Roll Overs for Business Startups ROBS IRS of Tax Revenues: So Look Carefully before Rolling Over
If you are already sold on this procedure and wish to pursue it, nevertheless, here are a few recommendations that may help:
- Hire an appropriate attorney to prepare the new retirement plan document. Avoid using the M&P (master and prototype) plan provided by the franchise seller. A number of promoters of ROBS transactions are on the IRS's watch list.
- Have an objective valuation of the stock of the new corporation prepared with supporting detailed analysis. An obvious red flag to the IRS would be the value of the corporate stock being assessed at the amount of funds rolled over into the retirement plan. The value of the stock should be set as the value of the available assets, its true enterprise value. The lack of a bona fide appraisal would raise a question as to whether the entire exchange is a prohibited transaction.
- Before purchasing a franchise through promoters charging fees out of the proceeds of the stock purchase, consider whether they can be construed by ERISA or the IRS as "fiduciaries" rendering "investment advice" or administering the plan. If a fiduciary receives a payment from plan assets, it may constitute a violation of the Internal Revenue Code.
- Enable future employees to acquire employer stock. Often ROBS transactions are designed to take advantage of a one-time only stock offering, failing to satisfy the available benefit requirement of retirement plans. In order for the plan to not discriminate in favor of highly compensated employees, an extension of the stock investment option must be afforded to non-highly compensated employees to be hired in the future.
- Establish the plan as permanent; do not discontinue it within a few years after its adoption.
- Never pay purely non-business expenses from the plan.
- Communicate in writing the existence and availability of the plan to all new employees; otherwise, your plan will be in violation Treasury regulations, and may result in its failure.
The consequences of entering into any prohibited transactions and of carelessly setting up a ROBS are staggering penalties of 110% or more of the amounts involved in the transactions or the roll over itself. On November 5, 2008, the IRS issued the following warning to all business owners contemplating the implementation of a ROBS arrangement:
For these reasons, we intend to scrutinize ROBS arrangements. Our guidelines will serve as instructions to our technical specialists to resolve issues they encounter when evaluating these plans. We believe that ROBS arrangements may endanger the qualified status of otherwise tax-qualified employee plans and may be prohibited transactions, requiring complete undoing of the transaction, and imposition of excise taxes.
So tread carefully, and obtain the necessary legal, accounting, and other professional advice before adopting a ROBS arrangement. Or perhaps even consider other alternatives, such as borrowing from your 401(k) plan. For more information on ROBS, 401(k) loans, or other tax and accounting issues, please contact William Brighenti, Certified Public Accountant, Hartford CPA Accountants, or visit my website at Accountants CPA Hartford, or professional blog at, Accounting and Taxes Simplified.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. The above tax advice was written to support the promotion or marketing of the accounting practice of the publisher and any transaction described herein. The taxpayer recipients of this offering memorandum should seek tax advice based on their particular circumstances from an independent tax advisor .
The Barefoot Accountant—is a Certified Public Accountant, Certified QuickBooks ProAdvisor, operating an accounting, tax, and QuickBooks consulting firm in Berlin, Connecticut, Accountants CPA Hartford, Connecticut, LLC. Bill has instructed graduate and undergraduate courses in Accounting, Auditing, and other subjects at the University of Hartford, Central Connecticut State University, Hartford State Technical College, and Purdue University. He also taught GMAT and CPA Exam Review Classes at the Stanley H. Kaplan Educational Center and at Person-Wolinsky, and is certified to teach trade-related subjects at Connecticut Vocational Technical Schools. His articles on tax and accounting have been published in several professional journals as well as on several accounting websites. William was born and raised in New Britain, Connecticut, and served on the City's Board of Finance and Taxation as well as its City Plan Commission. Bill is a crazed animal lover, feeding birds, squirrels, chipmunks, skunks, possums, stray cats, and any two-legged or four-legged critter traversing through his yard. His backyard in Berlin, Connecticut has been certified as a habitat suitable for wildlife by the National Wildlife Federation.
Bill also writes an Accounting, QuickBooks, and Tax blog: Accounting, QuickBooks, and Taxes by the Barefoot Accountant. For entertaining articles, please see his listing at The Amazing Brighenti.