After the ROBS plan sponsor purchases the new company’s employer stock with the rollover funds, the sponsor amends the plan to prevent other participants from purchasing stock.
• If the sponsor amends the plan to prevent other employees from participating after the DL (ed. note: determination letter that qualifies the plan) is issued, this may violate the Code qualification requirements. These types of amendments tend to result in problems with coverage, discrimination and potentially result in violations of benefits, rights and features requirements.
• Promoter fees (ed. note: the issue here is that the IRS believes that plan assets should not pay promoter fees).
• Valuation of assets
• Failure to issue a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., when the assets are rolled over into the ROBS plan.
Work with people who know how to address these IRS issues with ROBS and can educate you so you are the best plan sponsor you can be. Frank Selden Law does not administer 401k plans, but we do help set up your ROBS arrangement in conjunction with a plan admin of your choice to ensure full compliance with all of the rules and issues.
For a free consultation about how we can help you, call or email today.