RC50

Yes. Agreed. Good point. Thank you. This has been done. There is no doubt there is some gray here hence my post. I believe this will require a further deep dive to ensure protection. Lastly, can anyone comment on the percentage of Plans that do get audited? None of this matters if there is never an audit. If audited we will want there to be no gray.

I should note the wife's 401(k) plan owns a minority position in the husband's company, less than 10%. We created two different membership classes within the husband's company, Class A (with one vote per unit) and Class B (with nor voting rights or governance rights whatsoever). The wife's 401K owned Class B membership. This effectively ensures the IRS can’t argue that the wife's plan ever had any control over the husband's business. Much like preferred stock there is some type of return on investment to compensate for the loss of voting privileges. The husband's company is a partnership so not a ROBS. ROBS require investment in a C Corp. PT exposure is avoided because there is no attribution between husbands and wives.

So we're told by both the TPA and the attorneys.

The husband did perform actual work for the company while hired which created value for the wife's company so although his employment appears to be for 401K rolling the company received benefit. Thanks for the links above. This mechanism is similar to a ROBS but doesn't meet the exact definition because of the plan of the wife's company owns the membership shares. The 401K does have to sell the asset at a fixed size. The good news is the husband's company was post revenue in month one and the valuation of the business is already quite high. I believes the IRS takes issue with ROBS because of the inherent risk that many of these deals have in loosing 100% of the value. Risky, yes. Thanks for the comments. All are good.

The plan is not a one-person plan but is subject to IRC 4975 PT rules.

Yes, that is correct. The wife's plan owns less than 10% of the husband's business. There is provision in the operating agreement of the husband's company which states the memberships are sold back to the company once each membership is worth double what it was initially purchased at. Effectively, double the money that was put into the husband's business is put back into the 401K plans tax protected.

Thank you. Yes, we did that and the general consensus is that this all works. However, just because experienced attorneys believe it all works doesn't mean in practice that DOL believes it works. What I know is that interpretation of the code sits in a narrow range. I too have read over the code and believe it all to be permissible. What would be helpful is to hear from anyone else out there who has structured these types of arrangements and to hear their comments in case our team has missed something.

A wife has run a company for the past 8 years as a single member LLC. The LLC establishes a qualified 401K plan of which the husband rolled his 401K after becoming an employee. The wife's Plan states if an employee quits or is fired the Trustee ( who is the wife per The Plan) controls the 401K investment decisions. The husband was then let go. The husband then setup his own partnership LLC of which the wife's 401K Plan invested in with "for the benefit of her and for the benefit of the husband's," 401K funds from her qualified Plan. We believe this structure is legal given that the wife's company's 401K Plan is written to allow these types of alternative investments and that there is no attribution between husbands and wives to create a disqualified or prohibited transaction. The wife's business has no business dealings with the husband's business and the wife is not compensated in any way by the husband's business. The wife has helped in the husband's new business with marketing and the like but this is being done on the side and is separated from her main, profitable business. The wife's 401K Plan has a TPA who files form 5500 and drafted the Plan documents. All of the funds that were rolled into the wife's 401K Plan are now invested in the husband's business. A valuation of the husband's business is done yearly to establish value of each membership held in the 401K plan of the wife's business. The operating agreement for the husband's company states how the memberships get sold back to the wife's 401K once the business returns double the original investment. Can anyone comment on this structure as it relates to being a prohibited transaction?