IRS View on Using Retirement Funds (ROBS 401k) to Finance Your Own Business

 ROBS or Rollover as Business Start-Up is the coined term by the IRS to refer to the use of one’s retirement funds (e.g., IRA, 401k, 401a, 403b, TSP, 457, PSP, DBP, etc.) to finance a new or an existing business that the retirement account holder will operate.

Here is a review of the IRS’s published statements with respect to ROBS (Rollover as Business Startup) transactions:

October 2008 Memorandum: Brief Summary

  • This is the first official publication where the IRS formally addressed the use of retirement funds to finance one’s business;
  • IRS affirmed that the use of retirement funds to finance one’s own business is not considered noncompliant and stating its view that these transactions may be not challenged as “non-compliant per se”;
  • IRS explains the steps involved in the ROBS transaction; and
  • IRS identified compliance holes–for example, the non-filing of the annual retirement plan form 5500 tax return, non-filing of the corporation’s tax return, the nonattainment of an annual valuation of the plan’s assets including the investment in the corporation stock.

2009 – ROBS Project

  • In 2009, the IRS initiated a “ROBS project” to define traits of compliant ROBS plans and in doing so acknowledged that the use of one’s retirement funds in a ROBS transaction can be conducted in a compliant manner.

2010 – IRS Telephone Forum

  • In a 2010 telephone forum conducted by the IRS, the IRS’s Director of Employee Plans Examinations Office and the Area Plan Manager stated that ROBS transactions are not “abusive per se” and that “you can have a textbook ROBS that is pretty much problem-free.”

Fall of 2010 Retirement News for Employers: Brief Summary

  • The IRS confirms that the ROBS transaction is not considered an abusive tax avoidance transaction;
  • The IRS does not protect business owners (also known as the plan sponsor) from incorrectly administering the retirement plan;
  • The IRS confirms that if the rules are not followed the retirement plan will be subjected to adverse tax consequences

February 2013 Employee Plans Compliance Unit ROBS Project: Brief Summary

  • Last report published by the IRS regarding rollovers as business start-ups (ROBS);
  • Much of the same information contained in the October 2088 Memorandum was published in this summary; and
  • The IRS again confirmed that ROBS is not considered abusive transaction.

In sum, the IRS has clearly taken the position regarding the ROBS arrangement as clearly supported in the above IRS published communications.

The IRS essentially agrees that it is an allowable transaction if properly carried out and maintained. As such, it is essential to work with competent professionals such as compliance personnel and attorneys.

Thus, it is clear that per these statements the IRS’s position is that a ROBS transaction can be conducted in a compliant manner. Rather than whether a ROBS transaction is authorized, the focus of the IRS’s compliance-related concerns has been on the ongoing operation of the plan – such as not filing the Form 5500, not communicating the plan to new employees, etc. (note: while the IRS is also concerned that individuals may be putting their retirement savings at risk the IRS clearly acknowledges that this risk is not a compliance issue but rather a financial risk).

For anyone considering a ROBS transaction, the IRS’s concerns highlight the importance of understanding the ongoing compliance requirements and working with an experienced professional that can provide ongoing compliance support.

Thus, while entrepreneurs should certainly understand the compliance requirements and work with qualified professionals, a ROBS transaction remains a viable financing strategy with manageable compliance risk.

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 >>