Rollovers as Business Start-Ups

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Rollovers as Business Start-Ups (ROBS) are arrangements in which current or prospective
business owners use their 401(k), IRA or other retirement funds to pay for new business startup costs, for business acquisition costs or to refinance an existing business. ROBS is an
acronym from the United States Internal Revenue Service for the IRS ROBS Rollovers as
Business Start-Ups Compliance Project.[1]
Contents
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1Background

2ROBS Project Findings

3See also

4References

Background[edit]
ROBS plans, while not considered an abusive tax avoidance transaction, are, according to the
IRS, "questionable"[2] because they may solely benefit one individual the individual who rolls
over his or her existing retirement 401k withdrawal funds to the ROBS plan in a tax-free
transaction. In most cases, since the IRS pronouncement concerning this potentially
discriminatory approach, ROBS plans have been inclusive of all participants and provide
broad-based participation for all employees. The ROBS plan then uses the rollover assets to
purchase the stock of the new business. A C corporation must be set up in order to roll the
401(k) withdrawal.
Promoters, such as a Roth IRA broker of a self-directed IRA LLC, or small business financing,
aggressively market IRS ROBS arrangements to prospective entrepreneurs and business
owners for funding for a business as small business financing. In the case of most ROBS
facilitators, there is a very close relationship between the promoter/facilitator and the franchise
industry, seeking to sell and promote business "opportunities" and seeking funding sources for
these sales and promotions. Most ROBS "promoters" and facilitators pay substantial referral
fees to the franchise brokers who refer business to the promoters. Rarely are these fees
disclosed to the entrepreneur. Fees charged by most "promoters," consequently, are in excess
of the fees that would be charged by attorneys and accountants for the same services who are
prohibited from paying referral fees. Some companies offering ROBS plans do not pay referral
fees to brokers, and charge lower fees as a result. There remains a substantial question
whether such referral fees are illegal under ERISA and the U.S. Criminal Code: Offer,
Acceptance, or Solicitation to Influence Operations of Employee Benefit Plan (18 U.S.C.
Section 1954).
In many cases, the broker will apply to IRS for a favorable determination letter (DL) as a way to
assure their clients that IRS approves the ROBS arrangement. The IRS issues a DL based on
the plans terms meeting Internal Revenue Code requirements. DLs do not give plan sponsors

protection from incorrectly applying the plans terms or from operating the plan in a
discriminatory manner. When a plan sponsor administers a plan in a way that results in
prohibited discrimination or engages in prohibited transactions, it can result in plan
disqualification and adverse tax consequences to the plans sponsor and its participants.
Accordingly, promoters who emphasize or "promote" base on a favorable determination letter
are, at a minimum, engaging in deceptive trade practices.

ROBS Project Findings[edit]

New Business Failures
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 dissolutions
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.
Specific Problems with ROBS
Some other areas the ROBS plan could run into trouble:

After the ROBS plan sponsor purchases the new companys employer stock with the
rollover funds, the sponsor amends the plan to prevent other participants from purchasing
stock. Since the 2008 announcement from the IRS such amendments are rare.

If the sponsor amends the plan to prevent other employees from participating after the
DL is issued, this may violate the Code qualification requirements. These types of
amendments tend to result in problems with coverage, discrimination and potentially result
in violations of benefits, rights and features requirements.

Promoter fees

Valuation of assets

Failure to issue a Form 1099-R, Distributions From Pensions, Annuities, Retirement

or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., when the assets are rolled over
into the ROBS plan