In October 2008, the IRS issued and internal memo regarding what they call "rollover business startups" (ROBS). This report was the culmination of 2 years of investigation into the world of self directed 401K plans designed to buy stock in its own sponsoring C-Corp (ESOP types of structures). The ROBS are the same basic design as the NAFEP mySOP.
At first reading of the report, the report comes across as negative and aggressive. However, to those of us in the "biz" the report is actually a very good thing. The IRS is
tacitly approving the setup and structure. What they are focusing on and
pointing out is that people are not implementing or operating the self directed 401K plans (mySOP) per the DOL
guidelines.
The following is a section by section review of the IRS memo and how the NAFEP plan stacks up.
1
Issues raised in the IRS
memo
1.1
Identification of 9 promoters of ROBS – NAFEP
has not been identified or contacted regarding ROBS transactions as we
do not amend or change the plans so as to prevent employee
participation. The promoters identified were identified because they do
amend and alter the plan after its initial creation in an effort to
limit employee participation to some degree.
1.2
Benefits, Rights & Features Discrimination
1.2.1
Our current plans only target Officer/Employee
types and/or single participant plans. As a general rule our plans do not have
NHCEs (non highly compensated employees).
1.2.2
Our plans do not prohibit or eliminate a
employee from participating in the plan, therefore there is no discrimination.
1.3
Prohibited Transactions – Valuation of Stock
1.3.1
All clients are advised verbally and through the mySOP
setup guide that they need to seek annual valuations of the company stock.
1.3.2
We do not see any issue with the plan’s initial
purchase of company stock being purchased at par value. Clients do need to make
sure that the plan receives a fair price. Clients should not skew shares to
themselves or others buy offering stock at a lower price than the plan paid.
1.3.2.1
Subsequent plan capitalization of the C-Corp
will require a valuation of the stock.
1.3.3
All clients are advised to use proper valuations
for their annual 5500/5500EZ reporting.
1.3.4
Any clients concerned about this issue should
seek to get a “qualified appraisal”.
1.3.5
NAFEP has never provided any valuation services
to any plans. NAFEP has only completed 5500 filings for the plans.
1.4
Prohibited Transaction – Promoter fees
1.4.1
NAFEP gets paid by the client directly prior to
setup of their plan and corporation.
1.4.2
NAFEP does not meet the definition of a
fiduciary or investment advisor as we only receive fees prior to the plan's
existence, the client pays NAFEP directly. In cases where we are consulted
after the plan's creation, NAFEP does not charge the plan or receive fees from
the plan for advice, consulting or services. NAFEP is never hired or retained
to offer advice to the plan. NAFEP has no discretionary authority over the plan
and its operation.
1.4.3
There may be issues with the client reimbursing
himself for the setup costs of the corporation and the plan. The client needs
to have capitalization for the corporation and its hard to argue that they have
capitalized when they receive all of their fees back.
1.5
Permanency
1.5.1
The NAFEP plan would not violate any permanency
issues as :
1.5.1.1
the plan is designed to allow all employees to
participate in all features and aspects of the plan so as not to benefit HCEs
at the expense of NHCEs
1.5.1.2
Our plans have a 401(k) component that provides
for all employees to make regular contributions to the plan.
1.6
Exclusive Benefit
1.6.1
No plan fees are ever directed to NAFEP. The
plan does not exist until after we have received a fee for setup of the plan
and the corporation.
1.6.2
We instruct and counsel all clients that they
should not use the funds to purchase any personal assets from themselves or for
themselves.
1.6.3
The IRS
states in the memo that they do not believe that ROBS violate the exclusive
benefit rules.
1.7
Plan not communicated to the employees
1.7.1
The NAFEP setup guide and our verbal consulting
always informs clients/employers that the plan musts be offered and
communicated to employees.
1.7.2
The plan manual provides for setup instructions
and all necessary and required documents relating to communicating and setting
up of employees.
1.8
Inactivity in cash or deferred arrangement
1.8.1
NAFEP plans do not provide any mechanisms for
preventing employees from making contributions.
1.8.2
The NAFEP setup procedures instruct the
client/employer on offering the plan and providing open access to all plan
features to all employees.
2
Summary
2.1
The IRS is
not saying that ROBS are illegal in basic structure.
2.2
The IRS is saying
that they find many operational defects in how the plans are actually operated in the following areas:
2.2.1
No notification provided to employees
2.2.2
Employees not able to participate on an equal
basis with HCEs
2.2.3
Plan asset valuation are questionable
2.2.4
Failure to file annual reports
2.2.5
The business entity has failed
2.2.6
The client has received personal use or benefit
of the asset (prohibited transaction)
Current clients of the NAFEP mySOP can take great comfort in the fact that we provide a very solid, safe, and compliant plan and mySOP structure. For those of you interested in reading more about the mySOP, click here.
