Recall that a ROBS plan is not just a funding mechanism for a new corporation but also a qualified retirement plan. After the initial funding transaction, the plan must be expected to continue indefinitely.
The first thing to do is to read your retirement plan document to become familiar with the benefits provided. Ask your third-party administrator to explain (or correct) any plan terms you don’t understand. The document is the foundation of the plan’s operations.
Throughout the plan’s existence, the 3 key elements of plan operations must be:
- Employee communications
- Annual reporting, and
- Regular contributions to the plan
(1) Employee Communications
- Give your employees a copy of the plan’s summary plan description (SPD) as part of the onboarding process.
- Does your plan permit employee deferral contributions? This is the classic 401(k) plan feature. If so, make sure your rank-and-file employees that are eligible for the plan are given an enrollment opportunity, usually via a plan’s employee web portal or call center.
- You must make sure that any deferral contributions are actually transmitted from the corporation to the plan’s custodial account in a timely manner. Ask for help from your plan’s registered investment adviser (RIA) or your ERISA attorney if you’re not clear on how to do this.
(2) Annual Reporting
- The TPA prepares an informational tax return each year – this is known as the Form 5500 [see the link to our 5500 blog post below]. You will provide plan data to your TPA, who completes the Form 5500 for your signature.
- Throughout the year, ask your TPA any questions that come up for you about plan operations.
- Shortly after year-end, provide the TPA your employee data for the year – via the TPA’s secure portal.
- The plan’s financial data must be reported on the Form 5500 too, so be prepared to provide that to your TPA as well,, also securely, to protect sensitive financial data.
- See the link below to the DOL’s current guidance about cybersecurity requirements and tips for plan fiduciaries (employers sponsoring a plan).
(3) Regular Contributions to the Plan
The regulatory agencies (DOL, IRS) care very much that a ROBS plan provide conventional retirement savings for rank-and-file personnel. This fundamental tax qualification rule requires the employer to actively use the plan to help all of its eligible employees build retirement savings.
Therefore, new contributions must be made to the plan after the initial ROBS rollovers are received.
Many ROBS plan documents do not require specified annual contributions; such plans often permit only discretionary profit sharing contributions and the qualified employee rollovers. For a year or two, this may satisfy the retirement plan rules. However, as soon as possible after the plan is established, your ROBS plan must begin to receive regular, ongoing contributions.
If you find that your plan document does not permit employee salary deferrals (aka 401(k) contributions), you may amend it to do so. You may also begin to make employer cash contributions in the form of matching funds for 401(k) contributions and/or profit sharing contributions. Note that all employer contributions to the plan are tax deductible business expenses.
As you see, employee participation, annual reporting, and regular contributions are costs of using the plan as a funding vehicle for the ROBS corporation. How much will this cost your company? Good question – read our blog on this topic at Planning for Retirement Plan Expenses – KLB Benefits Law Group (klblawgroup.com)
Here are links to some of our other blog posts and websites that you might find helpful in understanding your duties:
- No Ifs, Ands, or Buts: All ROBS Plans Must File a Form 5500 – KLB Benefits Law Group (klblawgroup.com).
- Commit to Compliance: No ROBS Plan is “Plug and Play” – KLB Benefits Law Group (klblawgroup.com)
- The Advantages and Tax Effects of Dividends Paid to the ROBS Plan Account – KLB Benefits Law Group (klblawgroup.com)
- US Department of Labor announces new cybersecurity guidance for plan sponsors, plan fiduciaries, record-keepers, plan participants | U.S. Department of Labor (dol.gov)