For anyone considering using a ROBS 401K Retirement Plan to use retirement funds for business financing, it is prudent to engage business tax and legal advisors so that you can focus on growing the business.
In this post, we discuss the top considerations regarding the ROBS Retirement Plan to discuss with your business tax and legal advisors.
- To learn more about ROBS Retirement Plans generally click HERE
#1 The ROBS 401K-funded business must be operated as a C-corporation
- No exceptions – S-corporation/partnership is not allowed.
- The C-corporation must be an active operating company.
- The C-corporation may have subsidiaries.
#2 The ROBS Retirement Plan fee can’t be reimbursed
- The ROBS C-corporation can’t reimburse you and can’t payoff credit card used to pay the fee.
- You may receive stock personally in exchange for incurring this expense & in that case coordinate with your tax advisor to report as a business expense.
#3 Income and expenses must flow through ROBS C-corporation
- The C-corporation must file a C-corporation tax return (e.g. 1120 at the federal level).
- Reasonable compensation may be paid to you as w-2 wages and any profits distributed to the owners in accordance with the ownership percentages (e.g. 401k for your benefit & you personally).
#4 You must be a W-2 employee
- A 401k plan is for w-2 employees (not 1099-MISC independent contractors).
- Any reasonable compensation that you receive for work performed is reported as w-2 wages.
#5 Your compensation must be reasonable
- You must wait to receive compensation until the C-corporation generating income to justify.
- Your compensation must be reported as w-2 wages – coordinate with business tax advisor.
- Your compensation must be reasonable (i.e. no more than what the company would have to pay someone else to do all of the things that you do).
#6 Any business loan is made to the ROBS C-corporation
- A loan to the business must be a commercial loan in the name of the C-corporation.
- You may personally guarantee the loan.
#7 Your ROBS 401k-funded business cannot do business with any other business that you or disqualified persons own.
- ROBS C-corporation can’t interact directly or indirectly with another business that you own.
#8 No Personal Loans to the ROBS C-corp
- Any retirement funds invested in the business must be structured as a stock purchase.
- No personal loans to the ROBS C-Corp.
#9 ROBS C-corp can’t buy stock of an S-Corp
- Per S-corporation rules, ROBS C-corporation can’t own an S-corporation (consider if buying the stock of a business taxed as an S-corporation).
#10 ROBS Retirement Plan has a separate EIN
- The C-corporation will have its own EIN and a separate EIN is required for the 401k.
#11 ROBS C-corp must maintain a 401K plan
- The ROBS C-corp must maintain a 401k plan:
- Offer to eligible employees
- Annual 5500 filing
- Annual valuation, etc.
- Work with tax/legal advisor to handle annual requirements for the ROBS C-corp such as federal, state and local taxes, licenses, etc.