A little old but still important-
In Retirement News for Employers , Fall 2010 Edition, the Internal Revenue Service (the “IRS”) provided some thoughts on the practice of using retirement savings to pay the start up costs of a new business. The practice involves the roll over of retirement savings into a plan (a “ROBS plan”) which uses the funds to purchase an ownership interest in the new business. The IRS does not yet consider a ROBS plan to be a tax avoidance transaction. However, these plans raise issues, because they may benefit solely one individual – namely the individual who rolled over his or her retirement savings into the ROBS plan. This could result in a prohibited transaction or have other adverse tax consequences.
Last year, the IRS began a ROBS project to study these issues. One finding was that most of the businesses in which the ROBS plans had invested had failed or were failing, that the retirement savings rolled over to the ROBS plans had been lost. Many ROBS plan sponsors had failed to file Form 5500, possibly resulting in large penalties, based on a misunderstanding of an exception to the filing requirements. That 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 the business . Here, however, the ROBS plan itself owns the business, so the exception does not apply. Other problems found with ROBS plans were:
–the ROBS plan does not allow any of its participants to acquire an ownership interest in the business;
–the ROBS plan does not allow employees-other than the individual who rolled over retirement savings into the plan-to participate;
–payment of promoter fees with plan assets;
–incorrect valuation of plan assets; and
–failure to issue a Form 1099-R to report the distribution or rollover of the retirement savings.
Note: If you have used a ROBS plan, it may be time to get some legal advice, or just shoot me a message through the blog.