Jump to content

ERSOPS


Guest mikeymo
 Share

Recommended Posts

This is a non-exempt PT, plain and simple. You can't use your qualified retirement plan money to start your own business unless you are acting solely as an investor, and even then there are PT problems you have to work through. Until Bob Doyle or Ivan Strasfield blesses it, I wouldn't do it.

Link to comment
Share on other sites

Guest Eric.

I absolutely cannot believe that nobody has yet provided you with this link ... which I took from Benfit Link's Retirement Plan Newsletter email. But then again, I can't believe the NJ Devils didn't win the Stanley Cup last year either. Show's you what I know ...

http://www.irs.gov/pub/irs-tege/rollover_guidelines.pdf

Link to comment
Share on other sites

  • 2 years later...

It can be done. It is very difficult to navigate. Even under the best circumstances there is some legal uncertainty I would not do business with a promoter who did not up front emphasize (1) the limited ability and the difficulty of pulling it off legally, (2) the very high probability that business failure would wipe out retirement savings as well as current assets and income source, and (3) the heightened IRS scrutiny and animosity with respect to such arrangements. I would not do business with a promoter who who uses "it's" as a possessive. I see only bad signs at the website.

Link to comment
Share on other sites

The ERISA book by Sal says the IRS admits they can be done. There are difficulties, and any research will show the IRS doesn't like them.

But then again the IRS doesn't like S corp ESOPs and there is nothing they can do about it.

The law is clear on both of these topics, difficulties-- but it can be done.

Link to comment
Share on other sites

Did the IRS tell you why they had a watch list?

IRS has always had a watch list. It is just a list of firms or individuals whose plans have been flagged (for whatever reason) so the agents know if they receive one of these plans to review, they should notify their manager first before spending time reviewing the plan.

Thanks for the link to the ROBS guidance. As I was reading through the posts, I kept thinking this sounded like ROBS with an ESOP twist.

ERSOPs sound like a great topic for ASPPA Annual Conference this year.

Link to comment
Share on other sites

so it can be done, but is anybody in TPA industry recommending them? I can only find people who are selling ERSOPs pushing them.

Why would any reputable TPA or advisor recommend toxic waste to a client?

ROBS are sold to unsuspecting entrepreneurs as legitimate tax free way to get money from a retirement plan into a business because the 401k plan established by the start up gets an IRS determination letter which makes the transaction "legal". What the promoters dont tell these fools is that the determination letter does not protect the plan in operation if any of the following rules are violated.

1. nondiscrimination .ROBS plans must comply with the benefits, rights and features provisions to prevent discrimination against non owner employees. Most ROBS plans are set up to provide for issuing of stock in the start up company only to the owners at the inception of the company and never include non owner employees.

2. use of plan assets to benefit the promoters. Promoters want to get paid up front so they request their fee from the plan assets which can be a prohibited transaction subject to the 15/100% excise tax.

3. failure to get a legitimate appraisal as to the value of the company purchased with plan assets. Most appraisals for the the value of the shell company purchased with ROBS plan assets base the company value on the cash that will be transfered to the company by the plan in exchange for the stock. From what I understand the IRS does not accept this appraisal of as a fair value for an ESOP stock.

Other violations include failure to file a 5500 5500-EZ if the plan assets are below $250,000 or failure to file a corporate tax return.

The biggest reason against transferring personal retirement assets to a ROBS 401k is because 80% of all start up businesses fail in the first few years leaving the owner with a loss of the retirement assets and a big tax liability from the IRS for violating the above tax laws. The fall 2010 edition of IRS Employee Benefits news has an article on ROBS and their risks.

mjb

Link to comment
Share on other sites

Well then this link does not:

http://www.irs.gov/retirement/article/0,,id=231594,00.html

What difference does it make whether S or C Corp etc?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

Link to comment
Share on other sites

Well then this link does not:

http://www.irs.gov/retirement/article/0,,id=231594,00.html

What difference does it make whether S or C Corp etc?

This is the very short version of the answer to your question. An ESOP that owns 100% of the stock of a S Corp sets up a tax free entity. The S corp does not pay taxes because it is an S Corp and the income passes to the stockholder(s). The ESOP being the sole stockholder is a non-tax paying entity in this case.

People were setting up ESOPs and making the S corp election to avoid taxes and not offering broad base ownership to the company employees. These rules were intended to encourage broad base ownership of the company.

Classic example a Dr. or lawyer in a sole practice was setting this up and their practice was not paying taxes. This was not the intent of the S corp ESOP rules.

The link on abusive S corp ESOPs is about trying to avoid the various rules that are trying to stop those abuses.

As for the link to ROBS that is the IRS’ position, but read it carefully. They never say it can’t be done. I agree with the problems outline here. The objection that new businesses go under and people will lose their retirement funds is a “nanny state” objection, not a legal one. I know plenty of people who have been laid off since 2007 who have spend all of their retirement saving supporting themselves while trying to find a job. Why shouldn’t they be able to take the risk of starting a business or franchise with this money? The “nanny state” somehow thinks they will be better off staying a wage slave, sorry that is not a valid objection.

Link to comment
Share on other sites

  • 5 months later...
Guest bitadvisors
:rolleyes: Speaking of bending the rules, I have a new client who has a leveraged esop and who advised he refinanced the esop. The documents provided appear to show the original esop finance remained in placed, and now the company has a new loan for company equipment where he used the esop shares to secure a loan as collateral. I do not believe he can do this and have done research everywhere to find proof but cannot find anything. Any suggestions?
Link to comment
Share on other sites

My first suggestion is to make sure your fee agreement with the client is very clear what is out of scope. There is an excellent chance they are going to have to pay you a lot of money to help them get out of this problem. They may have to pay their attorney a bunch of money also. This is a classic case of someone being penny wise to end up a dollar foolish. His not coming to you guys up front is going to hurt.

For an answer along the lines you were expecting and needing.

1) Whoever gave this loan and thought they had shares securing the loan is most likely wrong. The anti-alienation rules are going to stop them from ever getting those shares if the loan goes into default. Although if the loan goes into default that may mean the company isn’t worth anything anyway.

http://www.ecrllc.com/safequalifiedplans.asp

2) A problem I see here this is a prohibited transaction.

http://www.irs.gov/retirement/participant/...=211437,00.html

This seems like a self dealing that violates these rules.

3) Maybe a violation of the exclusive benefit rule is bigger than the PT. I believe they have disqualified the plan. By the way in case it isn’t obvious since the securing of the loan was for the benefit of the sponsor and not the plan that is the violation.

http://www.clausen.com/index.cfm/fa/firm_p...iary_Duties.cfm

I think they have little choice but VCP to fix the problems with the IRS and I think there is a similar program with the DOL to fix the FT problems.

I don’t see how they get out of that radical fix. This seems too big to be a self correction.

Link to comment
Share on other sites

It sounds to me like the lender really doesn't have the security interest it thinks it has. The client may also wish to consult a good lending law attorney and possibly a criminal defense attorney because there may be issues of fraud vis a vis the lender.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...