401k Funded Business (ROBS) Exempt in Personal Bankruptcy?

The situation is simple. Nowadays many people will roll their retirement funds (401k, 403b, IRA, etc.) into a ROBS account to self-fund a business. So imagine for a moment, you take out retirement funds, self-fund a business. The business technically is 95% owned by your Retirement Accounts (call them 401k for simplicity) and 5% funded by you. 

As a business owner, you take an SBA loan, your bank of course never gives the correct amount of working capital, so you end up using personal credit cards, personal funds, etc. to help your business succeed. And in fact your business does succeed. But you are left in the unenviable position of being essentially bankrupt. But you have a business that has a great chance of success. You still have monies in your 401k funds. And to survive you need to consider personal (not business) bankruptcy as your debts exceed your ability to pay them. And you are not taking a salary from your business because it needs the working capital to continue growing successfully. So the question becomes, if this individual files for personal bankruptcy, and if there 401k retirement funds are protected, and it so happens that the 401k owns 95% of the business, is that business protected??

The question posed here - Is a 401k funded business (ROBS) protected or exempt from personal bankruptcy???

That would be a question for a bankruptcy attorney. Is it a Chapter 7 or a Chapter 13? So many variables to it. I don't know a lot about the subject, but there are new rules in place that make it harder to file bankruptcy.

13 hours ago, Stephen Michael said:

The situation is simple. Nowadays many people will roll their retirement funds (401k, 403b, IRA, etc.) into a ROBS account to self-fund a business. So imagine for a moment, you take out retirement funds, self-fund a business. The business technically is 95% owned by your Retirement Accounts (call them 401k for simplicity) and 5% funded by you. 

 

If "nowadays many people roll.... into a ROBS account", then many people are idiots.  None of MY clients are doing that.

I'm not going to definitively answer your question, because I'm willing to bet there are other problems with this "plan".  Anyone who takes their qualified plan money and buys into these ROBS schemes deserves everything he gets for being an idiot (in almost all cases).  It's not his fault that he's an idiot (since most of us are investment idiots), but his being taken advantage of without getting appropriate legal advice IS his fault.  See the attached IRS memorandum on ROBS.  Each one that the IRS investigates violates at least one and often many rules about QPs. 

So, IF there becomes a bankruptcy case, a smart lawyer for the creditor is going to investigate the ROBS and find the flaws and argue there is no protection because the plan is not a "good" plan in the first place.  

Your question actually anticipates that there is something about ROBS that is problemattic. The real question (that you didn't ask) is "is a 401k retirement plan protected or exempt from personal bankruptcy" and you should know the answer (generally, of course it's proteccted).  The question you are really asking is whether a ROBS is a "good plan", and I wouldn't want to have to defend that client who adopted one; I want to be on the other side explaining to the judge all the problems with that plan and why it should not be given ERISA protection!

Best of luck. 

Guidelines_regarding_rollover_as_business_start-ups.pdf

One approach taken on behalf of creditors is to challenge the qualified status of a 401(k) plan.  ROBS plans are vulnerable to such a challenge.  I suspect the reason that there are "many" ROBS plans is that the IRS does not have the resources to challenge them, so it may appear that they stand.

Don't hold back Larry, tell us how you really feel - LOL!

All kidding aside, I agree ROBS plans are almost always a very bad idea. In some instances they are just a bad idea (sans very).

Also agree that protection is contingent upon being a qualified plan, so if all the i's aren't dotted and t's crossed, no PT's etc., then that is the basis where a creditor will challenge ERISA protections.

On ‎10‎/‎31‎/‎2019 at 2:04 AM, Stephen Michael said:

The situation is simple. Nowadays many people will roll their retirement funds (401k, 403b, IRA, etc.) into a ROBS account to self-fund a business. So imagine for a moment, you take out retirement funds, self-fund a business. The business technically is 95% owned by your Retirement Accounts (call them 401k for simplicity) and 5% funded by you. 

As a business owner, you take an SBA loan, your bank of course never gives the correct amount of working capital, so you end up using personal credit cards, personal funds, etc. to help your business succeed. ...

So, would funneling personal assets into an asset 95% owned by the plan be considered a PT, contributions subject to Section 415 or both?

2 hours ago, CuseFan said:

Don't hold back Larry, tell us how you really feel - LOL!

 

I did hold back; strong letter to follow! ??