Using money held in a retirement account to start up or purchase a small business or franchise is a viable alternative to taking out a loan. There is only one qualified plan structure that allows participants to invest retirement funds in an “active trade or business” – the structure that was recently named “Rollovers as Business Startups (ROBS)” by the Internal Revenue Service.
There are several firms that create this structure for a fee. The key to selecting one is to ensure that the firm you select is qualified to help you comply with the intricate tax and ERISA laws that govern the ROBS structure. DRDA, P.C. is a CPA firm that is qualified to provide advice on the ROBS structure. DRDA has their own IRS approved prototype qualified plan called the BORSA™ (Business Owner’s Retirement Savings Account), that they use when creating ROBS structures.
The BORSA™ is a tool that allows entrprenuers to fund the purchase of a business, franchise, or start-up using the holdings in a 401(a) pension, profit sharing 401(k), 403(b), 457, or IRA rollover. These purchases can be accomplished without distributions, taxes, penalties, or loans from the qualified plan.
DRDA focus on supporting prospective business owners by helping them establish their small business in a compliant manner. Any Rollovers as Business Startups structure requires complex planning to ensure it remains within IRS tax compliance from its inception and going forward.
Since the IRS has discovered many non-compliant plans that have caused problematic tax consequences for users, entrepreneurs need to be informed that not all structures adhere to the guidelines the IRS recently released. On October 1, 2008, the IRS released a memorandum that addresses several operational deficiencies they issues found in many ROBS structures. The IRS takes issue with plans that are designed with these attributes:
· Benefits, Rights, and Features discrimination under ERISA
· are not fully explained to participants
· entail the purchase of personal assets using plan funds
· value stock with “threadbare” analysis
DRDA P.C. takes issue with such practices as well and has created the BORSA plan to give prospective business owners a ROBS structure that complies with the IRS’ guidance. DRDA strives to help its clients remain in IRS compliance by promoting a qualified plan that addresses the following:
Benefits, Rights & Features – All participants must be treated fairly and without discrimination in favor of highly compensated employees. Persons who own more than 5% of the company or receive a wage of over $110,000 are considered by law to be highly compensated employees.
Prohibited Transactions – Assets held in a qualified plan have tax implications for purchase and distribution. Exchange of stock between the plan and its sponsor is prohibited unless it meets ERISA section 408(e) requirements.
Promoter Fees: Using assets to cover promoter (organization providing ROBS structure) fees are prohibited. DRDA requires that service fees are paid out of personal funds and not repaid using company funds at a later time.
Permanency: The BORSA is a qualified retirement plan that allows for self-directing investing. It is an actual on-going plan and not just a funding vehicle. The IRS states that the plan must be permanent and used primarily for providing retirement benefits for employees.
DRDA professionals know that to stay within tax compliance all transactions require regular observation and reporting. They work closely with clients to avoid complications and stay in agreement with the IRS. To learn more about how a BORSA plan can be used as a financing alternative for a small business startup contact the business advisors at DRDA P.C. at 281-954-6040 or visit www.drdacpa.com.
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