ROBS 401(k) with existing individual plan and loan

[matth100]

Wondering if there might be a way to get a ROBS 401(k) from an existing Individual 401(k) that also has a loan attached.  TP doesn't have the cashflow to pay off the loan now, so doesn't want to risk termination of that aspect.

If anyone is familiar and drafts documents for this, please let me know thoughts and prices.

[ESOP Guy]

I will admit I don't hold myself out as a ROBS expert but I understand the basic idea of them and 401(k)s in general.  Your question doesn't make any sense to me. 

What do you mean when you say "get a ROBS 401(k) from an existing individual 401(k)"?

Get a ROBS???  Are you talking about setting up a new 4k plan that will be the ROBS?  If so, then what doing some kind of transfer/ rollover to the new plan from the old plan?  Merging the plans?

Are you just planning on having the existing 4k plan buy the stock? 

Like I said "get a ROBS" is terms I don't understand. 

I can't for the life of me figure out what the loan has to do with any of this but that might be due to the fact I can't figure out the flow of assets between the ROBS and the existing plan in your mind. 

[ratherbereading]

I just had this come up the other day!  A participant can only take a ROBS from a previous employer plan. See attached and this as well--- How To Set Up A ROBS

IRS_robs_guidelines.pdf

[matth100]

"Get a ROBS" is the official IRS definition  

Sorry for the confusion... 

I think that Karoline may have identified the issue, but also, it might make it possible if so....

Existing k has a loan. If the plan is terminated then the loan will default. However, I'd like the client to be able to access k funds since he has no other available assets and needs some cash to keep afloat.

I felt that a ROBS k would be a good option here, but we can't just close up the old plan and roll it, we would need to either find a way to amend the plan into a ROBS plan (my question) or if it would be possible to partially roll out from the old plan, leaving the loan intact, so it doesn't trigger default....?

I'm looking for this to be done by someone, for both plan paperwork and TPA, if it is possible to be done.

[stephen]

I'll chime in to suggest you look closely at the 2008 IRS Memo:

First the IRS uses the acronym RollOvers as Business Startups. (ROBS) - thus it seems to me the IRS has a negative opinion of ROBS plans.

Amongst other comments the memo includes the following:

"Current Examination Contacts

We have examined a number of these plans - having opened a specific examination project on them based off referrals from our determination letter program - and found significant disqualifying operational defects in most. For example, employees in some arrangements have not been notified of the existence of the plan, do not enter the plan or receive contributions or allocable shares of employer stock. Additionally, we have identified that plan assets are either not valued or are valued with threadbare appraisals. Required annual reports for some plans have not been filed. In several situations, we have also found that the business entity created from the ROBS exchange has either not survived, or used the resultant assets on personal, non-business purchases."

AND 

"CONCLUSION

ROBS transactions may violate law in several regards. First, this scheme might create a prohibited transaction between the plan and its sponsor. At the time of the exchange between plan assets and newly-minted employer stock, the value of the capitalization of the entity is equivalent to the value of all plan assets, when in reality, the entity may be valueless and asset-less for an indefinite period of time. Additionally, this scheme may not satisfy the benefits, rights and features requirement of the Regulations. The primary utility of the arrangement may only be available the business's principal individual."

 

Thus it seems to me they are reiterating their opinion on ROBS.

[shERPA]

The existing (k) plan might very well be a "ROBS" plan in that it probably has standard PS plan language that allows the plan to purchase employer securities.   That's just the beginning of the hoop jumping, however.  The corp has to issue new shares, they have to meet an SEC registration exemption, the corporation must be a C corp, the appropriate offering price has to be determined, if there are other participants, how or do they participate in this (pooled plan, or self directed?).  Fiduciary has to decide this the an appropriate investment for the plan, what's the unwind strategy, how will FMV be determined initially and ongoing?  All the issues the IRS memo raises.  

Lot of work and issues just to avoid taxation on a defaulted loan.  Questionable as to whether it is worthwhile to do so. 

[Luke Bailey]

The basic principle of a ROBS is that an individual who has a K-plan account elects to invest it in newly issued stock of the K-plan's sponsoring employer. It's a lot easier to do with a new plan of a start-up company and the individual in question is the only plan participant and has rolled over from an unrelated employer, but it might technically be possible with an existing K plan if the new employer adopts the K plan. The loan wouldn't matter. I doubt it would technically be possible with the existing company, assuming the plan participant owns the existing company.

As to whether ROBS is a good idea, complies with law, etc., read Ellis v. Commissioner (an IRA case, to be sure), including the footnoted 4975(c)(1)(E) argument, and decide for yourself.

[Kac1214]

It seems like a ton of hoops to jump though to allow access to K funds. I would review the current document and look at withdrawal provisions to see what options are, or can be, made available as in-service or hardship withdrawals. If those have been exhausted, how much more money can the person still have available that the headache/risk involved are worth it? 

[imchipbrown]

Might be better to go belly-up and save the 401k for retirement.  Just my 2 cents.