FAQS for the ROBS (Rollovers as a Business Start-Up)
It’s tax season and time to initiate your annual, required Internal Revenue Service and Dept. of Labor reporting and filing requirements for your Corporation and your 401(k) Plan. Here are some of the common questions we receive and compliance issues that occur at this time of year.
- IRS Form 1120 is required for your Corporation - Client is Responsible for Filing
- IRS Form 5500 is required for your 401(k) Plan - LRS will complete and help you file with the Dept. of Labor
- C-Corporation Status - Do not change the type of entity
- Corporate Ownership - The 401(k) Plan is an owner/shareholder
- Company Owners: Tracking Hours
- Company Owners: Compensation
- Form 1099-R
- Do not pay yourself as an independent contractor (1099 employee)
- Exit Strategy – For questions about changing the C Corporation Status or buying stock back from the 401(k) Plan, contact us, there are a number of options
- What services are Leading Retirement Solutions providing
- Call us for help, don’t do it alone
IRS Form 1120 is required for your Corporation – Client is Responsible for Filing
- You are responsible, each year, for filing a tax return with the IRS, on behalf of your Corporation.
- Provide your bookkeeper or CPA with a copy of the Corporation’s Stock Ledger. They will need to understand that the 401(k) Plan is an owner of the Corporation.
- The state you filed your entity in will also have their own annual reporting requirements.
- We can assist you with locating a tax professional. It is very important that a tax professional understands who the owners of your Corporation are and that the Corporation must retain its C-Corporation status.
IRS Form 5500 is required for your 401(k) Plan - LRS will complete and help you file with the Dept. of Labor
- LRS will prepare and help you file the tax return required by the IRS and Department of Labor (DOL), of your 401(k) Plan.
- You are required to file IRS Form 5500 with the DOL, each year. Most CPA’s will not prepare returns that are filed with the DOL.
- In general, your 401(k) Plan is an entity recognized by the federal government and no filings are required of your 401(k) Plan at the state level.
C-Corporation Status – Do not change the type of entity
- Your Corporation must retain its C-Corp status as long as your retirement (401k) monies are invested in the Corporation.
- If a CPA recommends that you convert your C-Corp to S-Corp, an LLC or any other entity type, do not agree to do so without talking with us first. If 401k monies are invested in your Corporation, conversion to S-Corp status will result in a prohibited transaction, taxes and penalties.
- The reason a "C" corporation must be used, as opposed to an "S" corporation or LLC, is that the regulations that apply to this strategy (the strategy of investing retirement monies into a Corporation) require stock (not membership or other interest) ownership by the Qualified Retirement Plan (401k, etc.).
- Even though Limited Liability Companies (LLC) can select to be taxed as a “C” corporation, “S” corporation, partnership, disregarded entity, they do not qualify because the entity structure only allows membership interest and no stock ownership.
Corporate Ownership - The 401(k) Plan is an owner/shareholder
- The 401(k) Plan is an owner and shareholder of your Corporation and in fact, is usually the majority owner.
- Provide your tax professional with a copy of the stock ledger and/or stock certificates to ensure that ownership is properly reported to the IRS.
- Be careful not to miscommunicate ownership to a CPA or other tax professional who assists you with filing tax returns for your Corporation.
Company Owners: Tracking Hours
- If you invested your own retirement monies into the Corporation, you must be considered a bona fide employee of the Corporation.
- Track the hours you work. That is how we establish you were/are a bona fide employee of the Corporation that sponsors the 401(k) Plan you are utilizing for your business financing strategy.
- Business owners should start tracking hours you work effective as of the date the Corporation was established (you are already working for the company at that point, spending a lot of time getting the business ready to go live).
- Our team must collect the hours you work at the end of each year as the DOL & IRS require us to report certain information about employees eligible to participate in the 401(k) Plan, including you.
- You don’t need to use a fancy time tracking system, use an excel spreadsheet and at a minimum, track your hours by week.
- This is an important requirement. In order to qualify to participate in a company retirement plan, roll retirement monies into that plan and invest those monies into your Corporation, you must be a bona fide employee of the company sponsoring the 401(k) Plan. Think about it this way, in order to participate in a 401(k) Plan, you must be an employee of the company sponsoring the 401(k) Plan (otherwise we could participate in any 401(k) Plan in the country, at our choosing).
Company Owners: Compensation
- Taking Compensation.
- One of the ways in which you can establish that you are a bona fide employee of the company is for the Corporation to pay you compensation.
- Business owners don’t always take compensation, initially or take compensation from the Corporation at irregular intervals. This is ok. Your Corporation should generate revenues sufficient to support any compensation you take.
- Reporting Compensation.
- If you are instructed to pay yourself as a 1099/independent contractor, do not agree to do so without talking with us first. This is generally not allowed.
- If you invested retirement monies into the Corporation you must pay yourself as a W-2 employee.
- You can NOT pay yourself as a 1099/independent contractor if you invested retirement monies into your Corporation.
- Your Corporation can hire/employ other individuals as 1099/independent contractor(s) so long as you meet the federal as well as your state/local requirements related to 1099/independent contractors.
- If you are instructed to take your compensation as a “draw” from the Corporation, that suggests you would be reporting your Corporation as an “S-Corporation” which is not allowed by IRS regulations with the strategy you engaged in.
- If you take a “dividend” from the Corporation, all owners of the Corporation must receive their rightful share of the dividend. Remember, the 401(k) Plan is an owner of the Corporation and must receive a share of the dividend.
- If you requested a rollover or transfer of your retirement accounts (IRA, 401k, SIMPLE IRA, SEP IRA, 403b, pension plan, TSP, etc. etc.) into your 401(k) plan you should receive a 1099-R from your former provider.
- Usually 1099-R’s begin arriving in early February.
- Make sure you review your 1099-R closely and pay special attention to box 7. The rollover should have been reported by your former provider as a non-taxable event. The transfer of retirement monies into a 401(k) Plan should generally not be reported as a taxable distribution. Make sure box 7 is coded with a “G”, meaning your rollover was coded properly. (Direct rollover of a distribution (other than a designated Roth account distribution) to a qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA). To view a sample Form 1099-R, click here.
Why not use an IRA (individual retirement account) to fund the business?
- If a violation occurs, IRA’s offer no correction programs and all monies are disqualified and full taxable with penalties. Qualified Retirement Plans, like a 401(k) Plan, offer a number of IRS and Dept. of Labor approved correction programs that may be utilized in the event of a violation.
- Examples of mistakes or violations that often occur with this type of strategy include, prohibited transactions, disqualified person dealings, improper valuation of stock and more.
- The disqualified person rules associated with IRA’s would generally prohibit the use of IRA monies to fund a business/company.
For questions about changing the C Corporation status (to S Corporation or LLC) or having the Corporation buy the stock back from the 401(k) Plan, contact us, there are a number of options.
What Services are Leading Retirement Solutions Providing
- We keep your Retirement Plan in compliance with both the Internal Revenue Service (IRS) regulations and the Department of Labor (DOL) regulations. Retirement Plans are pretty unique because they are governed by two separate sets of regulations.
- One of your most important responsibilities when you own a company that sponsors a 401(k) Plan is to file IRS Form 5500 each year. Form 5500 is like the 401(k) Plan’s tax return. Just like you or your CPA would prepare your personal tax return or your Corporation’s tax return. CPA’s do not generally work with the Department of Labor and don’t do Form 5500.
- We will prepare Form 5500 and present to you for review. Ironically, Form 5500 is not filed directly with the IRS, it’s actually filed with the Department of Labor (we help you with this filing process).
Call Us for Help, Don’t Do it Alone
- We are here to help. Call us, have us phone conference with you and your CPA or tax professional. We are here to help you avoid these common mistakes.
Leading Retirement Solutions
(206) 430-5084 phone
(800) 974-2814 (toll free)
Our mission: to proactively support organizations and lead them toward a secure future.