Rollover as Business Startup (ROBS 401k) Transaction

Referred by the IRS as a Rollover as Business Startup or ROBS transaction, and by some in the industry as a self-directed 401k, ROBS serve as means for aspiring business owners to finance their new or existing business or franchise using their retirement funds, such as IRAs and former employer retirement plans (e.g., 401k, 403b, 457b, defined benefit plans, profit sharing plans, etc.).

While many entrepreneurs are excited at the benefits of financing their business via a rollover as business startup (including the possibility of starting a business that is well capitalized and free of debt), some wonder how the IRS views ROBS transactions.

IRS officials agree that a Rollover as Business Startup (ROBS 401k) arrangement is legal if correctly setup and correctly administered stating that they “do not believe that the form of all of these transactions may be challenged as non-compliant per se…” See IRS ROBS Guidelines here. Because the rules governing ROBS can be easily confused and incorrectly applied, it is important to work with the right team, such as our Harvard Law-trained attorney and other experienced compliance professionals, who can help you navigate the complex provisions of the internal revenue code applicable to 401k plans. This will mitigate substantial tax and penalties that may arise if the 401k is not properly setup or administered properly.

The Employee Retirement Income Security Act of 1974 (ERISA) contains the legal requirements for opening and operating 401k plans, including the types of 401k plans utilized in a Rollover as Business Startup transaction. By working one-on-one with our attorney and other compliance professionals, we will help ensure that your 401k plan meets the ERISA requirements of a properly designed and established qualified plan, and will provide ongoing compliance support in the operation of the 401k plan.

Some of the important items to consider when opening a Rollover as Business Startup (ROBS 401k) plan including the following:

  • The business you are looking to fund must be an operating business (e.g., a retail or on-line store providing goods and/or services) not a passive-investing business (e.g., a company setup for day trading stocks).
  • Only rollover funds from non-Roth fund sources qualify for funding the C-corporation.
  • Only a C-corporation may be used in the ROBS transaction; therefore, other entity types such as an S-corporation, LLC, partnership and sole proprietorship may not be used in the ROBS arrangement.
  • The purchase of employer stock must be for adequate consideration (i.e, the 401k profit sharing plan must purchase the employer stock at fair market value).
  • No commission may be charged for the 401k profit sharing plan’s purchase of the stock.
  • An annual valuation must be performed of the assets of the plan including the employer stock.
  • If the business has existing employees, it is likely that those employees will need to be provided the option to rollover their retirement funds and invest in the business if they wish to do so.

If you are interested in learning more about this business funding strategy please submit your contact information on the right or call us at 800.489.7571.

 

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