Complete Guide to Rollovers as Business Start-Ups (ROBS)

Compliance and Ongoing Responsibilities

View Table of Contents

Setting up a Rollovers as Business Start-Ups (ROBS) structure is just the beginning of your journey. Once established, maintaining compliance and fulfilling ongoing responsibilities are crucial to the long-term success and legality of your ROBS-funded business. This section delves into the essential tasks and obligations you must manage to keep your ROBS arrangement in good standing with regulatory bodies. From annual filings to corporate formalities, we’ll explore the key areas that demand your attention and diligence. Understanding these responsibilities is vital for protecting your investment and ensuring your business operates within the boundaries of ROBS regulations.

Annual filing requirements for ROBS

Embarking on a Rollovers as Business Start-Ups (ROBS) journey doesn’t end with the initial setup. To maintain compliance and protect your business, you must adhere to specific annual filing requirements. These obligations ensure your ROBS structure remains in good standing with regulatory bodies and helps prevent unwanted scrutiny.

One of the primary annual filing requirements is Form 5500. This document provides the Internal Revenue Service (IRS) and the Department of Labor (DOL) with crucial information about your 401(k) plan. It includes details on the plan’s financial condition, investments, and operations. The complexity of Form 5500 varies based on the size of your plan and the number of participants.

For smaller plans with fewer than 100 participants, you may be eligible to file Form 5500-SF, a simplified version. However, as your business grows and your plan expands, you might need to transition to the full Form 5500, which requires more detailed reporting.

Another critical filing is the corporate tax return. Since ROBS requires the formation of a C Corporation, you’ll need to file Form 1120 annually. This corporate income tax return reports your business’s income, gains, losses, deductions, and credits. It’s essential to accurately complete this form to maintain your corporation’s tax status and avoid potential issues with the IRS.

Depending on your state’s requirements, you may also need to file an annual report or statement of information. These documents typically update basic information about your corporation, such as the business address, registered agent, and officer details. Failing to file these reports can result in penalties or even the dissolution of your corporation.

It’s crucial to note that ROBS structures often face heightened scrutiny from the IRS and DOL. As such, maintaining meticulous records and meeting all filing deadlines is paramount. Many business owners find it beneficial to work with a qualified tax professional or ROBS provider to ensure all requirements are met accurately and on time.

Click to view Key Takeaways & Tips

Key Takeaways

Form 5500 or 5500-SF must be filed annually for your 401(k) plan.
Corporate tax returns (Form 1120) are required for your C Corporation.
State-specific annual reports or statements of information may be necessary.
ROBS structures face increased regulatory scrutiny, making compliance crucial.

Tips

Set up a compliance calendar to track all filing deadlines.
Consider working with a ROBS provider or tax professional for ongoing support.
Keep detailed records of all business transactions and 401(k) plan activities.
Stay informed about any changes in ROBS regulations or filing requirements.
Regularly review your ROBS structure to ensure continued compliance as your business grows.

Maintaining corporate formalities

When utilizing a Rollovers as Business Start-Ups (ROBS) structure, maintaining corporate formalities is crucial for protecting the integrity of your business and ensuring compliance with legal requirements. Corporate formalities are the practices and procedures that corporations must follow to maintain their status as separate legal entities.

For ROBS-funded businesses, adhering to these formalities is particularly important, as failure to do so could result in the IRS viewing the ROBS transaction as a distribution from your retirement account, potentially leading to taxes and penalties.

To maintain corporate formalities, your business should:

Hold regular board meetings and shareholder meetings
Keep detailed minutes of these meetings
Maintain separate bank accounts for personal and business finances
Issue stock certificates to shareholders
File annual reports and pay necessary fees to your state
Keep accurate and up-to-date financial records
Use the corporate name on all official documents and contracts
Obtain necessary business licenses and permits

It’s essential to treat your corporation as a separate entity from yourself. This means avoiding the commingling of personal and business funds, making clear distinctions between personal and corporate property, and ensuring all corporate decisions are made in the best interest of the company.

Additionally, you should establish and follow corporate bylaws, which outline the rules and procedures for running your company. These bylaws should cover aspects such as how directors are elected, how meetings are conducted, and how major decisions are made.

Remember, maintaining these formalities is not just a legal requirement—it’s also a good business practice that can help protect you personally from potential liabilities associated with your business.

Click to view Key Takeaways & Tips

Key Takeaways

Corporate formalities are essential for ROBS-funded businesses
Failure to maintain formalities can lead to IRS scrutiny and potential penalties
Regular meetings, accurate record-keeping, and clear separation of personal and business finances are crucial
Corporate bylaws provide a framework for running your company

Tips

Set up a system for organizing and storing corporate documents
Use a corporate calendar to schedule regular board and shareholder meetings
Consider working with a corporate attorney to ensure all formalities are properly maintained
Educate all directors and officers about the importance of corporate formalities
Regularly review and update your corporate practices to ensure ongoing compliance

Managing the new 401(k) plan

Managing the new 401(k) plan is a crucial aspect of maintaining compliance with ROBS regulations. As the business owner, you’re responsible for ensuring the plan operates smoothly and adheres to all legal requirements.

The 401(k) plan created through the ROBS process isn’t just a formality—it’s an active retirement plan for your business. This means you’ll need to manage it as you would any other company-sponsored retirement plan. Here are some key responsibilities:

Plan Administration: You’ll need to handle day-to-day operations of the plan, including processing contributions, managing participant accounts, and providing required disclosures to plan participants. Many business owners choose to work with a third-party administrator to handle these tasks.

Contribution Management: Ensure that all contributions to the plan are made in a timely manner and in accordance with plan rules and IRS regulations. This includes both employee contributions and any employer matching or profit-sharing contributions.

Investment Options: The plan should offer a diverse range of investment options to participants. While you can include company stock as an investment option, it’s important to provide other choices to allow for diversification.

Non-Discrimination Testing: Conduct annual non-discrimination tests to ensure the plan doesn’t unfairly benefit highly compensated employees over others. This is a complex process that often requires professional assistance.

Fiduciary Responsibilities: As the plan sponsor, you have a fiduciary duty to act in the best interests of plan participants. This includes carefully selecting and monitoring investment options, ensuring fees are reasonable, and making decisions that benefit all participants.

Participant Education: Provide ongoing education to employees about the plan, including information about contribution options, investment choices, and the importance of saving for retirement.

Recordkeeping: Maintain accurate records of all plan activities, including contributions, distributions, and investment performance. These records may be necessary for IRS audits or Department of Labor investigations.

Annual Reporting: File Form 5500 annually with the IRS to report on the plan’s financial condition, investments, and operations.

Click to view Key Takeaways & Tips

Key Takeaways

The 401(k) plan created through ROBS is a real, active retirement plan.
Plan management involves ongoing responsibilities beyond the initial setup.
Compliance with IRS regulations and ERISA rules is crucial.
Professional assistance may be necessary for complex tasks like non-discrimination testing.

Tips

Consider working with a third-party administrator to manage day-to-day plan operations.
Stay informed about changes in retirement plan regulations that may affect your ROBS setup.
Regularly review and update your plan’s investment options to ensure they meet participants’ needs.
Document all decisions and actions related to plan management to demonstrate your fulfillment of fiduciary responsibilities.
Provide clear, regular communication to plan participants about their rights and options under the plan.

Adhering to prohibited transaction rules

When utilizing a Rollovers as Business Start-Ups (ROBS) structure, it’s crucial to understand and strictly adhere to prohibited transaction rules. These rules are designed to prevent the misuse of retirement funds and ensure the integrity of the ROBS arrangement.

Prohibited transactions are actions that directly or indirectly benefit the business owner or other disqualified persons at the expense of the retirement plan. Disqualified persons typically include the business owner, their spouse, lineal descendants, and certain business partners or service providers.

Some common examples of prohibited transactions include:

Selling property to or buying property from the plan
Leasing property to or from the plan
Lending money to or borrowing money from the plan
Furnishing goods, services, or facilities to or from the plan
Transferring plan assets to or using them by or for the benefit of a disqualified person

To maintain compliance, business owners must ensure all transactions between the company and the retirement plan are conducted at fair market value and in the best interest of the plan participants. This includes paying reasonable compensation for services rendered and avoiding any self-dealing or conflicts of interest.

It’s important to note that violating prohibited transaction rules can result in severe penalties, including taxes, fines, and potential disqualification of the retirement plan. The IRS may also require the unwinding of the ROBS arrangement, which could have significant financial implications for the business.

To stay compliant, business owners should:

Maintain clear separation between personal and business finances
Document all transactions thoroughly
Seek professional advice when unsure about a potential transaction
Conduct regular self-audits to ensure ongoing compliance
Stay informed about any changes to IRS regulations regarding ROBS and prohibited transactions

Click to view Key Takeaways & Tips

Key Takeaways

Prohibited transaction rules protect retirement plans from misuse
Violations can result in severe penalties and plan disqualification
All transactions must be at fair market value and benefit the plan
Regular compliance checks are essential for maintaining ROBS integrity

Tips

Consult with a ROBS specialist or tax professional regularly
Implement a compliance checklist for all business transactions
Educate all company stakeholders about prohibited transaction rules
Consider annual third-party audits to ensure full compliance
Create a system for documenting and justifying all plan-related decisions

Go to Previous Section

Go to Beginning

Go to Next Section