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K. A. Lindow, CPA, P.C. CPA Firm, Phoenix, AZ.

Rollovers as Business Start-Ups (ROBS)

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Rollovers as Business Start-Ups

Rollovers as Business Start-Ups (ROBS) are arrangements in which prospective business owners use their 401(k) retirement funds to pay for new business start-up costs. ROBS is an acronym from the United States Internal Revenue Service for the IRS ROBS Rollovers as Business Start-Ups Compliance Project.


ROBS plans, while not considered an abusive tax avoidance transaction, are, according to the IRS, "questionable" because they may solely benefit one individual – the individual who rolls over his or her existing retirement 401k withdrawal funds to the ROBS plan in a tax-free transaction. In most cases, since the IRS pronouncement concerning this potentially discriminatory approach, ROBS plans have been inclusive of all participants and provide broad-based participation for all employees. The ROBS plan then uses the rollover assets to purchase the stock of the new business. A C corporation must be set up in order to roll the 401(k) withdrawal.

Promoters, such as a Roth IRA broker of a self-directed IRA LLC, or small business financing, aggressively market IRS ROBS arrangements to prospective entrepreneurs and business owners for funding for a business as small business financing. In the case of most ROBS facilitators, there is a very close relationship between the promoter/facilitator and the franchise industry, seeking to sell and promote business "opportunities" and seeking funding sources for these sales and promotions. Most ROBS "promoters" and facilitators pay substantial referral fees to the franchise brokers who refer business to the promoters. Rarely are these fees disclosed to the entrepreneur. Fees charged by most "promoters," consequently, are in excess of the fees that would be charged by attorneys and accountants for the same services who are prohibited from paying referral fees. It should be noted that some companies offering ROBS plans do not pay referral fees to brokers, and charge lower fees as a result. There remains a substantial question whether such referral fees are illegal under ERISA and the U.S. Criminal Code: Offer, Acceptance, or Solicitation to Influence Operations of Employee Benefit Plan (18 U.S.C. Section 1954).

In many cases, the broker will apply to IRS for a favorable determination letter (DL) as a way to assure their clients that IRS approves the ROBS arrangement. The IRS issues a DL based on the plan’s terms meeting Internal Revenue Code requirements. DLs do not give plan sponsors protection from incorrectly applying the plan’s terms or from operating the plan in a discriminatory manner. When a plan sponsor administers a plan in a way that results in prohibited discrimination or engages in prohibited transactions, it can result in plan disqualification and adverse tax consequences to the plan’s sponsor and its participants. Accordingly, promoters who emphasize or "promote" base on a favorable determination letter are, at a minimum, engaging in deceptive trade practices.

New Business Failures

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. These findings are questionable since there are many ROBS arrangements in which the businesses are quite successful and represent very prudent alternatives to more traditional investments. Business success is based on large part to the proper operational management of the business venture and by following sound management and risk principles.

Specific Problems with ROBS

Some other areas the ROBS plan could run into trouble:

• 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. Since the 2008 announcement from the IRS such amendments are rare.

• If the sponsor amends the plan to prevent other employees from participating after the DL 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.

• 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.

What type of business can I start with the 401k ROBS Plan?

Almost any type. The 401k ROBS Plan is a very flexible small business financing strategy. The type of business you can start with the 401k ROBS Plan is virtually unlimited. As long as the business is active and not exclusively engaged in the investment or lending of capital, your business should qualify for the 401k ROBS Plan.

Why am I required to use a C-Corporation?

We have designed the 401k ROBS Plan to ensure it satisfies applicable legal requirements. The 401k ROBS Plan requires the use of a C-Corporation in order to comply with Federal pension law. The use of an S-Corporation, LLC or another entity type other than a C-Corp would not meet the legal requirements.

Can I receive a salary from my new business?

Yes. You are required to be an employee of your new business that is financed with the 401k ROBS Plan. While you are not legally required to take a salary you may take a reasonable salary once the business generates revenue.

Will you hold the rollover funds?

No. To ensure that your business is financed as fast as possible we will fully assist you with the rollover of your retirement funds through the 401k ROBS Plan. However, we will never hold your money. You will select a bank to set-up the ROBS accounts and hold the funds.

Is the 401k ROBS Plan just a loan from my 401k?

No. By financing your business with the 401k ROBS Plan you will not be borrowing any money from your 401k. Instead, you will be investing your retirement funds in a new business. More importantly you will be investing in YOU!

ROBS Retirement Plans Targeted

An IRS memorandum has been issued containing audit guidelines for a version of a qualified plan being marketed as a means for prospective business owners to access accumulated tax-deferred retirement funds without paying applicable distribution taxes in order to cover new business start-up costs. The memorandum refers to these arrangements as ROBS (rollovers as business startups). IRS indicates that they "may serve solely to enable one individual's exchange of tax-deferred assets for currently available funds, by using a qualified plan and its investment in employer stock as a medium. This may avoid distribution taxes otherwise assessable on this exchange. Although a variety of business activity has been examined, an attribute common to this design is the assignment of newly created enterprise stock into a qualified plan as consideration for these transferred funds, the valuation of which may be questionable."

Tax Due Dates