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5 Common ROBS Mistakes and How To Fix Them

August 25, 2023

Rollover as Business Start-Ups (ROBS) plan is a popular financing solution that allows entrepreneurs to invest their 401(k) balances into their businesses without incurring tax penalties from premature withdrawals while simultaneously providing a retirement plan for themselves and their employees.

Many business owners are unaware that once they establish a ROBS plan, they assume certain legal responsibilities related to compliance regulations. Failure to comply can include legal violations resulting in hefty fines, and in some cases, plan disqualification.

Below is a chart of five of the most common mistakes that ROBS entrepreneurs make with tips on how to correct any current errors and avoid potential future issues.


Find the Mistake

Fix the Mistake

Avoid the Mistake

You haven't updated your plan document within the past few years to reflect recent law changes.

For older items, review the annual cumulative list to see if the plan has all the required law changes.

Ask your plan administrator about adopting amendments for missed law changes.

If you missed the deadline to adopt an amendment you may need to use the IRS correction program.

Review your plan document annually.

Maintain regular contact with the company that sold you the plan.

Stay up to date on notifications from your plan administrator.

You haven't filed a Form 5500-series return this year.

Find your signed copy of the return and determine if you filed it timely.

Ask your plan administrator about filing all delinquent returns.

Understand your filing requirements and know who filed and when.

Stay up to date on notifications from your plan administrator.

Eligible employees weren't given the opportunity to make an elective deferral (exclusion of eligible employees).

Review the plan document sections on eligibility and participation.

Check with your plan administrator to determine when employees are entering the plan.

Make a qualified nonelective contribution for the employee that compensates for the missed deferral opportunity.

Monitor census information and apply participation requirements.

Stay up to date on notifications from your plan administrator.

The plan failed the 401(k) ADP and ACP nondiscrimination tests. 

Ask your plan administrator to conduct an independent review to determine if highly and nonhighly employees are properly classified.

Make qualified nonelective contributions for the non-highly compensated employees.

Consider a safe harbor or automatic enrollment plan design.

Communicate with plan administrators to ensure proper employee classification and compliance with the plan terms.

The plan was top-heavy, and the required minimum contributions weren't made to the plan.

Review the rules and definitions for top-heavy in your plan document

Determine whether your plan is top-heavy for the plan year.

Work with your plan administrator to properly contribute and allocate the required top-heavy minimum, adjusted for earnings, to the affected non-key employees.

Work with a plan administrator to perform a top-heavy test each year.


It is important to understand the rules and regulations surrounding ROBS arrangements to avoid common compliance errors. By doing so, entrepreneurs can successfully finance their new businesses while avoiding legal issues and penalties.

Leading Retirement Solution's team of retirement plan experts can provide support to help business owners remain compliant and ensure they adhere to governing retirement plan laws. Our compliance programs ensure that plan fiduciaries comply with their obligations, protect plan assets, and minimize personal and financial liability wherever possible.

To learn more about common 401k mistakes and how to fix them, review the complete guide from the IRS.

For tips and information regarding retirement plans, contact us.

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