ROBS (Rollover for Business Startups)

The pitch

Use your 401(k) to buy a business with no taxes, no penalties, and no loan. Roll the retirement funds into a new C corporation's qualified plan and have the plan buy the company's stock.

What the structure actually requires

• Must be a C CORPORATION. S corps cannot have a qualified plan shareholder without blowing the election or triggering Sec. 409(p).
• The plan must be a real qualified plan offered to all eligible employees
• The stock purchase must be at INDEPENDENTLY APPRAISED fair value
• Sec. 4975 prohibited transaction analysis on all related-party dealings
• The owner must take reasonable W-2 compensation

The IRS's actual position

ROBS is NOT CONSIDERED AN ABUSIVE TAX AVOIDANCE TRANSACTION, but the IRS calls it QUESTIONABLE because it may serve only the individual who initiates the rollover.

What auditors actually found

• Form 5500 NOT FILED. Sponsors wrongly assumed the one-participant exception applied. IT DOES NOT, because the PLAN owns the business, not the individual.
• Discrimination: plans amended after the determination letter to prevent other employees from buying stock, violating coverage and nondiscrimination
• Promoter fees, asset valuation problems, and failure to issue Form 1099-R

The real risk

Not tax. Failure. The IRS ROBS Compliance Project found that most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy and corporate dissolution. Entrepreneurs lost both the business and the retirement assets, sometimes before operations began.

What it costs you if it is wrong

Red flags specific to this structure

• The entity is not a C corporation
• The plan is presented as available only to you
• You were told no Form 5500 is required
• The stock price was set without an independent appraisal
• The promoter's role ends at formation
• Nobody said out loud that the retirement principal is at risk

Questions to ask the person selling this

Take these into the next meeting. Someone selling the legitimate version answers them without difficulty.

1. 1Will the business be a C corporation?
2. 2Will the plan be genuinely available to my employees?
3. 3Who files Form 5500 each year, and what does that cost?
4. 4Who performs the independent valuation of the stock?
5. 5Are you administering this after formation, or does your role end at closing?
6. 6If the business fails, what happens to my retirement money?

Which of the Seven Markers this trips

• The promoter selects the appraiser or the actuary

• 'The IRS has never listed this'

Score your own situation against all seven

The legitimate version

Real C corp, real qualified plan document, real independent business valuation, Form 5500 filed every year, plan genuinely available to employees, reasonable compensation paid, no personal use of corporate assets.

What distinguishes it

• The client understands they are risking retirement principal with no bankruptcy protection on the business
• The promoter is running annual administration rather than disappearing after formation

Typical fees

4,000 to 6,000 dollars setup and 130 to 160 dollars per month administration is the typical market rate.