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ROBS Plans and IRS Form 5500

In late 2009 IRS started a project on rollovers as business start-ups (ROBS). This is a strategy that has been heavily marketed by several companies and targets individuals that want to finance business ventures using their retirement funds. They are directed to establish a self-directed IRA, a corporation, and a 401(k) plan for the corporation. The plan allows participants to roll in IRA funds.

ROBS transactions and IRS Form 5500The individual funds the self-directed IRA with their existing retirement funds and then rolls funds from the IRA to the newly established 401(k) plan. The plan then uses the funds to purchase shares of the newly established corporation’s stock (generally it purchases all the shares). If you followed all of this, here is where we end up: the retirement money is now in the checking account of the corporation and no taxes were paid.

All of this is, in theory, allowed under the tax code. Understandably though, IRS has some concerns about this strategy - which you might have gathered from its mere use of the acronym “ROBS.” As a result of the ROBS project, IRS has found that there is an almost universal misunderstanding of the rules regarding the annual filing of IRS Form 5500.

According to IRS, there is an exemption for the Form 5500 filing requirement IF plan assets are less than $250,000 and the plan has deferred compensation for only the business owner and/or their spouse who wholly own the business. In the case of a ROBS arrangement, the owner of the business is not the individual but instead, is the company plan. Remember the cash flowed into the plan which then bought all the shares of stock in the company so the plan is the business owner.

If you have done a ROBS transaction or if any of your clients have done this, make sure that Form 5500 is timely filed for the business. The form must be filed by the last day of the 7th calendar month after the end of the plan year. For a calendar year business, that means the form must be filed by the end of July.

-By Beverly DeVeny and Jared Trexler


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Consumers: Send in Your Questions to [email protected]

You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?


IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.