Creating a ROBS plan is tricky, and a whole industry has developed to help business founders avoid key compliance pitfalls—Is the ROBS participant an eligible employee of the company? Is the plan sponsor a C corporation? Generally, ROBS providers do a good job educating and assisting founders with such initial compliance issues.
However, getting the ROBS plan under way is only the beginning. For as long as the plan exists, compliance tasks remain permanently on the company’s to-do list. In addition to holding ROBS stock, the plan is also subject to myriad rules as a tax-qualified retirement plan subject to ERISA and its many regulations. This is not an easy lift for a ROBS company, especially if it does not understand its role as a retirement plan sponsor.
In fact, in our experience representing ROBS clients before the agencies that enforce retirement plan compliance – the Department of Labor and the IRS – we have learned that what usually trips up a ROBS plan in an agency audit is not necessarily the ROBS element of the plan, but more often the more mundane aspects of everyday retirement plan compliance. For example, many ROBS companies ignore, at their peril, the requirement to inform their employees about the plan and its eligibility rules.
To get it right, ROBS companies must hire, monitor, and interact regularly with a number of service providers. These outside professionals include:
- The plan’s third-party administrator (TPA),
- The plan’s registered investment advisor (RIA), and
- The fund custodian, which is the institution that receives the company’s traditional plan contributions and invests them as directed by the plan’s participants. (Yes, you read that right – a ROBS plan must provide for the employees and/or the employer to make cash contributions to the plan throughout its existence.)
Plan service relationships can work like a well-oiled machine, but the outside service providers aren’t able to perform their jobs without the help of the ROBS plan sponsor. For example:
- No TPA can do its testing and reporting tasks without certain key information from the sponsor, such as an accurate employee census each year.
- The RIA needs the input of the company to advise it on appropriate investment funds for the plan’s participant population.
- The fund custodian cannot be responsible for transmitting employee salary deferral contributions from payroll to the custodial account; that’s the sponsor’s job, each pay period.
- To meet basic compliance, the company must enroll new employees who meet the eligibility conditions stated in the plan document.
No retirement plan is plug and play, no matter how expert and all-knowing a service provider seems (or promises) to be. The ROBS employer simply cannot delegate all of its legal duties to outsiders. A good relationship with service providers is a key to successful plan compliance, so keep lines of communication open, create a compliance calendar for the tasks required each pay period and annually, and familiarize yourself with your plan document and your written service agreements.