ROBS The FSL Way Pt 1

This ROBS History is the first of a three-part series on the differences between the Frank Selden Law, PS approach to creating a ROBS versus the promoter approach. This week looks at the history of the ROBS industry and how it changed after IRS scrutiny in 2008. Next week, Part two will contrast the typical promoter approach to a ROBS setup versus our setup.

ROBS History

I first became aware of ROBS as a concept working with self-directed IRAs in 2004. At the time, most people did not know about ROBS, a name given by IRS in 2008.

Congress passed ERISA (the body of law that created 401K plans, etc.) in 1974. My understanding is that Leonard Fischer, an ERISA attorney, first thought of the ROBS concept in the early 1980s. He started Benetrends in 1983. His company is still one of the strongest in the industry.

Steven Cooper, a pension plan consultant, began marketing a ROBS type plan in 1999. He calls his approach an ERSOP plan (Entrepreneur Rollover Stock Ownership Plan). The IRS rules do not recognize a plan by that name; ERSOP is his marketing term for his concept.

As so often happens in America, when someone is making money with a concept, other people want to do the same. Other companies entered the field, each creating their version and giving the idea their name. ROBS History grows.

Enter David Nilssen and Jeremy Ames, founders of Guidant. They were not ERISA attorneys or pension consultants. Instead, they understood internet marketing and how to hire smart people. I viewed them as the Henry Ford of the ROBS business. With creative marketing backed by reliable ROBS program, Guidant soon vied with Benetrends as the largest ROBS creator in the country. Guidant also did one other thing differently than the other promoters. They required all of their clients to be represented by legal counsel to go through their process. Guidant created a team of attorneys who worked for the clients, not Guidant, although Guidant paid the bill out of their fee. I was the 2nd attorney accepted into that program.

Many CPAs, attorneys, and consultants wrote disparagingly about the concept, saying that people who engaged in this transaction either committed prohibited transactions or violated ERISA duties. I find that a few still believe that today. An ERISA flat-Earth society?

By 2008, the ROBS concept grew to become a mini-industry, each promoter creating a slightly different version and calling it a unique name, as is the way of American business. The differences were enough to raise the eyebrows of the IRS. ROBS History was about to change again.

Enter the IRS

The IRS created a project team to study the concept in 2008. It contacted all of the known ROBS promoters and asked for them to describe their process, send copies of their marketing and product paperwork and a client list. The IRS assured the industry that they would only use the client list to ask random clients for copies of the materials the company sent them.

This IRS team created the name ROBS. Some naysayers rejoiced. One even wrote a column that the IRS used the term ROBS because it believed that it robbed 401K Plan assets. Not true, and self-serving for the author of that article who owned a company poised to accept a tremendous amount of business if the IRS would shut down the ROBS industry. That, of course, is not what happened. For the IRS’s ROBS Project Summary, their version of the ROBS History, click here.

Instead, the IRS issued some cautions, some guidelines on how to create the concept properly. Today, the ROBS idea is cleaner and more standardized across the promoters because of the IRS. Imagine that. The IRS is sometimes helpful!

The IRS issued a ROBS memo in 2008 and launched a ROBS project through its Employee Plans Compliance Unit (EPCU). EPCU issued a compliance project report in 2010. You can find links to both of these under IRS Resources on our ROBS page.

Some people advise avoiding financial advisors who have never been through a down market. If there is a down market in the ROBS industry, it is the 2008 IRS project. As a ROBS outside counsel in 2008, I witnessed a couple of ROBS promoters close their doors. Others modified their protocols into compliance. A handful of ROBS promoters did not need to change their programs at all. Up to that point, we all operated in a grey zone, making our best-educated guesses as to how the IRS would scrutinize a ROBS setup. Now we know.

To create your fully compliant ROBS company, book a no cost or obligation appointment on my calendar.

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