ROBS Arrangement

[rblum50]

I was recently approached by a CPA who as a client that just recently was talked into and started a ROBS arrangement. He wanted to purchase an insurance agency for about $250,000 and didn't have the ready assets. He did have that amount in a 401(k) from a prior employer. Using this "ROBS" approach, he rolled his 401(k) balance over into a newly created 401(k) plan and had the plan purchase $250,000 of stock in his newly created company with the proceeds going to him to buy of business. As a consideration, the CPA told me that this client is extremely conservative when it comes to his money.

I am not that familiar with these arrangements, but, based upon my research, these arrangements are not "per se" illegal. They are, in my estimation, mindfields of potential prohibited transaction violations.

Here are my questions:

1. Has anyone has any experience with these arrangements and, if yes, what were your reactions and conclusions?

2. The prospective client started this 401(k) containing these provisions just a couple of months ago. What would

be the best way of getting him out of this arrangement? Is there anything that can be done before the end of the year

to mitigate potential problems? I don't think that he has another $250,000 lying around to reverse this transaction.

3. Assuming this this arrangement is already fraught with PT and potential PT violations, what would be the best and the worse this client could do with regard to this plan?

Thanks

[mbozek]

ROBS are suspect vehicles for aggressive tax planning and the IRS has issued a memorandum of the rules that ROBS must comply with.

While ROBS are legal if they comply with the IRC requirements for qualified plans, there are 3 ways in which the a ROBS plan can easily violate the rules.

1. Nondiscrimination requirements. Most ROBS plans restrict the issue of stock to owners or founders of the business and exclude non highly compensated employees which fail the non discrimination tests.

2. To properly establish a plan there needs to be a valuation of the business by a qualified appraisal. Just assuming that the value of the business is the price that is paid to purchase the shares of the business is not a proper valuation.

3. ROBS usually require payment to promoters and consutants who set up the plan. These payments can result in a Prohibited Transaction if they are made from plan assets.

See link to article on an IRS PLR which according to the author appears to conclude that ROBS progam is not valid. The PLR does not conclude that ROBs per se violate the tax rules but it does create a red flag on the legitimacy of such a program if counsel concludes that the tax rules have been violated. It also provides a way for the taxpayer to unwind the transaction.

http://iraideas.com/?p=619

[rblum50]

Thanks, this is exactly what I need.

[austin3515]

Does he currently have another business with employees? Or is he just going out on his own now?

[ESOP Guy]

I would add if this plan has to file a Form 5500 and it checks the box that says the stock isn't appraised annually expect a letter from the IRS asking questions about the plan. I had a PS plan that didn't value its stock with an appraiser every year and we wrote many letters to the IRS about the plan.

As far as I can tell if done right they are legal. They are just a mine field waiting to blow up in your face because the IRS has decided they don't like them.

Here is more information about them from the IRS in case you haven't seen this stuff:

http://www.irs.gov/Retirement-Plans/Retire...pliance-Project

This is older but it still spells out much of the IRS' thinking as far as I can tell:

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

I for one like the idea of ROBs almost used one once to get myself in business after being laid off. But the reality is you better make sure it is all done right as it is clear the IRS doesn't like them.

[rblum50]

He purchased an insurance agency (figures) with 3-4 employees. This, as far as I know, is his only active business