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Rollovers as Business Start Ups (ROBS)

The Top 3 Highlights of the IRS Rollovers as Business Start-ups (ROBS) Bulletin

Written by Frank Selden | Founder & Owner of Frank Selden Law, PS

What can we learn about Rollovers as Business Start-ups (ROBS) setups from the IRS ROBS 2010 bulletin? This blog, originally from benefits attorney Susan Jordan, accurately describes the IRS concerns for ROBS plans as they existed at the time.

Read the original IRS Bulletin here

How do we set up ROBS arrangements in light of these concerns? My experience is that the ROBS industry has changed little, other than making recommendations in ways that leave the client responsible for compliance. Here is what one needs to do to remain compliant:


A 401(k) plan requires benefits to be made “effectively available” to all plan participants. Some clients do not want their employees to have an opportunity to purchase qualified employer stock (QES) through the plan. If a plan is designed to make a benefit or feature available to key employees only, and not other employees, that plan can fail the discrimination testing. How do we ensure compliance on this issue?

Plans require at least three distinct investment choices, including the QES. At no time will the plan contain zero investment selections. However, specific investments may come and go. The QES is available the same way as any other investment inside the Plan. The corporation’s board of directors decide on a “reasonable” time frame. Proper plan design eliminates this issue by taking into consideration when the corporation may have employees other than the client.

Prohibited Transactions

In a proper ROBS setup, funds in the Corporation that came from the plan are no longer a plan asset. Therefore, the concept of Prohibited Transactions (PTs) dealing with plan assets does not apply. Still, the IRS took issue with the corporation paying ROBS promoter fees with plan investments. ROBS promoters are not plan fiduciaries. As an attorney for the plan sponsor about plan legalities, I am considered a fiduciary. This issue can be defeated by asking clients to pay a fee upfront and have the corporation reimburse them in stock.

The promoter fee is not the only PT issue. The Department of Labor (DOL), in 2006, stated that they reserve the right to ascertain PTs after the corporate investment given all of the circumstances at the time. They looked at a hypothetical of the corporation renting or leasing property owned by the same individual who created funded the company with qualified money.

General Qualification Concerns

The rules require that the plan sponsor intend that the plan exist for an indefinite period of time, with “substantial and recurring” contributions. Our clients intend this, according to initial corporate documents relating to sponsoring the plan. What if it doesn’t happen? Nothing. Do the rules require any employee to participate in the plan just because they become eligible to do so? No, not even the key employee/client. Is the client allowed to coerce employees to participate in order to make the plan look more attractive? Absolutely not. What is the issue?

Some people, prior to 2010, chose a ROBS funding mechanism with no intention at all of ever creating an active plan. When you sign up for a ROBS arrangement, intend to create an active plan for the benefit of all of your employees. What if the client is the only employee and never contributes? Allowed. What is not allowed is to sponsor a plan, execute a QES transaction, and close the plan. Have the proper intent and this issue disappears.


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