Way back in 2008, the IRS issued some guidelines to a strategy they called the Rollover as Business Startup (ROBS). Reading between the guidelines (sorry, couldn’t resist) it was apparent the service didn’t like the idea one bit. If you want to learn more about the ROBS program this is a link to the IRS guidelines.
Today the IRS formally released a PLR that was years in the making and appears to come to the conclusion that the ROBS program is not valid, and the retirement plan or self directed IRA used in the strategy isn’t valid either.
Here’s the backstory. The taxpayer received a distribution from his old retirement plan. At the same time he decided that he wanted to get involved in a healthcare franchise. (Franchise brokers love telling people about ROBS programs because now people who couldn’t afford to purchase the franchise have instant bucks. Since franchise brokers make a commission on the sales of the franchise, voilà, an instant love affair.) During the course of his investigation into the business, the taxpayer met with an attorney who gave the typical attorney advice, there were red flags, but the IRS hadn’t flat out said the ROBS program was illegal. . . yet. Seeing that as a green light, the taxpayer decided to roll his retirement funds into a new plan, with that plan purchasing stock in the new franchise.
About a year later the taxpayer’s accountant suggested the taxpayer should get a second opinion with another attorney. Apparently that attorney was a bit scarier than the first with the result that the taxpayer decided to scrub the whole plan. Tiny problem though, the tax code only gives you 60 days to rollover your retirement assets in a tax free manner, and by scrubbing the ROBS program, the taxpayer would fail the 60 day limit.
Fortunately for the taxpayer, there’s a law on the books that says that if the reason for not making the 60 day rollover wasn’t your fault, then the IRS can grant you a longer time period. In this case, the initial distribution was June 5, 2009, with the final waiver of the 60 day time limit being granted in June of 2012. Apparently the IRS was of the belief the taxpayer was hoodwinked and so the service did grant the waiver on the 60 day rollover period.
How doe we know the service thinks the taxpayer was hoodwinked? Here’s a quote from the PLR:
“The information presented and documentation submitted by Taxpayer A is consistent with his assertion that his failure to accomplish a timely rollover of Amount A was caused by his reliance on the combined advice provided by Company C, Attorney D and Law Firm F, which resulted in Amount A retroactively being held in other than a qualified plan rollover IRA.”
Seems like a clear cut assertion that the ROBS wasn’t considered a valid retirement plan. If you’ve set up a ROBS program this seems like a good time to be eyeing your exit strategy.
I am involved with a ROBS transaction with Guidant Financial Group.
This is very hard to explain.
Here is how Guidant works:
Guidant Financial Group
1) Form a Corporation
2) Set up 401k for the C-Corp. Corporation sponsors a 401k plan designed to allow for investment into your corporation. This comes complete with a favorable determination letter from the IRS.
3) Guidant guides through the process rolling the pre existing 401k from previous employer (IBM) to the 401k of the new C-Corp (belongs to the employees).
4) As administrator of the C-Corp 401k I invested funds by buying Shares of the C-Corp.
Now the business is debt free and cash rich from the sale of stocks.
This how I funded the C-Corp to buy a Franchise in June of 2006.
I now understand this is called a ROBS account, Roll Over as Business Start Up Transaction.
After being let go from IBM for the second time in twenty four years in 2005 I investigated Franchises. While searching Franchise information on the internet I also came across the Guidant Financial Group and how to use your pension funds to buy a Franchise or start a new business. I had an Attorney and an Accountant review the Guidant process and they didn’t raise any big concerns so I entered into contract with Guidant, and purchased a Franchise called Stretch-n-Grow which is a Children’s exercise program where I go into the area pre schools and teach a 30 minute exercise program. I purchased the Franchise in June 2006. What I thought was a great thing has turned into a Nightmare.
I have been to my SCORE Chapter, talked to many Attorneys, Talked with different departments in the IRS, talked with the DOL. As nice as people have been the answer is always the same – I’m sorry but it’s not our jurisdiction.
Including the startup fee($5,000.00) for Guidant I have spent over $25,000.00 in Guidant Recordkeeping fees and Accounting fees from 6/2006 to 2/29/2012 which is my business year end date.
Are you starting with more that 250,000?????? I started with less than $98,000.00 in my 401k.
From 2006 to 2008 ROBS promoters like Guidant incorrectly advised me that I didn’t have an annual filing of form 5500 because of a special exception in the form 5500 EZ instructions. This exception applies when plan assets are under a specified dollar amount (250,000) and the plan only covers only an individual, or an individual and spouse. In a ROBS arrangement the PLAN through its company stock investments owns the business; it’s not the individual that owns the business. Now all plan sponsors have to file a form 5500 annually.
Guidant recordkeeping fees have gone from $800.00 in 2006 to $1,188.00 a year.
Requirement of form 5500 a business valuation has to done annually cost from $750.00 – $2,000.00
(Guidant did have a presentation that said the valuation was free but when I asked I was directed to a site where you can order a valuation)
Required fidelity bond has to be purchased annually.
Workers Compensation Ins. – because the PLAN owns most of the stock and the stock is not owned by one individual
I was billed $708.00 dollars annually because based on certain law they base my corp. on payroll of $31,200.00.
My payroll was $11,000.00. Most officers starting a Corp. can be exempted form workers comp. ins. completely.
(When I questioned Guidant about this they didn’t know about the law)
Corporate payroll taxes are much more expensive.
Now because everything with Guidant is so complicated you have to have a CPA that can understand and guide you through everything. This is costing me over $3,000.00 a year.
I don’t know why the Accountant and Attorney didn’t have more warnings about entering into this kind of arrangement.
There only two ways to get out of this type of arrangement which is going bankrupt. Or a complicated way of buying back your stocks which in my case I can’t afford.
Guidant offers one hour advice with outside counsel, but this is the same attorney that helped get me in to this.
I don’t have any employee’s and won’t because it would only make things worse and more costly.
Because of the way the program is set up I haven’t been able to find an Attorney to advise me, and I can’t find an Accountant that is affordable.
I am on my way to bankruptcy, and believe most small businesses can’t withstand the high costs of doing business with Guidant.
I need help to find a way to get out of this mess that is affordable and legal.
I want other people to know about ROBS transactions.
I just received notice from Guidant that they are increasing the recordkeeping fee form $99.00 to $120.00 per month ($1,440.00) because they will be providing the Business Valuation which is now a requirement and justifies the recordkeeping fee increase. I feel completely stripped of any control over my account and it will make it impossible to get the shares down to be able to do a buy out of the stocks. How or Why would I expect Guidant to do anything that is to My best interest.
I recently fired my CPA because it was brought to my attention that his fees were out of line at over $3,000.00 a year and he was becoming less forthcoming about itemizing his invoices. This was just additional insult to injury.
I just read about IRS PLR201236035.
The following is a report done by the IRS in the fall of 2010; this confirms my worries.
Retirement News for Employers – Fall 2010 Edition – Rollovers as Business Start-Ups Compliance Project
What is a ROBS?
ROBS is an arrangement in which prospective business owners use their retirement funds to pay for new business start-up costs. ROBS plans, while not considered an abusive tax avoidance transaction, are questionable because they may solely benefit one individual – the individual who rolls over his or her existing retirement funds to the ROBS plan in a tax-free transaction. The ROBS plan then uses the rollover assets to purchase the stock of the new business.
Promoters aggressively market ROBS arrangements to prospective business owners. In many cases, the company 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 plan’s terms meeting Internal Revenue Code requirements. DLs do not give plan sponsors protection from incorrectly applying the plan’s 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 plan’s sponsor and its participants.
Employee Plans ROBS Project
EP initiated a ROBS project last year to:
• Define traits of compliant versus noncompliant ROBS plans;
• Identify ROBS plans that are noncompliant and take action to correct them; and
• Use results to design compliance strategies focusing on identified issues and trends (for example, Employee Plans Compliance Resolution System, Fix-It Guides, Web-based information, newsletters, and speeches).
Using compliance checks, we initially focused on companies that sponsored a plan and received a DL but didn’t file a Form 5500, Annual Return/Report of Employee Benefit Plan, or Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, and/or Form 1120, U.S. Corporation Income Tax Return.
Our contact letter to plan sponsors asked questions about the ROBS plan’s recordkeeping and information reporting requirements, including:
• the plan’s current status
• plan contribution history
• information on the rollover or direct transfer of the assets into the ROBS plan
• participant information
• stock valuation and stock purchases
• general information about the business itself
• why no Form 5500 or 5500-EZ and/or Form 1120 were filed
We always invite a plan sponsor to furnish any other documents or materials that they believe will be helpful for us to review as part of the compliance check.
ROBS Project Findings
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.
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.
Specific Problems with ROBS
Some other areas the ROBS plan could run into trouble:
• After the ROBS plan sponsor purchases the new company’s employer stock with the rollover funds, the sponsor amends the plan to prevent other participants from purchasing stock.
• 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
If You Have Questions
E-mail us and we will answer your questions about the Project and how it relates to your situation. Include the words “ROBS Project” in the subject line. Additionally, we encourage you to e-mail any comment for the ROBS Project or any other EPCU project, especially if these suggestions focus on areas of potential noncompliance.