The Rollover for Business Startup (ROBS) Solution is an IRS and ERISA approved structure. With this structure, you can use your retirement funds to capitalize in a new business/franchise that you have personal involvement in. Because of an exception under Internal Revenue Code (IRC) section 4975(d), also known as qualifying employer securities, when you employ the Rollover for Business Startup solution, you will not trigger the IRC prohibited transaction rules for using your retirement funds in your own business venture.
When you make the choice to employ the structure for a business/franchise, there are criteria you must adhere to and things you should never do with the structure. Below is a list of what you should do to stay IRS compliant and benefit most from the Rollover for Business Startup.
- ROBS allows one to use retirement funds to start a business
- There are certain guidelines you must adhere to to keep the structure IRS compliant
- If you sell the business, make sure to exit the ROBS correctly
1. Maintain an Active Business
Ensure that you run an active operating business/company. It cannot be a passive business, such as certain real estate ventures, nor can it shift into one. Additionally, your business must be legal on a federal level in order to employ the ROBS solution. For example, marijuana is not legal on a federal level, therefore you may not be able to fund your business with the Rollover for Business Startup Solution. ROBS providers are not likely to move forward with such a business, because the IRS has not yet approved it.
2. Be an Active Employee
In order to stay IRS compliant, your business must provide a legitimate service, and you must be an employee of that business. You can earn a salary, but not before the business derives compensation. At that point, you can earn a “reasonable” salary for your position. You can work with a ROBS provider, such as IRA Financial, to determine what a “reasonable” salary is, or you can perform a basic market salary comparison. It does not matter what role you choose in the company, but it must be active. For example, you cannot be a passive investor in your brother’s company. The number of hours you work annually is not set, but 1,000 hours is a good baseline.
3. Offer 401(k) Plan to Employees
It’s important to give your employees the option of participating in an employer-sponsored 401(k) plan, and you should never make it difficult for them. Plus, all employees must have the same investment options. If it is available to owners, it must be available to all employees.
When you offer a 401(k) plan, you increase your chance of hiring individuals best equipped for the job, and you better retain key employees. Additionally, you receive tax benefits by offering a 401(k) plan, and participating in one.
Read More: What is a 401(k) Plan?
4. Be Aware of ROBS Audit Risk
Though the ROBS structure it completely legal, they are quite complicated to set up on your own. If you don’t set it up properly, or fail to maintain the allowed structure, you can face an IRS audit. If the IRS deems that the rules were broken, then the entire amount of the transaction may be taxed. Note that there is less than a one percent chance that your ROBS will be audited. IRA Financial ensures that you’re ROBS structure will be completed. and maintained properly.
5. File Your ROBS Documents Annually
One thing you must remember to do is file all the necessary documents and tax returns for your business every year. Generally, you must file your corporate taxes on your own. Other forms, such as the 5500, will be completed and returned by your plan administration service. Failure to file these documents annually will lead to unnecessary tax consequences.
To be clear, all the responsibilities you have as a business owner will be there. In addition, when using the Rollover for Business Startup to invest in a business, you must make sure all rules are followed. The tax bill may be hefty if you don’t. IRA Financial will always make sure this doesn’t happen to you!
Watch this – ROBS – Additional Benefits
6. What Happens When You Close or Sell the Business?
In the unfortunate event that you have to close the business, or if you decide to sell it, you must take appropriate measures to close out your Rollover for Business Startup. As mentioned above, all taxes (including State if they are owed) must be submitted for the final year of operating the business. Further, you must now close the 401(k) plan set up for the business.
There are basically two ways to close the 401(k): 1) insolvency and 2) stock buy back. When your stocks become valued at $0, they are insolvent. You must distribute the plan assets to those who participated and thus dissolves the plan. If you buy back the stock that the 401(k) has in the business, you then must deposit the funds from the sale back into the plan. You can then distribute those funds to the plan participants.
There are a few other maintenance issues to resolve, but the final thing you must do is file the last Form 5500 for the business. Again, this is generally prepared and submitted by your administration team. 1099 forms may also be needed to report all distributions from the plan. IRA Financial will prepare and/or help you submit all the required paperwork so that you are not hit with any penalties.
Related: Year-End Tax Planning for ROBS Users
Rollover for Business Start Up Conclusion
Getting started with ROBS is only the beginning. Whether you used your retirement funds to start a new business or invest in an existing one, you must make sure to follow all IRS rules. Failure to do so will lead to unnecessary taxes and penalties. Here at IRA Financial, we will guarantee that this does not happen to you. If a question arises, our experts will work diligently to get you the correct answer and keep you IRS-compliant.
Do not hesitate to get in touch with us via our contact page or by calling 800.472.0646. We are here every weekday from 9am-7pm EDT. We are always available for all of our clients’ needs, big or small.
