Promoters, such as a Roth IRA broker of a self directed IRA LLC, or small business financing, aggressively market IRS ROBS arrangements to prospective entrepreneurs and business owners for funding for a business as small business financing. In the case of most ROBS facilitators, there is a very close relationship between the promoter/facilitator and the franchise industry, seeking to sell and promote business "opportunities" and seeking funding sources for these sales and promotions. Most ROBS "promoters" and facilitators pay substantial referral fees to the franchise brokers who refer business to the promoters. Rarely are these fees disclosed to the entrepreneur. Fees charged by most "promoters," consequently, are in excess of the fees that would be charged by attorneys and accountants for the same services who are prohibited from paying referral fees. There remains a substantial question whether such referral fees are illegal under ERISA and the U.S. Criminal Code: Offer, Acceptance, or Solicitation to Influence Operations of Employee Benefit Plan (18 U.S.C. Section 1954).
In many cases, the broker will apply to IRS for a favorable determination letter (DL) as a way to assure their clients that IRS approves the ROBS arrangement. The IRS issues a DL based on the plan’s terms meeting Internal Revenue Code requirements. DLs do not give plan sponsors protection from incorrectly applying the plan’s terms or from operating the plan in a discriminatory manner. When a plan sponsor administers a plan in a way that results in prohibited discrimination or engages in prohibited transactions, it can result in plan disqualification and adverse tax consequences to the plan’s sponsor and its participants. Accordingly, promoters who emphasize or "promote" base on a favorable determination letter are, at a minimum, engaging in deceptive trade practices.
ROBS Project FindingsNew Business Failures
Preliminary results from the ROBS Project indicate that, although there were a few success stories, most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy (business and personal), liens (business and personal), and corporate dissolutions by individual Secretaries of State. Some of the individuals who started ROBS plans lost not only the retirement assets they accumulated over many years, but also their dream of owning a business. As a result, much of the retirement savings invested in their unsuccessful ROBS plan was depleted or ‘lost,’ in many cases even before they had begun to offer their product or service to the public. These findings are questionable since there are many ROBS arrangements in which the businesses are quite successful and represent very prudent alternatives to more traditional investments.
Specific Problems with ROBS
Some other areas the ROBS plan could run into trouble:
- After the ROBS plan sponsor purchases the new company’s employer stock with the rollover funds, the sponsor amends the plan to prevent other participants from purchasing stock. Since the 2008 announcement from the IRS such amendments are rare.
- If the sponsor amends the plan to prevent other employees from participating after the DL is issued, this may violate the Code qualification requirements. These types of amendments tend to result in problems with coverage, discrimination and potentially result in violations of benefits, rights and features requirements.
- Promoter fees
- Valuation of assets
- Failure to issue a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., when the assets are rolled over into the ROBS plan.
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