Things to Consider When Considering a ROBS Retirement Plan
Absolutely necessary to adhere to:
You must work for the business and be a W-2 employee. You cannot do a ROBS as a passive investor or by working for free.
The entity created to sponsor the new retirement plan must be a C corporation. If your tax planning requires it to be or to become a pass-through entity, don’t do a ROBS transaction.
The new entity may not have any business dealings with you of any kind (other than employing you); this would be a prohibited transaction under the Internal Revenue Code. This means no transactions between the corporation and any other outside entity you own and no dealings with spouse or family members. One example of a common arrangement that would be prohibited for a ROBS company is the corporation leasing its premises from you or from an entity that you own.
Business considerations:
What is your level of business experience and knowledge? Do you need any help running the business? Where can you get the help and how will the business pay for it?
Amount of funds available in retirement funds. Note that they must be traditional retirement savings (i.e., not Roth).
What other sources of funds would be available (co-investors, your own individual funds, an SBA loan)?
What is the price of the target entity you plan to acquire? Do you have someone negotiating on your behalf?
You must be able to articulate a realistic business plan. This is a key aspect of investing with qualified plan money; you will be a fiduciary of the new retirement plan and must justify the investment of so much of your retirement savings into a new venture.
Jargon and terminology: become familiar with retirement plan jargon as well as general business and investment jargon, to help you communicate with your service providers.
Plan expenses:
These are absolutely necessary and unavoidable. No retirement plan is a DIY task. You should budget for at least $5,000 of annual expenses in all. (However, there are likely tax credits available to help you offset some or all of these in the first few years.)
You do not have to use a ROBS promoter, but you can. You can expect to pay a ROBS promoter (who sets up the plan and acts as the TPA for the plan) $3,000–$5,000 for the initial fee.
You need a third-party administrator to help you with your annual compliance routine. Whether it is your ROBS promoter fulfilling that role, or a separate TPA firm, you can expect to pay the TPA about $2,000 per year. You may also require a corporate attorney to help you get the corporation established and running.
It’s essential to hire a registered investment advisor (RIA) to help meet your compliance duties in connection with the plan’s traditional investments and participation by rank-and-file employees.
Corporate expenses. Do not ignore the requirements for running the corporation as a corporation. You must file Form 1120 annually to report and pay corporate income tax. There is state tax, corporate tax (usually), local franchise taxes, and perhaps other fees for operating a business. You need to hire a CPA who is familiar with C corporation taxation rules.
Payroll administration. You must establish a W-2 payroll which requires tax remittances as well as whatever the unemployment insurance, workers compensation insurance and any other fees imposed by your jurisdictions (city and state as well as federal).
The Bottom Line is: A ROBS plan can be a powerful tool for funding your business, but it comes with strict rules and ongoing costs. Make sure you fully understand the compliance requirements and have a solid business plan in place before moving forward.
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