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The dangers of ROBS-ing your retirement plan.

November 07, 2008

It is dangerousle to use retirement plan assets to fund a new business. In addition to putting your retirement at risk, there are tax and labor law minefields.

The Benefitsblog warns of a plan aptly-named "ROBS," short for "Rollovers as Business Startups," that is being promoted around the country:

The IRS outlines in this Memorandum issued October 1, 2008 how the programs typically work:
An individual establishes a shell corporation sponsoring an associated and purportedly qualified retirement plan. At this point, the corporation has no employees, assets or business operations, and may not even have a contribution to capital to create shareholder equity.
The plan document provides that all participants may invest the entirety of their account balances in employer stock. The individual becomes the only employee of the shell corporation and the only participant in the plan. Note that at this point. there is still no ownership or shareholder equity interest.

The owner rolls retirement plan assets into the new shell corporation plan and buys employer stock. Then they amend the plan to lock any other employees out. Of course, the promoter gets a cut. Unfortunately for the owner, there are too many shortcuts. The IRS memo says:

We have examined a number of these plans - having opened a specific examination project on them based off referrals from our determination letter program - and found significant disqualifying operational defects in most. For example, employees in some arrangements have not been notified of the existence of the plan, do not enter the plan or receive contributions or allocable shares of employer stock. Additionally, we have identified that plan assets are either not valued or are valued with threadbare appraisals. Required annual reports for some plans have not been filed. In several situations, we have also found that the business entity created from the ROBS exchange has either not survived, or used the resultant assets on personal, nonbusiness purchases.

This is all reminiscent of the "Magic of ESOP" that one central Iowa CPA promoted vigorously in the 1980s. He had a great brochure that addressed the appraisal issue with some tremendous logic that went something like this: you can go out and get a professional appraisal. You can also get a lawyer to help you get a divorced. Or, you can do it yourself and be just as divorced - so why spend the money on a fancy appraisal? It hasn't worked out well for him, but it worked out even worse for his plan participants and his clients.

Tags: scams.