Can I Use a Stock Bonus Plan Like a ROBS 401k (Business Financing 401k)

QUESTION:

I have a former employer 401k and old IRA that I would like to use to for the 401k business funding structure. Can I rollover my 401k and IRA to a stocks bonus plan and then use the stock bonus plan for the 401k business funding structure?

ANSWER:

No. The 401k business funding structure, referred to as rollover as business startup by the IRS, only works in conjunction with a 401(k) profit sharing plan. Note that while both a Stock Bonus Plan and a 401k / profit sharing plan fall under the defined contribution category of retirement plans, a stock bonus plan allows the employer to make contributions in the form of employer stock. This is quite different from the 401k business funding structure or rollover as business startup (ROBS) arrangement whereby the 401k uses funds rolled over from a former employer 401k or from an IRA (or other approved retirement funds) to buy newly issued C-corporation shares, not for contributing existing employer stock.

Breakdown of the ROBS 401k (Business Financing 41k) Funding Steps

Formation of a New C-Corp

The corporation documents are drafted and filed with the secretary of state.

Adoption of a New 401k Business Financing Plan

The 401k plan allows for the purchase of employer stock (i.e., shares of stock in a C-Corporation).

IRS Employer Identification Numbers (EIN)

Obtain employer identification numbers (EINs) for the corporation and the new 401k business financing retirement plan.

Bank and Brokerage Accounts

Set up the 401k brokerage account for holding the retirement funds and a business bank account for holding the Corporation funds.

Fund the 401k Business Financing Plan

Fund the 401k business financing plan by transferring former employer retirement funds (former employer 401(k), 403(b), TSP, IRA, etc.) to the new brokerage account.

Purchase Employer Stock

The funds are wired from the 401k business plan to the Corporation bank account and stock certificates are subsequently issued along with the rest of the corporation documents (e.g., bylaws, meeting minutes, etc.).

 

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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