Invest in Business

[Randy Watson]

I've read about a "product" that would allow an individual to use 401(k) assets to establish and operate a business. I won't give any free advertising to the company. Bascially, an individual sets up a corporation and the corporation adopts a 401(k) plan. The sole participant then rolls his account from a prior employer into the plan and would direct that the assets be invested in a new entity (solely owned by the 401(k)). Anyone heard of this? I can't imagine that it's legit.

[QDROphile]

At a recent presentation by IRS audit and enforcement representatives, the informal comment was that the IRS was very skeptical about these arrangements, but the IRS is coming to the conclusion that maybe, if done correctly, some form of the scheme could work. Lots of qualifications in the statements, with particular warning about prohibited transactions that can occur at various stages, including exit strategies. The IRS did not mention the issue of allowing the principals the right to purchase employer securities for their 401(k) accounts, but then shutting the door on other employees/participants. At best, is is a delicate proposition with uncertainties that cannot be completely resolved. The IRS knows that promoters are out there, especially in franchising, and that some of them are scum. Apart from the compliance issues, the IRS questions the economic wisdom of the investment of the retirement funds. Q: How many new businesses fail in the first five years?

[John Feldt ERPA CPC QPA]

In January 2008, at the Los Angeles Benefits Conference, it was noted that while there may be ways to legally accomplish such a design, the arrangements are also showing up on the IRS radar as possible abusive tax avoidance schemes. The IRS has not officially declared them to be abusive tax avoidance transactions at this time, however.

http://benefitslink.com/boards/index.php?s...24&hl=ERSOP

They should get competent counsel to do the transaction right. The plan should probably have some employer contributions in order to really be considered a plan and not just a conduit for rollovers. The end-game distribution aspects should be considered before the plan is set up: ordinary income tax instead of capital gains tax (the basis was zero). That's just a start.