ROBS Project Summary
The Employee Plans Compliance Unit (EPCU) rollovers as business start-ups (ROBS) project began in December 2009 and ended in September 2010. Beginning in April 2010, compliance contact letters were sent to a sample of ROBS plan sponsors identified as being non-filers of the Form 5500 series return, but having received a favorable determination letter from EP Rulings & Agreements regarding the form of the plan.
On October 1, 2008, the Director, Employee Plans, issued a Memorandum entitled ‘Guidelines regarding rollovers as business start-ups’ to address certain concerns. The Memo stated that promoters nationwide are aggressively marketing an arrangement that we refer to as Rollovers as Business Start-ups (ROBS). The ROBS plan is being used as a vehicle for prospective business owners to access accumulated tax-deferred retirement funds without paying applicable distribution taxes in order to cover new business start-up costs. ROBS plans, while not considered an abusive tax avoidance transaction, are questionable in that they may serve solely to benefit one individual's exchange of tax-deferred assets for currently available funds. This is accomplished by using a retirement plan and its investment in employer stock as a means to avoid distribution taxes otherwise assessable on this exchange. Although the form of these ROBS transactions did not appear non-compliant per se, there were a number of issues that needed to be developed on a case by case basis before it could be determined if such plans were abusive.
EPCU was tasked with developing a project designed to solicit information from ROBS entities that would then enable EP to have a better understanding of the ROBS sector. The goals of the project were to:
- Identify ROBS plans that were non-compliant and take action to correct,
- Define similarities and traits of compliant versus non-compliant ROBS plans, and
- Use results to design compliance strategies focusing on identified issues and trends (for example, Employee Plans Compliance Resolution System, Fix-It Guides, Web-based information, newsletters, and speeches).
The contact letter sent to plan sponsors asked questions about the ROBS plan’s recordkeeping and information reporting requirements, including:
- the plan’s current status;
- plan contribution history;
- information on the rollover or direct transfer of the assets into the ROBS plan;
- participant information;
- stock valuation and stock purchases;
- general information about the business itself; and
- why the Form 5500 series return was not filed.
The project goals were met, and focus points for EP were identified including recommendations to enhance compliance. Overall, the research we conducted and the responses we received to the compliance checks indicated that while some of the ROBS were successful, many of the companies in the sample had gone out of business within the first 3 years of operation, experiencing significant monetary loss, bankruptcy, personal and business liens, or had their corporate status dissolved by the Secretary of State (voluntarily or involuntarily). However, since many of the ROBS we contacted had just started their business within the last few years, it was difficult to get a long term view of the characteristics of successful ROBS and those that failed.
The ROBS plans we looked at spanned a cross section of businesses including those in senior care, cleaning services, fitness, health food, real estate, machinery, daycare, pet products and services, and consulting. Some ROBS were start-ups while others were purchases of existing businesses. Most of the ROBS were not part of an affiliated service group or controlled group. Some of the ROBS were franchises while others were stand alone businesses. Some of the ROBS were started by individuals who had worked in that same field before starting a business of their own, while others had just started a business for the first time.
Most of the ROBS plans were pre-approved (Master & Prototype or volume submitter) Code section 401(k) plans. The ROBS plan typically had only one participant, the individual that completed the rollover and who was the sole employee. However, some of the successful ROBS had gone on to hire additional employees. Regarding employer contributions to the ROBS plans, many sponsors indicated none had been made beyond the initial rollover due to profitability concerns, however, some sponsors anticipated they would be making additional contributions shortly or within the next few years of operation. Many of the sponsors had assistance from their ROBS adviser with completion of the compliance check.
We determined that a large reason many sponsors in the sample were non-filers was because they and their advisers were incorrectly interpreting an exemption to the Form 5500 series filing requirement which does not apply to ROBS plans. The filing exemption only applies if assets are less than a specified dollar amount ($250,000) and the plan provides deferred compensation solely for an individual or an individual and his or her spouse who wholly own a trade or business, whether incorporated or unincorporated. However, in ROBS arrangements, the plan rather than the individual owns the trade or business. Therefore, this filing exemption does not apply and the annual Form 5500 return is still required.
Form 5500 series returns were solicited as appropriate and taxpayers were advised regarding the correct filing requirements by use of the following caveat:
Please be advised that as long as your qualified retirement plan and related trust are in existence, certain plan administration actions need to be taken in order to keep your plan qualified. These actions include ensuring that the plan is in compliance with all of the plan qualification requirements of Internal Revenue Code section 401(a) and all related Regulations. These actions are necessary until the plan is terminated and all trust assets are distributed. In addition, upon plan termination a final Form 5500 - Annual Return/Report of Employee Benefit Plan – must be filed. This is required even if you were exempt from filing a Form 5500-EZ in previous years.
- Rollovers as Business Start-Ups Compliance Project, Retirement News for Employers (Fall 2010)
- Guidelines regarding rollovers as business start-ups, Memorandum from Michael Julianelle, Director, Employee Plans Rulings & Agreements (October 1, 2008)