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.
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