Since the passage of ERISA
in 1974 (the Employee Retirement Income Security Act), thousands of new
businesses have been financed by retirement funds without penalties or a
taxable distribution. Using their
existing retirement funds held by a former-employer qualified retirement plan
or IRA to finance the startup or acquisition of a new business, entrepreneurs
have been able to realize their dream of business ownership and at the same
time have bolstered the economy by providing thousands of jobs in the process. These structures are usually referred to as rollovers as business startups (ROBS). Using a ROBS structure allows
entrepreneurs to purchase or fund a franchise or business with pre-tax
retirement funds without incurring any penalties or taxes that normally apply
to early distributions.
There Are Many Promoters of the ROBS Structure
A simple Google search
will produce several promoters of the ROBS Structure and they have varying
degrees of experience and expertise.
The initial steps in creating the structure are easily accomplished if
you have a rudimentary understanding of entity formation and you know how to
follow both ERISA regulations and Internal Revenue Code. The real challenge, however, lies in
the compliance of the retirement plan at the heart of the ROBS Structure.
Without getting too far
into the weeds, most of the promoters don’t offer true administration services,
but only offer simple record maintenance services for the newly formed
retirement plan. Some of them use
Third Parties to make sure the retirement plan is up to date. However, not all Third Parties
and promoters are created equal nor do they all understand the nuances of this
type of retirement plan. This is where
the “devil is in the details.”
Specific Questions to Ask When Choosing a ROBS Provider
Too many times
entrepreneurs jump at the opportunity to invest their retirement funds into the
purchase or startup of a new business or franchise without weighing the long
term consequences of the decision of which company to use.
There are several questions
that should be asked at the beginning of the decision-making process to make
sure the choice is wise and correct.
They are:
- Who shoulders the responsibilities
of the fiduciary, the candidate or an independent trustee?
- Does the structure include an
investment platform for ongoing contributions to the retirement fund to be
invested in publicly traded securities (i.e. mutual funds,) or is the client
expected to try to find someone to handle this responsibility on their own?
- Does the investment platform include
a registered investment advisor who has contractually assumed fiduciary responsibility
for plan investments?
- Does the administrator of the
retirement plan include reviews of business tax returns and other accounting
information for compliance purposes every year at no additional cost?
- Does the administrator of the
retirement plan include unlimited consultation with the candidate’s attorney/CPA
at no additional cost for the life of the retirement plan?
- Does the administrator of the
retirement plan include an integrated administrative system that provides
real-time access to data for monitoring compliance and detect and correct
processes for maintaining compliance in real-time?
- Does the administrator of the
retirement plan have real-world experience in representing entrepreneurs and
business owners who have run into trouble with the IRS or DOL questioning the
viability and compliance of their retirement plan?
- If
an SBA or Conventional Bank Loan is part of the business or franchise
transaction, does the lending institution have the highest possible comfort
level that the ongoing compliance requirements are being handled with the
competence and expertise required to help the business stay on the correct side
of the issues raised by the IRS and the DOL?
The
correct answers to these questions provide a level of safety and security that
will free up the entrepreneur and business owner to focus on the things that
matter in his or her business.
Conclusion
Most
promoters are not true plan administrators and when the dreaded IRS/DOL review
occurs, it leaves the business owner exposed. Business owners need to focus on growing and building their
businesses to profitability, not looking over their shoulders, wondering if the
IRS is ready to pounce. Choosing
the right company to handle your ROBS formation and the ongoing compliance
takes the worry and concern off the shoulders of a business owner.