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Exiting the ROBS Structure

Introduction and Overview

There are several great reasons to get started with the Rollovers for Business Start-ups (ROBS) arrangement for small business funding — fast funding, debt-free financing and increased buying power to name a few. And as your business grows, there are also many reasons you may want to unwind the ROBS structure, so that your 401(k) plan no longer owns stock in your business.

Whether you’re selling your high-performing business for a profit, closing doors to move on to your next adventure or are keeping operations growing, but prefer to see your funds back in your retirement account, you can smoothly exit the ROBS arrangement with the help of your plan administration team.

You’ll need to report the closure to the IRS and file specific forms depending on your situation. You may also have other legal obligations and/or state-filing requirements.

Exiting ROBS usually goes one of two ways. An insolvency termination occurs when the business has experienced such loss that the shares of stock in the plan are valued at $0. You’ll have to submit financial reports proving you’re insolvent. Once plan assets are distributed to those who participated to the plan, the 401(k) dissolves. Note that you’ll still have to follow the steps below.

The other option is a stock buy-back. A stock buy-back is when you redeem shares of stock that the 401(k) plan has in the business. This sale might be at a loss or a gain (when compared to the original price-per-share valuation), depending on the results of a business valuation. The total worth of the stock is then deposited back in your 401(k) plan. The plan assets are distributed among those who participated in the plan.

It’s your legal obligation to handle winding down the 401(k). We see people make the mistake of putting off these requirements until the last minute or, even worse, ignoring the final steps completely. If you don’t completely wind down the 401(k) plan and file the associated appropriate tax forms at the end of the year or plan year, you can get hit with IRS fines.

It’s important to remember that no matter what your unique situation is, in the eyes of the IRS, following the proper steps to end your ROBS arrangement is just important as properly setting it up — even if you’re closing your doors due to insolvency.

If you’re considering closing up shop, selling your business or buying back your stock, it’s extremely important to reach out to your third-party provider, so they can help you through the process. If your business is insolvent, it’s equally important to work with your third-party provider to unwind the ROBS arrangement, but all of the steps in this article will not apply to your situation.

Here’s an overview of the steps you’ll take as well as some helpful tips to help you quickly and seamlessly unwind ROBS.

1. Call the Guidant Plan Administration Team

The best way to get started successfully exiting the ROBS arrangement is to reach our to your account representative at Guidant. They will discuss your specific situation with you and provide you with written instructions as well as actionable next steps to move forward.

2. Determine the Value of Your Company’s Stock

Follow the steps in the documentation your plan administration’s team has sent you. This will allow you to determine the best route for valuing your company’s stock — an important first step when repurchasing the stock from the 401(k) plan. This may involve discussing whether your company is insolvent or not, potentially obtaining an appraisal, or determining the value another way.

3. Complete the Stock Buyback

Once the stock has been valued or the business has been sold, you can move forward with repurchasing the stock from the 401(k) plan. Unless the company is insolvent or an in-kind distribution is completed (in which case funds do not move), a 401(k) bank account will need to be established. The funds are moved from the corporate operating account into the 401(k) bank account and eventually into an IRA.

4. Complete the Buyback and Plan Termination Paperwork

During your call with the plan administration team, you’ll review various documents, which need to be completed in order to properly terminate your 401(k) plan. These documents include notifications to employees, a Board Resolution to terminate the 401(k) plan, an updated stock ledger and additional documents depending on your unique situation.

5. Return Year-End Documentation to Guidant

Once the stock buyback is complete and all paperwork has been reviewed with the plan administration team, all plan termination and year-end documentation need to be returned to Guidant. Your account representative will give you a detailed list of which documents are required, but it will include appraisal information, a copy of your Board Resolution, the updated stock ledger, account statements showing the movement of funds as well as all year-end information such as an employee census and corporate summary.

6. File Your Final IRS Form 5500

The final, extremely important step in exiting the ROBS arrangement is filing a final IRS Form 5500. Until this step is complete, you have an active 401(k) plan in the eyes of the IRS, even if no one is participating or the business is not operating. The best action to take is to e-sign and file the form as soon as you receive notification from Guidant that it’s ready. And, that’s it! After the final Form 5500 has been successfully filed, you don’t have any additional steps to take. Remember, the failure to correctly wind down your 401(k) plan may result in some adverse penalties, so don’t be caught flat-footed!

If you’re feeling overwhelmed, your Outside Counsel can guide you through the necessary legal hurdles to bring your 401(k) plan to a close. These steps may include, but are not limited to:

  • A copy of the adopted board resolution in which the Board of Directors of your corporation resolved to terminate the plan;
  • Direction about if you’ll be obtaining an IRS Determination Letter regarding the compliance of your 401(k) plan prior to closing the plan;
  • Copies of the 401(k) investment accounts and/or bank accounts showing that all plan assets have been distributed to the plan participants, and the 401(k) has no further plan assets;
  • If Guidant is to complete the 1099 distribution forms, information on the amount distributed and to whom it was distributed;
  • Copy of your Corporate Stock Ledger showing the corporation has bought back the stock your 401(k) had initially purchased, and so the 401(k) plan has no further assets;
  • A Census Form showing all employee information for the plan year; and
  • A Plan Year End Summary for the applicable plan year.

It can seem like there are a lot of steps to complete when exiting the ROBS strategy, but your Guidant Account Representative can help ensure your transition is a smooth one. The most important things to remember are that everyone, even if their business is insolvent, must file the proper paperwork to dissolve their 401(k) plan in the eyes of the IRS and that your complete documentation package must be returned to Guidant before the team can complete your final Form 5500.

What will Outside Legal Counsel do that I can’t do myself?

The failure to correctly wind down your 401(k) plan may result in some adverse penalties. You or your employees could incur unnecessary tax consequences.

Your Outside Counsel can guide you through the necessary legal hurdles to bring your 401(k) plan to a close. These steps may include, but are not limited to:

  • Adopting a board resolution terminating the plan;
  • Notifying participants of the plan termination;
  • Determining whether the 401(k) plan is compliant with mandatory federal and operational amendments prior to the plan’s termination;
  • Consulting on additional requirements, including a determination as to whether IRS Form 5310, a formal request for a plan determination letter, should be submitted on behalf of the plan; and
  • Consulting with a CPA regarding any returns, including closing returns, that may need to be filed for the 401(k) plan.

If you need a recommendation of an attorney who can help you with the termination of your plan, please contact Guidant Financial at 888.472.4455 x3350 or [email protected]

Note: Using Outside Counsel services may cost additional fees. 

Further Questions? Contact Guidant!

With Guidant as your ROBS provider, we’ll serve as your prototype plan sponsor and provide you with ongoing Plan Administration services. You’ll continue to be billed monthly for Plan Administration services until you distribute assets, and we receive all the above documents. We want to make sure that anyone winding down their 401(k) plan doesn’t incur unnecessary costs. So as soon as you know you’ll be shutting down your 401(k) plan, please contact Guidant Financial at 888.472.4455 x3350 or [email protected].

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