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How Does the ROBS Transaction Work?

October 30, 2012


ROBS Transaction

The ROBS transaction (also known as the Qualified Employee Securities (QES)) is designed to allow business owners and entrepreneurs to use pre-tax retirement assets to fund a new or existing business without paying taxes on the retirement assets, normally assessed under IRC § 72(t).


A company that offers the ROBS transaction is referred to as a “Promoter” or "Provider," (see how to select a ROBS Provider) and such company establishes a new “C” corporation and also a new 401(k) Plan, on behalf of a client. The Promoter claims that the 401(k) Plan is a “special” plan that contains unique plan language allowing plan participants to invest their entire account balance in employer stock. The corporation then adopts the 401(k) Plan. Typically, at this point, the corporation has no employees, assets or business operations and the Promoter’s client is the only employee and participant in the plan.

The Promoter’s client then executes a rollover of existing retirement money into the newly adopted plan and directs the plan to purchase qualified employer securities (aka corporate stock) in the new “C” corporation. The promoter’s client then transfers funds from the plan to the new corporation and uses the funds to capitalize a new or existing business that is then operated by the corporation. The promoter tells the client that the transaction is permissible under an exemption provided by ERISA § 408(e).  Relying on the ERISA exemption and the promoter’s advice, the client pays no taxes or penalties for distribution or early withdrawal of retirement monies.

However, there are several common compliance issues that can result from the ongoing administration of a ROBS Plan. Some of the more common questions and their answers can be found in some of our other blogs. Ultimately, it is recommended to work with a Third-Party administrator that will work with your ROBS Provider and administer your ROBS Plan over time to make sure you remain compliant with federal regulations.

For a more detailed guide, check out our ROBS Business Financing Strategy: The 8-Step Guide.

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