ROBS Client -

We have a tax client that decided to use an ROBS to fund a franchise investment. They used a promoter; when I got the promoter on the phone and asked if they were a TPA, she explained they are a "partial-TPA". 😳  Basically, they do all the plan doc, compliance, DOL/IRS filings and client communication BUT no heavier service models (no 3(16), etc.) and rely on the PS to track and pass required PP docs and track eligibility. 

Waiting on AA and plan doc to review; 5500 was said to be filed for 2022 but I have not personally reviewed yet.  We're obviously going to be super sensitive to PT issues of ROBS (owner comp in the c-corp reasonable, no PII loans, etc.), and with the understanding the IRS has a compliance program specifically for ROBS plans. I have been asked to source a RK, provide 3(38) services (I am an RIA/IAR and have plenty of plans we act as 3(38) on), and assist with enrollment. This is a 120+ EE plan.

Anyway, plan has been up since 2022, investment in the private c-corp franchise was done in 2022 and in 2023 (in a couple of months) they'll have their first 1-year EEs becoming eligible. As best I can tell, everything else is above board with the "partial-TPA"s involvement. There is currently no RK on the plan as until a couple months from now there haven't been any eligibles. The "partial-TPA" advised that the company is already too large for them to handle and suggested we find another. I've already spoken to a TPA I have a long-standing relationship that is very familiar with these ROBS designs. I am also sourcing RKs and making sure they are OK to work with an ROBS plan. The client company so far has been quite successful, and we are preparing valuation firm for ongoing valuation of the c-corp stock purchased by the owner/EEs with their rollover into the plan.

Just wondering if anyone has had any experience with these? Is there anything from a tax/advisory perspective that I might not find in easily accessible in my research that I should know about? This will be my first ROBS plan; I have a bitter taste in my mouth from S/D-IRAs and the promoters who are more asset gatherers/sales oriented than compliance & fiduciary oriented, which have gotten a few of our tax clients in trouble in the past, so I'm hyper cautious and will be eager to get vendors I trust involved going forward.

Thanks in advance!

Swimming, you mention: “The [plan-owned] company so far has been quite successful[.]”

If the participant who has employer securities allocated to her plan account believes the corporation’s business will continue to grow, she might prefer to own the corporation’s shares outside the plan so she can get capital-gains tax treatment for future growth. Likewise, she might prefer that ownership of the shares become unburdened by ERISA and other constraints that govern the retirement plan.

The plan’s fiduciaries might prefer to unwind, before the beginning of the first plan year for which the plan’s administrator must engage an independent qualified public accountant to audit the plan’s financial statements and related reporting, anything an IQPA might view as possibly a nonexempt prohibited transaction.

If you are, or your investment-adviser firm is, or might become a fiduciary regarding the retirement plan, you might prefer to steer clear of potential situations in which you might have a cofiduciary responsibility to remedy another fiduciary’s breach.

ERISA § 405(a)(3), 29 U.S.C. § 1105(a)(3) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1105%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1105)&f=treesort&edition=prelim&num=0&jumpTo=true

None of these observations is advice.

I have substantial experience in unwinding ROBS transactions. If the ROBS-capitalized business is successful, a carefully designed unwind often improves the owner’s business planning and personal financial planning, including tax treatment.

Swimmingetc., I wouldn't place any reliance on an IRS compliance program for ROBS, one way or the other. As far as I can tell they never really figured out what they thought of these, at least those that were executed properly. What I mean by that is that even if the ROBS investments are made in the right sequence with the right documents and parties, there is a basic "conflict of interest" prohibited transaction issue that remains under IRC sec. 4975(c)(1)(E). But it seems like the IRS just decided not to go after that issue.

You note that new employees are becoming eligible. Some ROBS companies take the position that if the company is not offering any more stock to sell to the plan, the new employees do not have to be able to have stock in their account, and that this is a corporate decision having nothing to do with the plan. IOW, the plan can't force the employer to sell it stock. The IRS notice that placed ROBS plans under scrutiny mentioned this issue but never took a stand on it, and as far as I know the IRS still has not.

Just a guess, but I doubt they've been successful enough yet to take Peter's otherwise very sound advice. An alternative approach would be to make clear in your agreement that you are not advising on any aspect of a participant account's investment in employer stock, but only on investments in other publicly available assets.

Luke Bailey is right that EBSA and IRS enforcement about ROBS transactions is almost none.

In each of the unwinds I worked on, the participant and the corporation had already been advised that the prospect of government enforcement is zero.

Rather, the businessperson’s motivator is an opportunity to use an unwind of a not conceded but arguable nonexempt prohibited transaction as a way to get ownership of the growing business out of the retirement plan and the law governing the retirement plan.

It’s not about fearing the IRS; it’s about opening business-planning opportunities. This is for situations in which the startup is successful and the individual expects the business to grow.

If the retirement plan holds the employer securities, carefully limit the scope of each provider’s services. That would be especially important for a registered (or not-required-to-be-registered) investment adviser. But remember, an agreement cannot rid a plan’s fiduciary of an ERISA § 405(a) co-fiduciary responsibility.

A certified public accountant who provides nonaudit tax services should follow her professional standards, including the AICPA’s Statement on Standards for Tax Services. In my experience, some CPAs feel extra steps made necessary by employer securities in the retirement plan, even if those steps are only within the CPA firm, push the time on an engagement past the budget the firm assumed for the fixed fee quoted or estimated.