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Rollovers As Business Startups: 4 Most Common Questions

June 27, 2018

So, you engaged in the Rollovers As Business Startups (ROBS) financing strategy or you’re thinking about it as an option for funding your business venture and you are just trying to do as much research as possible. Either way you have questions, and we have the answers! In fact, 4 answers to 4 of the most common ROBS questions we encounter.

The Leading Retirement Solutions team are experts in nontraditional investing and funding strategies including the ROBS business financing strategy. We work with your CPA, Financial Advisor, Promoter, or other Professional Advisor to make sure your ROBS transaction is compliant with federal regulations. We then make sure your retirement plan is kept in compliance with Internal Revenue Service (IRS) and Department of Labor (DOL) regulations long after the initial transaction has taken place. We are industry leading experts in the ROBS strategy.

We receive hundreds of inquiries regarding the ROBS business financing strategy, so we decided to share with you the four most common questions we answer.

1) I’ve already engaged in the ROBS transaction and now I have hired employees, what do I do?

This is probably the most common question we get from business owners that have used the ROBS business financing strategy to start a new business or fund an existing one. Oftentimes, our business owners began as solopreneurs or as the only employee of their C-corporation, and then their business grew and in turn they hired new employees. Great for business, right? But what do you do about the retirement plan (e.g. 401(k)) now that you have employees?

Unfortunately, you can’t do nothing. Meaning federal regulations require that you offer the retirement plan to your employees when they become eligible. The first step we take in helping business owners with is to determine when your employees are eligible for the retirement plan (which can vary for each business). The second step is to determine what benefits they are eligible for, and the final steps is for our team to prepare a comprehensive enrollment kit providing you with everything you need to give those employees.

Even if your employees do not plan to participate in the retirement plan there must be documentation showing that each employee declined enrollment. In our experience, that is the first thing an IRS agent or DOL investigator will ask for: proof. Every case we know of where an IRS audit has taken place (which are frequent with ROBS business strategies) the IRS has always asked the business owner if they had offered enrollment into the retirement plan for their employees. As a business owner you will of course say, yes! However, this initial question is always followed up by, “prove it.” You need the necessary documentation showing that you, in fact, offered the retirement plan to your employees and in turn they enrolled or declined enrollment in the retirement plan. We help our clients limit their liability by providing them with such documentation.

See the 4 Most Common ROBS Compliance Issues

2) I need more money for my business, or, I want to bring additional owners into the business, can I do that?

Yes, although additional actions and requirements will generally apply.

If you need more money to finance or fund your business, there are a couple of things to consider. If you’ve been operating for a year or more you may be able to qualify for traditional funding options such as an SBA loan, private equity/angel money, or other business financing solutions that could be an optimal fit for your needs.

However, if you’ve weighed your options and believe the ROBS strategy is the best way for you to go then you can certainly engage in another ROBS transaction. The good news is that you would use your existing C-Corporation along with your current 401(k) Plan and simply request an additional investment of retirement monies from the 401(k) Plan into the C-Corporation. However, there are additional regulatory requirements that would have to be met, such as getting your business’ corporate stock valued beforehand, among others.

To bring additional owners into the business is also certainly possible. However, the DOL has regulations requiring that the existing 401(k) Plan always gets the better end of any bargain. Therefore, you cannot just give or “gift” any new owners corporate stock. They would be required to make an investment into the business as well.

Usually, there is a litany of questions that come after this answer typically surrounding varying forms of “investments” the new co-owner can contribute. But the most common we have seen is: can the new co-owner just contribute sweat equity as their investment? Sweat equity can be considered as an investment under certain circumstances. However, there are strict regulatory guardrails that should be discussed in greater detail to confirm compliance before moving forward.

3) Can I use the Retirement Plan (e.g. 401(k)) to decrease my taxes and the taxes of the company?

Absolutely. Beyond using your 401(k) Plan as a business financing tool there are several strategies that put the 401(k) Plan to work for you, as the business owner. You can tap into your 401(k) Plan to attract and retain talent or increase your own retirement savings as well as you’re the retirement savings of your spouse, children and other family members. You can also use your retirement plan to help reduce the taxes of not only your business but also of your own personal tax burden. There are several strategies that can be used to save you money.

4) How do I get out of the ROBS strategy?

There are a number of ways to exit the ROBS strategy. However, we often see three strategies as the most common methods of exiting the ROBS strategy.

  • Perform a stock buy-back: Your 401(k) Plan bought stock in your corporation when you engaged in the ROBS business financing strategy. Your Corporation would need to come up with the money to buy the stock back from the 401(k) Plan at its current fair market value. We refer to this as the “buy-back” strategy. Money or other varying forms of assets can be used to deploy this strategy, however, there are again specific regulations that must be followed.
  • Unsuccessful Business Venture: It’s awful but it does happen. If you’re forced to close your doors you will dissolve your C-Corporation and your 401(k) Plan will be terminated. The IRS and DOL require certain activities to be performed to effectively terminate a 401(k) Plan, and failure to complete these required steps will generally result in a letter and penalties from the IRS.
  • Sell Your Business: When you go to sell your business, you will ultimately sell all assets and/or the stock of the Corporation. At this point the seller (that’s you) is considered “cash rich,” and the 401(k) Plan that had engaged in the ROBS transaction must receive its rightful portion of the sale proceeds or your Corporation may use the sale proceeds and begin a new business venture.

If you have further questions we have more answers. The ROBS business financing strategy can appear simple on the surface but is actually a very complicated beast. Leading Retirement Solutions proactively supports organizations in their pursuit of growth by making sure you know your options while keeping you compliant with regulations.

For more tips and information regarding retirement plans, contact us.

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Rollovers As Business Startups: 4 Most Common Compliance Issues

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