Rollovers As Business Startups

[mming]

We're considering taking over a plan that has had a ROBS transaction in the recent past and were reviewing the memo released by the IRS on 10/1/08 regarding their guidelines on this matter. It details the many possible design flaws that ROBS plans have, as well as the IRS' intention of intensifying their investigations of these types of plans. It seems that the IRS is now backtracking on an idea that they originally approved of, (kind of like the 412i plans)? The employer's attorney, who sold them the plan, is also backtracking.

The plan's approved prototype document allows the plan to invest up to 100% of its assets in qualifying employer securities; the plan appears to have been operated as the document dictates in every respect. The IRS memo makes it hard to believe that even if everything was done right, the employer may still not escape unscathed from an investigation. What would be the best way to insulate the employer in this situation - a private letter ruling, EPCRS - or is there nothing that can be done after the ROBS transaction has occurred? All help is greatly appreciated.

[J Simmons]

Knee pads.

[GBurns]

It does not matter that "everything was done right" nor that it was "operated as the document dictates", if the rationale etc was wrong in the first place.

I noted that you did not opine on the issue of compliance with the IRC or Treas Regs.

I do not agree that the IRS is backtracking because I have not seen where they ever approved those ideas.

What I have seen are unsubstantiated claims of approval and claims of approval but for a different plan design. Have you compared your design to what was alllegedly approved ?

[MSN]

We've opted to not take on these types of plans. We recommend that the sponsor terminate their existing plan and start up a new plan after 12 months. I would assume that you've solicited guidance from your counsel as to the potential issues with this type of plan and how to adequately insulate your firm to the extent possible.

EPCRS would not be applicable if you can't find a failure and I doubt that the PLR would call out all of the possible defects under such design, so I don't think that's a great help either.

[mming]

GBurns, I took it for granted that at some point in the past ROBS have been OK'd by the IRS, given the abundance of companies pushing this design. After much research, I had tentatively arrived at the same conclusion you did - no evidence of specific IRS approval - and just wanted to make sure something wasn't overlooked on my part.

MSN, we are in the very early stages of talking to the employer and determining whether or not we will take them on as a client, so formal counsel hasn't been brought in just yet. However, it looks like it will be soon. I agree that at this point the best option would be to get rid of the plan and start anew.

Supposedly, the IRS has put together a list of 9 companies that are marketing these arrangements slated for investigation so far. None of my colleagues have ever heard of ROBS so it was good to see this issue addressed. Thank you both for your assistance.

[Kevin C]

Even if they have a determination letter, the letter only applies to the form of the plan document. A determination letter will not bless the stock purchase. They still have operational issues and PT issues to deal with as outlined in the IRS memo.

[mming]

Right. The memo states that one of the main ways they're going to track these plans down is through their FDL program, though I'm not sure how that will show evidence of the stock purchase. Other than sales, it would be interesting to know how the ROBS scheme was first justified.