Often Told Myths
Let us clear up some misunderstandings…
If The Plan Assets Are Less Than $250,000, There Is No Need To File A Form 5500EZ Each Year.
From the IRS 2011 Robs Compliance Project: on Not Filing Form 5500 or Form 1120 “Many ROBS sponsors did not understand that a qualified plan is a separate entity with its own set of requirements. Promoters incorrectly advised some sponsors they did not have an annual filing requirement because of a special exception in the Form 5500-EZ instructions. The exception applies when plan assets are less than a specified dollar amount and the plan covers only an individual, or an individual and his or her spouse, who wholly own a trade or business, whether incorporated or unincorporated. In a ROBS arrangement, however, the plan, through its company stock investments, rather than the individual, owns the trade or business. Therefore, this filing exception does not apply to a ROBS plan and the annual Form 5500 or 5500-EZ (5500-SF for filing electronically) is still required.”
The Intention of Congress
Congress never intended plans to be used this way. Copies of the ERISA Congressional Conference Report are all but lost to time, but the Joint Committee staff makes it clear these transactions were expected and encouraged.
Necessity of 401(k) (AKA Salary Deferrals, CODA, Elective Deferrals)
Is it required? No. ERISA §407(b)(2)(A) states “the portion of such plan which consists of applicable elective deferrals (and earnings allocable thereto) shall be treated as a separate plan” which is not “eligible.” Or at least advisable? Probably not. Please see our presentation on 401(k) vs. ERSOP® Profit Sharing Plans. The IRS insists that you have a 401(k)/Salary Deferral Plan. The October 1, 2008 Memo does not state that you must have a 401(k) plan, only that if you have a 401(k), it cannot be “inactive.” You must pay yourself a salary and make salary deferrals immediately [within days, weeks or a few months] in order for you to be an considered an employee and a plan participant eligible to make a rollover. There are better ways to make you an eligible employee. The c-corporation may only pay you a salary once the c-corporation is profitable or generating cash-flow. There is no such requirement in the Code or ERISA.
Forbidden Types of Businesses
These plans may not be used to fund a finance business. Go tell that to Bank of America, Wells Fargo and Goldman Sachs. Check cashing, payday advance stores and factoring operations are common.
Favorable Determinitation Letters
An IRS advisory letter issued to the plan document sponsor is equivalent to an individualized Favorable Determination Letter issued after full disclosure to the IRS to you in the name of your company and plan. At every audit the agent requests an individualized FDL if it exists, however, in January 2012 the IRS stated that Service would no longer issue “comfort letters” (i.e. individual Favorable Determination Letters for word-for-word adoption of prototype or volume submitter documents with advisory letters and without amendments.) If there have been amendments to the documents then IRS will continue to issue individual Favorable Determination Letters.
Business Valuations
A business valuation is required by the plan as part of due diligence of a business acquisition. ERISA 408(e)(2) requires that the Plan Trust receive “adequate consideration.” Adequate Consideration is defined in ERISA (3)(18) as “Fair Market Value.” Fair Market Value is what you, as a non-coerced buyer, agrees to pay, to an agreeing unrelated unconcerned seller. A third-party valuation is an opinion, that is sometimes helpful. Could it hurt if you have a third-party valuation? No.
New Business Failures
From the IRS 2011 Robs Compliance Project: Preliminary results from the ROBS Project indicate that, although there were a few success stories, most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy (business and personal), liens (business and personal), and corporate dissolution’s by individual Secretaries of State. Some of the individuals who started ROBS plans lost not only the retirement assets they accumulated over many years, but also their dream of owning a business. As a result, much of the retirement savings invested in their unsuccessful ROBS plan was depleted or ‘lost,’ in many cases even before they had begun to offer their product or service to the public. In 2010 The Small Business Administration released a study that greater than 90% of SBA guaranteed loans to businesses with the capital injection coming from the retirement fund accounts of the entrepreneur were still performing which was considerably greater than those loans without such retirement funds.