Now that your business is set up, let’s take a look at the annual requirements that will keep your Rollovers for Business Start-ups structure in compliance with IRS and DOL standards.
Adding ROBS Annual Requirements to Your Yearly Planning
While your doors may have opened to your new business, it’s important to remember that there are annual requirements that need to be addressed in order to keep your Rollover for Business Start-up structure and new 401(k) plan compliant with the IRS and DOL. It’s an easy thing to forget with the hustle and bustle of launching and managing your new business, but this is something you should plan to put into your annual process.
It’s important to never forget that even in the unfortunate event your business must close or is sold, you still have these annual obligations. The annual requirements are based on the plan year end you choose during the Fulfillment process and may come due for completion months after your business is closed. In the case of closing your business, you still need to officially delegate the change to the IRS and close your files.
It’s also important to remember that you need to file corporate taxes for your business on your own. While the word “taxes” will come up as it relates to your 401(k) plan, Guidant’s Plan Administration services will ensure your 401(k) plan remains in compliance with the IRS but will not file your business’s corporate taxes. Some mistakenly believe our Plan Administration services will file your corporate taxes, and because we ask about taxes, that your 401(k) is being taxed. Both are wrong.
All these items are important to remember in your annual processes. If you are working with a reputable ROBS expert, you will have a Plan Administration team that will help facilitate the 401(k) components to keep you compliant.
Plan Administration Services at Guidant Financial
Due to the complexity of the Rollovers for Business Start-ups process, you’ll want an expert by your side to assist with your yearly paperwork that ensures you are meeting the compliance requirements set by the IRS so you don’t get hit with a taxable distribution.
Like all things IRS related, there is a similarity in language component that is important to clarify, otherwise it will leave even rocket scientists confused…but probably not attorneys and CPA’s.
Plan Administrator – YOU are your 401(k) plan’s Plan Administrator. Since you are the owner of the business that is offering the plan, that means you are the one that is administering it. You are ultimately responsible in making sure the plan is operated correctly.
Plan Administration – Guidant (or whichever third-party administration firm you hire) handles the plan administration. Plan Administration service providers will work and prepare the necessary annual reporting and file your annual Form 5500, among other duties.
This small nuance between a Plan Administrator and Plan Administration is important to clarify up front, because as we work through what you can expect from Guidant’s Plan Administration services, the terms are frequently referenced.
If you choose to work with Guidant Financial, one of our Plan Administration team members will oversee the paperwork and compliance checks required to ensure your 401(k) plan is compliant with the ROBS arrangement. This involves preparation of the Form 5500 with a full Annual Plan Report and Statement of Value. The Form 5500 is the key annual informational return that reports the assets within the 401(k) Plan and will show the IRS and DOL your plan, and therefore ROBS structure, is in compliance.
The preparation of these documents, while performed by Guidant, relies on you submitting the following information via Guidant’s Client Portal:
Year End Summary – Through the Client Portal, you will need to answer some basic questions surrounding the 401(k) plan activity during each plan year. These are a combination of Yes or No questions, along with providing some high-level financial info.
Employee Census – You will need to provide information around your employees. The employee information needed is their name, social security number, hours worked, compensation, date of birth, date of hire, date of termination. Guidant uses this information to calculate items like eligibility of employees within the plan, as well as employee participation and contributions into the plan. This part can be time consuming since it involves manually entering data, but can be automated if you use a payroll provider that integrates with Guidant and can supply us with that information directly.
Financial Info – We will need Profit & Loss Statements and Balance Sheets. These documents are used to help us produce an annual business valuation so we can determine what your stock investment is worth on an annual basis.
Investment Management Statements – If you or your employees are making any deferrals in to the 401(k) plan, we will need statements from your custodian showing funds contributed into the 401(k).
Guidant’s Plan Administration team is responsible for reviewing the Form 5500 and assisting you, the Plan Administrator, with filing it electronically with the IRS and DOL. If the Annual Report reveals there are any corrections needed to keep your plan in compliance, you are responsible for making sure you follow any instructions laid out by Guidant.
With Guidant’s Plan Administration Services, you don’t have to navigate all of this on your own. Your Plan Administration team will reach out via email reminding you to submit documentation to our Client Portal and be there to answer questions you have along the way. Basically, Guidant is always here to ensure you remain compliant.
Below is a comprehensive list of annual items you’ll need to complete every plan year based on 401(k) plan requirements and corporate/C corp requirements:
401(k) Ongoing Requirements
1. Sign All Documents
It’s important you remember to sign all legal documents personally – even the documents your Plan Administration team is preparing for you, like Form 5500. Your Plan Administration team cannot sign these documents for you. While it’s likely clear that you don’t want to sign away your power of attorney to any ROBS provider, many ROBS clients forget they still need to sign their documents, but it’s important to keep it top of mind.
401(k) Plan Management
A technical requirement for the ROBS structure is the retirement plan needs to be an Eligible Individual Account Plan (EIAP). A 401(k) plan is the most common example of an EIAP, and it is the type of retirement plan used with the Guidant 401(k) structure.
As an employee, you will be able to contribute to the 401(k) from your salary. As the employer, you can also elect to make profit-sharing contributions to employees who participate in the 401(k) or match a percentage of the employee’s deferral. All participating employees must be treated equally with respect to the benefits, rights and features of the 401(k) plan, so the plan must be managed accordingly to ensure you comply with this requirement.
Business Valuation & IRS Form 5500
Similar to you as an individual and your new corporation, 401(k) plans operate on a yearly schedule and have a plan year end. For most of our clients, the plan year end is either June or December. Within 7 months of the plan year end, you need to file a Form 5500 with the IRS and DOL. This informational return states to the IRS and DOL the current value of all the plan assets, including the Qualified Employer Securities (QES) you originally purchased. In order to determine the year end value, you will need to perform a business valuation to determine what the stock is worth, as well as any other assets your corporation holds. If you have further questions about when a business valuation is required, please contact Guidant directly.
If you choose Guidant to help with your Plan Administration, we will facilitate the preparation of the Form 5500. One of the requirements of the Form 5500 is that a value must be placed on the assets of each participant’s account. While Guidant is able to perform an estimated statement of value based on the information you provide to us, you may be required to obtain a written appraisal of the value of the QES in your account if Guidant deems such an appraisal is necessary in order to have a reasonable basis for determination of the value.
Prepare Corporate Taxes & Sign All Documents
It’s important you remember that your corporate taxes are different than your obligation to file the Form 5500 each year. Don’t forget to prepare and submit your corporate taxes on an annual basis (Guidant does not offer this service). Forgetting this can result in fines from the IRS.
It’s also important to remember that you’ll need to sign all documents related to forming and maintaining your corporation. Your Plan Administrator cannot sign these documents for you.
Your Salary and 401(k) Participation Requirements
For you to be eligible to make use of the Guidant 401(k) structure, you must, through the corporation, take a salary of at least a minimum wage under your local laws as soon as the corporation’s business operations can support such a salary. You must also work for the corporation at least 1,000 hours per year. You should begin taking this minimum salary as soon as your business can reasonably afford it.
From your salary, we also encourage you to contribute at least 1% of your salary to your 401(k) as retirement savings (this shows you are acting in the best interest of your 401(k) plan by actively contributing to it). Each of these operating requirements applies to any and all individuals contributing retirement funds to the Guidant 401(k) structure. It is important to note contributions to your 401(k) can only begin on the next entry date after you satisfy the minimum eligibility requirements stated in your Reference Guide and Adoption Agreement, Section 15.
Under 2010 guidance from the Internal Revenue Service, all 401(k) plans that contain Qualified Employer Securities or are not wholly owned by a single participant and spouse, must maintain an ERISA Fidelity Bond at all times, regardless of non-owner participation in the plan. (You’ll remember ERISA stands for Employee Retirement Income Security Act and is one of the laws that allows for ROBS, as we discussed in Chapter 1.)
This requirement applies to most of our client’s 401(k) plans used to create the ROBS structure. A Fidelity Bond is a form of specialized insurance aimed at preventing certain losses to retirement plans. ERISA regulations require that your plan be insured by an “ERISA bond,” which has a bond amount equal to 10 percent of plan assets, or $500,000, whichever is less. As part of your onboarding process with Guidant, we will provide recommendations on where to get the bond and what type of bond is required. All plans that have QES must have a bond and that bond is reported on the annual Form 5500.
C Corporation Ongoing Requirements
You Must Do Your Taxes Annually & Sign All Documents
It’s important you remember that your corporate taxes are different than your obligation to file the Form 5500 each year. Don’t forget to prepare and submit your corporate taxes on an annual basis. Forgetting this can result in fines from the IRS.
State Level Requirements
Each state has their own initial and ongoing requirements to maintain your corporation. Please locate your state on this page for some of the ongoing maintenance requirements:
Retention of Local Business Attorneys and Other Professionals
You likely will want to retain the services of a business attorney to address the multitude of common legal needs that will arise in the ordinary course of running a business. You also need to retain the services of a CPA or other tax advisor to handle any tax matters for your business.
C Corporation Maintenance Requirements
As we talked about earlier, the business entity structure used to setup a ROBS arrangement must be a C corporation. Pass-through entities like an LLCs or S corporations are not permitted to be used with the ROBS structure because they cannot issue private stock.
If you need further information or guidance regarding this subject, please contact Guidant or seek the advice of a tax professional.
Additional Entity Structuring
It is important to remember you CAN NOT change your corporation type from a C corp while you have the 401(k) plan invested in your corporation. Establishing additional entities and/or restructuring the entities already in existence could result in a prohibited transaction, disqualification of the plan and/or significant tax penalties. It is imperative that you contact Guidant and/or your Outside Counsel prior to establishing additional or different entity structures, or changing the type of business you are conducting. If you are working with a tax or legal professional, it is imperative that they take federal tax and ERISA law into consideration when advising you with respect to the Guidant 401(k) structure.
The Operating Company Requirement
TThe business entity your retirement plan invests in must meet the definition of an operating company. An operating company is an entity that either directly, or through a majority-owned (51% or greater) subsidiary, sells a product or service, and where the product or service sold does not constitute the investment of capital. Examples of businesses that do not meet the operating company requirements include: factoring services businesses, investment advisors, venture capital firms and day traders. Also included are real estate investment companies that do not meet the Real Estate Operating Company (REOC) criteria.