Rollover for Business Startup (ROBS) Accounting and What You Need to Know

​Let’s start by talking about what a ROBS is.  ​ROBS is an acronym for ​Rollover for ​Business ​Startups. It allows you to use your retirement to purchase the stock or an investment in a business. The structuring of this Plan is highly technical and very restrictive. It would be best if you used a third-party​ administrator like Guidant Financial, IRA Financial, or https://www.franfund.com/ to assist you in establishing and maintaining the Plan. You may use the following qualified pre-tax retirement plans to establish a ROBS;  Traditional IRAs, 401Ks, SEP plans, Thrift Savings Plans (TSP),  457(b), and 403(b) plans. You cannot use a Roth IRAs or Roth 401Ks in a ​ROBS plan

The ​ROBS​ plan is a restrictive process, and one of the restrictions is that you must be taxed as a C Corp. It cannot be a sole proprietorship, a partnership, an S Corp, or a non-profit organization.

Many people think it is as simple as cashing all or a portion of their 401(k), depositing the funds into a checking account, and making a business purchase.  This could not be further from the truth, and the consequences of getting this wrong are devastating. You could disqualify your entire retirement plan, causing it to be considered fully distributed and taxable.  There is a very specific strict path that must be followed to avoid this devastating outcome. We highly recommend using a third-party administrator to set up the Plan.  Doing it yourself could result in a life-altering chain of events.  Below is the correct series of events to funding a ROBS plan;

Step 1
ESTABLISH A CORPORATION
Create a C-Corporation, a legal entity separate from you and your retirement plan.

Step 2
CREATE A SELF-DIRECTED 401K
Create a Self Directed 401K Plan for your C-Corporation.

Step 3
ROLLOVER FUNDS
Roll over the funds to your new self-directed 401K.

Step 4
FUND YOUR BUSINESS
Direct your 401K to purchase stock in your new C-Corporation, providing it with the funding it needs.

Because these plans have been abused, the IRS keeps a close eye on these plans. Many people take advantage of ​ROBS plans by not following the rules and regulations set forth by the IRS and the Department of Labor.  The Department of Labor (DOL) is responsible for ​ERISA law, which governs 401(k)s and other qualified retirement plans.​ Both IRS and the DOL are responsible for policing these plans

With the close scrutiny and the high regulative nature of these plans, we feel using a  third-party plan administrator is a wise investment. Successful operating a ROBS plan requires a deep understanding of the rules and regulations. Below are some of the absolute requirements of operating a successful ROBS plan;

​

A ROBS plan must be an active business. There cannot be any passive element to the business.​ It cannot operate rental properties, oil royalties, or other activities classified by IRS regulation to be passive.

A ROBS plan must be actively managed. Each individual who contributed funds to the ROBS must be actively involved in the management of the business. You cannot have absentee owners.  

Each ROBS plan contributor must be an employee of the business. Each plan contributor must be on payroll and receive a Reasonable Salary. The definition of a “Reasonable Salary” has many elements.  This Reasonable Salary should be determined by an outside firm that will provide support for the amount of the “Reasonable Salary” chosen.  Depending on the fluctuation nature of the business’s income and other factors, you may want to have the “Reasonable Salary” reevaluated periodically.

The ROBS Plan must annually file a Form 5500.  Form 5500 is filed each year with the Department of Labor. It looks like an IRS Form but is filed with the Department of Labor through the IRS.​ This form is an informational return that lists the Plan participants, Plan investment, and current value. Establishing the annual value will require the assistance of an outside firm.  Many third-party administrators will process Form 5500 for you as part of their maintenance services. They will request information from you, including the valuation of the Plan.  We highly encourage that you use an outside firm to do this valuation. This is one of the ways the IRS tries to invalidate these Plans by indicating the Form 5500 provided inaccurate information.  The outside firm will provide documentation on how they determined the valuation of the Plan.

Word of Caution: Do Not Commingle Fund or Have Disguised Distribution  

There must be no personal commingling of expenses or income.  This means that the Plan should never pay an expense that provides a personal benefit.  Should this happen by accident, I suggest​ you​ immediately reimburse the Plan.

How Do You Get Money Out of the Plan?

Compensation and distribution strategies are very different in a ROBS plan than in other types of businesses. The ​ROBS plan places restrictions on how you can get money out of the business.  There are only two ways to get the money out of the ROBS Plan, Payroll and sell the business.  Other than through a sale, all money you take out of the business must come out through payroll.  You may not take a dividend.  A dividend would be seen as a distribution of Plan funds.

There are two opportunities when it comes to selling the business, selling to an outside party and buying out the C Corporation shares.

Selling the Business In the Plan to an Outside Party

Selling the business to an outside part is one of the exit strategies to close out the ROBS.  In doing so, all of the proceeds from the sale must be paid to the Plan.  Once this has been done, the Plan now consists of cash.  You may now invest the money as you see fit.  In the year of the sale, you would file a final Form 5500 and Final C Corporation return.   Note: When the business is sold, all proceeds would be considered ordinary income taxed as the funds are distributed in a taxable transaction.  There are no opportunities to have any business sale proceeds considered capital gains regardless of the assets sold.  

Buying out the Shares of the C Corporation

Exiting the ​ROBS plan without selling the business involves buying the stock from the Plan through your own personal funds or outside financing. The best point to do this is when the value of the C Corporation shares is at its lowest.  Even more so than the annual valuation for Form 5500, this is another point when you want an outside firm valuation.  The lowest point is usually when you invest in building the business or making big changes in the earlier years. You would file a final Form 5500, and final C Corporation return in the buyout year. Once this has been done, the Plan now consists of cash.  You may now invest the cash as you see fit. 

Utilizing​ the ​ROBS plan may​ ​be a great solution to funding your business, but it has some very long-term effects. So consider running a full ROBS analysis before you make a purchase. Or if you’ve already made the purchase. Look at the ​ROBS plan analysis to determine if there’s an exit point that you should be watching for. A full ​ROBS analysis should look at the tax rate differences between the ROBS Plan and other methods of financing your business and the costs incurred each month to maintain the Plan. And it will compare to the long-term costs of the ​ROBS plan structure while evaluating an exit strategy. Sometimes we find some pretty remarkable cases where discover an excellent point to exit the ​ROBS plan well before you ever sell the business.

Q: What type of business can I start with the 401K ROBS Plan?

A: 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.

Q: Why am I required to use a C-Corporation?

A: 401K ROBS Plan rules were established to satisfy applicable legal requirements. The 401(k) ROBS Plan requires using a C-Corporation to comply with federal pension law requirements. Using an S-Corporation, LLC, or another entity type other than a C-Corp would not meet these legal requirements.

Q: Can I receive a salary from my new business?

A: Yes. You are required to be an employee of your new business financed with the 401K ROBS Plan. While you are not legally required to take a salary if the company is reporting a loss, you must take a reasonable salary once the business generates revenue.

Q: Will the third-party administrator hold the rollover funds?

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

Q: Is the 401K ROBS Plan just a loan from my 401K?

A: 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!

Q: What specific problems do you see with ROBS?

A: 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 individuals who started ROBS plans lost the retirement assets they accumulated over many years and 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 largely based on the proper operational management of the business venture and by following sound management and risk principles.

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 have been 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 amendments tend to result in problems with coverage and 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.