“ROBS” stands for Rollover for Business Startup, which describes a special kind of investment inside an otherwise normal defined contribution retirement plan. By making the employer stock available as a plan investment, the company sponsoring the plan can get operating capital from its own employee(s). The participant rolls qualified funds from an IRA or former employer plan into their new plan account. With employer stock as an investment option, the participant directs the plan to use the rollover cash to buy stock of the new entity, which must be a C corp. In this way, the company gets operating capital and the plan participant-entrepreneur defers taxation on their investment.
How does a ROBS Plan differ from a regular 401k plan?
A ROBS Plan is essentially a traditional 401k plan or profit-sharing plan with the added feature of holding employer stock in the plan account. While participants can and should use the plan like a normal retirement plan, the plan sponsor must navigate additional compliance concerns specific to the employer stock held in the plan. It’s crucial for ROBS owners to be aware of these unique rules to avoid costly compliance issues.
How can a ROBS owner exit the ROBS arrangement if needed?
To exit a ROBS arrangement, a ROBS owner can either receive a distribution of the stock from the plan and/or have the company redeem the stock by buying it back from the plan with cash. Distribution typically occurs under specific conditions such as reaching retirement age, while redemption involves the company finding enough cash to buy the stock back at fair market value, which can be costly.
How can an attorney assist a business owner with a ROBS Plan compared to a third-party administrator?
Attorneys play a vital role in handling legal complexities related to ROBS Plans, such as determining ownership structures and addressing potential prohibited transactions in plan assets. While third-party administrators primarily offer ongoing plan administration services, attorneys provide crucial legal guidance on specific compliance issues, prohibited transactions, and strategic tax planning for exiting the ROBS arrangement.
What considerations should a business owner keep in mind before opting for a ROBS structure?
Before deciding on a ROBS structure, business owners should evaluate their willingness to remain a C corporation, comply with retirement plan regulations, and plan for a long-term exit strategy. It’s essential to understand that a ROBS Plan is a retirement plan, requiring contributions, employee offerings, and ongoing compliance with plan documents. Engaging with legal and financial experts is key to navigating the complexities of a ROBS arrangement effectively.