ROBS Funding is Two Things in One Transaction: Start-Up Capital and a Retirement Plan Asset
As any search engine will reveal, there are plenty of websites and articles describing the joys of using employee retirement plans to fund a business start-up, in transactions commonly referred to as ROBS (Rollover Business Start-Up). The basics of the typical ROBS transaction are:
A company establishes a qualified retirement plan, such as a 401(k) plan, within certain specified guidelines,
A plan participant rolls tax-deferred funds into the new plan, and
The plan participant directs the plan to invest their plan account in stock of the company that set up the plan.
The appeal of a ROBS funding transaction, as the promoters are eager to point out, is the ability for the business owner to capitalize the venture using their tax-deferred retirement savings. This is a real economic advantage compared with using funds that have been reduced by income taxes.
There are many details to account for in the process, but, done properly, a ROBS investment is a legitimate plan asset and it may just seem like a no-brainer—what a nifty way to fund a business venture with tax-deferred savings, right?
Unfortunately, what is not usually emphasized in ROBS promotional materials is that the joy of the tax savings is followed by strong coffee, in the form of the many compliance activities required of the retirement plan as a tax-qualified retirement plan, in addition to the rules that apply to the ROBS aspects of the plan. Think carefully about that fact—until the plan is terminated, the company must continually ensure that all of the terms of the plan document are implemented in plan operations. You simply cannot have the tax breaks without the compliance hassles.
To avoid a chronic headache (or worse), the ROBS owner should become aware of the company’s duties under the plan and take action early on to handle plan compliance as soon as the ROBS funding transaction is complete.
Failure to comply with the retirement plan rules can cost the company the tax benefits of sponsoring a qualified retirement plan, including even the tax break involved in the ROBS transaction itself.
Bottom line: for the ROBS plan asset to be legitimate, the plan itself must be run correctly not only at the outset but continuously, just like any employee retirement plan.
The Bottom Line is: A ROBS transaction isn’t just a way to fund your business—it also creates a long-term retirement plan with ongoing compliance responsibilities. Staying on top of these requirements is essential to maintaining the tax benefits and legitimacy of your plan.
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