ROBS Exit Strategy

[Seattle260]

This might have been asked before but I wasn't able to find this exact question-

 

If I use a ROBS and open up a corporation with $300k, so lets say then my 401K plan gets 300K shares @ $1 each.

 

Fast forward 5 years and now my corporation is worth $600k, so my 401k plan now has 300K shares @ $2 each for a total value of $600k.

 

How do I exit the robs in this scenario? Do I have to pay $600k (assuming the valuation is comes in at that number or close to it)?  

 

I'm fairly certain I won't have $600K sitting around.

 

Thanks

[shERPA]

Just as well you won't have $600K sitting around, since your buying the stock from the plan would be a prohibited transaction.   

You won't find a lot of ROBS fans on this board, including me.  Google "IRS ROBS memo" and read the 2008 IRS document for a list of some of the potential issues.  If you're still interested in doing this, read the second hit about the IRS ROBS compliance project.  If you're still interested, seek legal counsel from an attorney with expertise in qualified retirement plans (most attorneys, even tax attorneys, are not experts in this area).

Good luck.

[Lou S.]

Have you discussed it with the people who helped you set up the Plan?

[Seattle260]

I don’t have one set up, I’m just exploring financing options. 
 

I might have explained it incorrectly, but I thought there was a way to unwind the transaction by buying the stock back at fmv.  
 

anyway, I’ve read enough on here to realize it’s not a well thought of transaction and I’ll probably just go convention SBA.  Because we rent I need place cash collateral in a separate account. It came out to me having to layout about 42% of my loan as cash injection and cash collateral. 
 

I’m just trying to do my due diligence, that’s all. There are quite a lot of folks out there willing to take your money for very little in return. 
 

ive talked to a couple of CPAs and business attorneys that were not even familiar with this transaction. 
 

thanks all

 

 

[shERPA]

20 minutes ago, Seattle260 said:

I’m just trying to do my due diligence, that’s all. There are quite a lot of folks out there willing to take your money for very little in return. 
 

Good job!  And you are certainly correct about that.  Glad that you know this before entering into a ROBS.  Yes there are ways to unwind it.  The tax code doesn't prohibit ROBS, it's just that there are so many other requirements and potential traps, and those of us in the business know that these sorts of things often trip people.    Good luck. 

[BenefitsPerson]

You can amend the plan to provide for an in-service distribution.  Normal income taxes and the 10% pre-59 1/2 penalty would apply.  You would need to figure out where the money for the taxes will come from.

 

 

 

 

[Kevin C]

And you've turned the $300,000 of appreciation that would be taxed as capital gains outside the plan into a qualified plan distribution that is taxed as ordinary income. 

[Larry Starr]

20 hours ago, Seattle260 said:

I don’t have one set up, I’m just exploring financing options. 
 

I might have explained it incorrectly, but I thought there was a way to unwind the transaction by buying the stock back at fmv.  
 

anyway, I’ve read enough on here to realize it’s not a well thought of transaction and I’ll probably just go convention SBA.  Because we rent I need place cash collateral in a separate account. It came out to me having to layout about 42% of my loan as cash injection and cash collateral. 
 

I’m just trying to do my due diligence, that’s all. There are quite a lot of folks out there willing to take your money for very little in return. 
 

ive talked to a couple of CPAs and business attorneys that were not even familiar with this transaction. 
 

thanks all

 

 

You have done well; anyone who sets up a "ROBS" program should have their head examined; I would not take on a client who goes this route and any client who does it after having been warned deserves all the bad results they will get.  You have accurately determined that you should not do this; congratulations. Now, find a competent consulting firm to guide you; this stuff is NOT "do it yourself" by surfing the interweb!!!!

[Luke Bailey]

On ‎11‎/‎7‎/‎2019 at 6:19 PM, shERPA said:

Just as well you won't have $600K sitting around, since your buying the stock from the plan would be a prohibited transaction. 

shERPA, there is an exception to PT if certain requirements are met. See IRC sec. 4975(d)(13) and follow cites.

Good luck, Seattle260.

[ESOP Guy]

I am not a fine of ROBs but leaving the editorializing about that aside for a moment yes there is a way to buy the stock from the 401(k) plan. 

 

You would be best to have a good ERISA lawyer and maybe even an outside trustee help you do such a transaction.  The government is going to look very carefully at the transaction to see if you really paid FMV for the stock. 

I have never seen it done but it would seem like if you are willing to stop being the primary owner of the company (say you are retiring and want to cash out) you could convert the plan to an ESOP and sell the company to the employees.    An ESOP is a type of retirement plan.  You can find banks that finance ESOP transactions. 

What I will tell you is that either idea has some pretty steep costs.   Lawyers and an independent trustee to help you prove you paid FMV could cost you in the $10ks.  An ESOP has those costs also.  

 

If you study a ROBs make sure you run the plan correctly.  It is easy to have the IRS come in a blow the whole thing up.  

[jashendorf]

Luke Bailey, if his corporation is an S corp, then (d)(13) doesn't apply. If it's not (which is probably the case), then the stock has to be qualified employer securities in order for it to apply, and that means that the corporation he established with the $300K rolled over to the plan has to be the plan sponsor. Theoretically possible, but not very likely.

[Luke Bailey]

Sure, jashendorf, I assume it is a C corp, since the typical ROBS employer would not work as an S because of 409(p).

In the typical ROBS the corporation capitalized with the rollover money is the plan sponsor. The individual who wants to start the business takes all or a portion of his/her 401(k) account from prior employer and rolls it over (directly or through conduit IRA) into a rollover account in a k-plan sponsored by the company that the individual wants to capitalize. He or she then directs the rollover account to buy securities of plan sponsor. Initially the individual starting the business and doing the rollover (one and the same) may be the plan sponsor's only employee and the k-plan's only participant, and the rollover assets (now invested in employer stock) the plan's only assets. The plan document typically provides that a portion of the plan is an ESOP and can invest in employer securities.

[ESOP Guy]

16 hours ago, jashendorf said:

Luke Bailey, if his corporation is an S corp, then (d)(13) doesn't apply. If it's not (which is probably the case), then the stock has to be qualified employer securities in order for it to apply, and that means that the corporation he established with the $300K rolled over to the plan has to be the plan sponsor. Theoretically possible, but not very likely.

He said 401(k) plan so I would assume it will be a C Corp.  An ESOP can have S Corp stock and not have issues except as pointed out the ROBs structure will almost never fly with 409(p) testing. 

But S Corp stock in a 401(k) plan has UBIT tax issues.  An ESOP doesn't have to pay taxes on the flow through income from the ESOP but a PSP/401(k) plan would have to pay income taxes on the flow through income.  That often times blows the PSP S Corp model.  

I guess you could make the portion with the stock an ESOP and the rest a 401(k) plan thus creating what is called a KSOP.  But I have not ever seen that structure with a ROBs.   I will admit I have only seen a few ROBs however.  

[Luke Bailey]

9 hours ago, ESOP Guy said:

He said 401(k) plan so I would assume it will be a C Corp.  An ESOP can have S Corp stock and not have issues except as pointed out the ROBs structure will almost never fly with 409(p) testing. 

But S Corp stock in a 401(k) plan has UBIT tax issues.  An ESOP doesn't have to pay taxes on the flow through income from the ESOP but a PSP/401(k) plan would have to pay income taxes on the flow through income.  That often times blows the PSP S Corp model.  

I guess you could make the portion with the stock an ESOP and the rest a 401(k) plan thus creating what is called a KSOP.  But I have not ever seen that structure with a ROBs.   I will admit I have only seen a few ROBs however.  

Actually, you don't really need an ESOP. All you need is an "eligible individual account plan," which 401(k) is. Check cites in my OP, but disregard part of my OP that implied had to be an ESOP.

[LeadingRetirementSolutions]

This article might be helpful for those looking to exit a ROBS plan: https://www.leadingretirement.com/blog/how-to-exit-a-robs-plan

For more articles on the ROBS strategy check out our blog: https://www.leadingretirement.com/blog?p=2