ROBS plan - what is different?

Hello all,

We have a prospective client that wants our help in administering their ROBS plan. Our firm has no experience in administering these types of plans. Can anyone with experience tell me what goes into the administration and 5500 for this type of plan that is beyond what is normal for a regular 401k plan?

Thanks.

Our firm does not administer these, so I may not be much help. However, one of our concerns is obtaining a legitimate valuation of the stock. The last plan with a ROBS transaction we looked at, the stock valuation provided to us was literally just a value written on a piece of paper determined by the owner. I think obtaining a legitimate valuation from a professional is expensive and the cost may deter owners from obtaining a proper valuation. We ran away from this one. We don't see ROBS often, but this is one reason we don't have interest. 

You may want to do a search on ROBS within this system.  There are a number of posts on the subject.

Its only taken 13 years but the IRS finally updated their vendetta against these arrangements, read carefully the 2008 memo towards the bottom:  https://www.irs.gov/retirement-plans/rollovers-as-business-start-ups-compliance-project

Essentially, the establishment and unwinding of the Plan are prohibited transactions.  And no one is properly valuing the stock in between.

Strictly speaking a ROBs is nothing more than a 4k or PSP with employer stock in them.   The stock price is the issue.  ESOPs have a clear legal requirement to get the stock appraised once a year by a professional.   Other plans it is simply part of the fiduciary requirement to run the plan right. 

I have seen ROBs in action over the years.   I have seen PSPs with employer stock in them over the years.   None of them got full blown appraisals annually like ESOPs do but they all had an objective method of getting a value that was more than someone's guess. 

None of them blow up in people's faces.   On the face of it if you can show the plan is using FMV and follow the rest of the rules the idea is legal.  But the stock price is a minefield that can easily get you as others noted.   So anyone setting one of these up needs to know there are real risks here.

I would add all of them that I have seen and had as clients allowed all the employees to get some of the shares.  That is another criticism of ROBs.   They don't actually share the ownership with the employees as the initial rollover is the only cash that buys shares.   I think that helped make them more acceptable to regulators. 

A typical rollovers-as-business-startups transaction has the retirement plan pay into the corporation an amount in exchange for original-issue shares of the corporation. The typical valuation sets the fair-market value of those shares as the same amount that will be paid in.

But if a corporation yet has no real property, no contracts, no money (until the purchase of the shares), no other assets, and no operations, isn’t its fair-market value $0.00?

On 4/14/2022 at 10:41 AM, Peter Gulia said:

A typical rollovers-as-business-startups transaction has the retirement plan pay into the corporation an amount in exchange for original-issue shares of the corporation. The typical valuation sets the fair-market value of those shares as the same amount that will be paid in.

But if a corporation yet has no real property, no contracts, no money (until the purchase of the shares), no other assets, and no operations, isn’t its fair-market value $0.00?

I have heard that before but I don't think so.

If we take that logic one more step what is the value of the stock the second after the transaction closes?   Isn't it the amount of cash divided by the number of shares?

I capital transaction that sells shares isn't supposed to increase or decrease the value of the shares if it happens at FMV.   It does lower EPS in active companies but if the new shares are bought at FMV the increase of cash on the balance sheet is supposed to offset the decrease caused by the effect of EPS going down.

I would add a company with no assets or operation can have value.   If the idea for the business and expected management are set up you can make a legit claim there is an expectation of future earnings the stockholders will benefit from.  In the end appraisers will tell you the value of a stock is the net assets plus the present value of the future earnings.   The big unknown is what is the future earnings to do the present value calc on.   That is why ESOP stock appraisals always look at management projections.  They use other methods to benchmark and make sure that method is grounded in markets if possible but the big driver of any ESOP appraisal is the projections of the businesses earnings.  

Taking up the thread with a different question/fact pattern

Client established his business (franchise with more than 1 location) using ROBS

Client now wants to set-up a SIMPLE for his employees?

Is this permissible?

Thank you.

5 hours ago, Dobber said:

Taking up the thread with a different question/fact pattern

Client established his business (franchise with more than 1 location) using ROBS

Client now wants to set-up a SIMPLE for his employees?

Is this permissible?

Thank you.

Nope

https://www.irs.gov/retirement-plans/simple-ira-plan-fix-it-guide-your-business-sponsors-another-qualified-plan

It is a waste anyway.  The ROBS should  allow for 4k deferrals and employer contributions for the "owner" and the employees.  There is no need for another plan besides the fact it can't be done. 

@ESOP Guy

Thank you for the response. 

Can you clarify why another plan can't  be established?  Is is due to the SIMPLE IRA "exclusive plan rule"?  or something else?

Did you check the linked material?