Rollover Business Startups (ROBS)

401(k) Rollover Business Startup


Leave the complexity to me

Financing a new or existing businesses using your own retirement funds is a funding mechanism called a RollOver Business Startup (ROBS). Opinions about the legal validity of the ROBS strategy range from blatantly illegal, to so complex that it needs to be avoided, to so easy an entrepreneur just needs pay a particular company and sign a few forms. There is no specific, single rule that delineates a ROBS approach and no rule that prohibits it. Rather, the strategy uses regulations from several sources which, when pieced together in the right framework, allows individuals to invest their own retirement funds into a corporation that sponsoring employer’s properly drafted 401(k) plan.

A Rollover Business Startup is a viable funding strategy

A 401(k) Rollover Business Startup strategy is a viable funding strategy if the entrepreneur follows all of the legal requirements for establishing and operating 401(k) plans and for offering Qualified Employer Securities to employees. I believe that some ROBS promoters over-simplify a client’s duties. This arrangement is not for everyone!

A properly structured and administered ROBS arrangement can satisfy both the requirements and spirit of the tax laws and serve legitimate tax and business planning purposes. It is critical, however, that entrepreneurs who fund their businesses through Rollover Business Startup arrangements understand the possible legal pitfalls and take seriously their ongoing responsibilities as fiduciaries of their companies’ retirement plans.

One expert suggests that around 10% of the 600,000 businesses started last year involved retirement funds. Some of that 10% are passive investments with little complications. However, for those businesses where the investor is also an employee, officer, director or other shareholder of that business the rules are more complex.

The IRS’ Employee Plans Compliance Unit (EPCU) launched a “rollovers as business start-ups” (ROBS) project in 2008. EPCU sent compliance contact letters to ROBS plan sponsors and numerous businesses who used this type of funding. Documents created by the IRS during this project are below. The project closed in 2013. Anyone contemplating setting up a ROBS arrangement should familiarize themselves with these IRS articles.

 

Frank Selden Law Resources

IRS Resources

Other Resources

ROBS Cases

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