BlogROBS 401k Qualifying/Eligibility
Posted about 5 months ago

ROBS 401k Qualifying/Eligibility

Referred to as “rollovers as business start-ups” or ROBS 401k, thousands of entrepreneurs have used their retirement funds to finance their own business tax and penalty free. In order to establish a ROBS 401k, however, the legal requirements outlined in the Employee Retirement Income Security Act of 1974 (ERISA), as well as the Internal Revenue Code (IRC). Following is a summary of the ROBS 401k eligibility requirements.

Active Business: Must be an operating business.

No Existing Debt: Can’t use the ROBS arrangement to pay off an existing loan that you are personally obligated on.

C-corporation: Only a C-corporation entity type may be used to finance your own business.

Pretax Funds: Can’t use Roth IRA or after-tax funds for the ROBS 401k funding.

Fair Price: The ROBS 401k must purchase the corporation common stock at fair market value.

No Commission: No commission may be charged for ROBS 401k plan’s stock purchase.

Valuation: For the funding of an existing business, a valuation is required.

Conversion: If you fund an existing business not setup as a C-corporation, the existing entity will need to be converted to a C-corporation.

Employees: In the case of funding an existing business, it is likely that those employees will need to be offered the option to participate in the plan and to rollover their retirement funds and invest in the business if the business has existing employees.

The Typical Steps for Funding Your Own Business Using ROBS 401k

  • A C-corporation is established;
  • the corporation adopts a ROBS 401k that specifically allows for investing in employer stock;
  • the business owner then directs his ROBS 401k plan to purchase common shares of stock in the corporation; and
  • the business owner uses the proceeds to purchase an existing business or to start a business. 
Published in Member Blogs, ROBS 401k

Comments ( 2 )

  1. If you are planning to use ROBS, keep in mind that it takes time to process all of the paperwork, establish the various accounts (401k / bank) and transfer funds. Mine took about 3 weeks, which was the low end of the estimate I was given (3-6 weeks).

  2. Good comments. Often times, the transfer of funds from the institution holding the retirement funds to be transferred to the new ROBS 401k is what slows down the process. Not all IRA or 401k companies are willing to transfer-out the funds timely.