Even after you close or sell your business, there are steps to take to exit your Rollovers for Business Start-ups (ROBS) structure.
Who to Contact When It’s Time to Exit ROBS
There are many reasons to exit your business – maybe you’re selling, closing your doors, or retiring. No matter why you exit your business, there are crucial steps you need to take to wrap up your business correctly. Neglecting these steps could subject you to steep penalties from the IRS or state/federal government.
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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.
To start, you’ll want to let your whole team of advisors know the steps you’re taking to make sure you don’t make any errors.
- Plan Administration/Client Services contacts These teams are through your ROBS provider
- Outside Legal Counsel – This is the person who helped with your plan setup if you’re working with Guidant Financial. As part of your Plan Administration services with Guidant Financial, we pay for one hour of time per plan year for you to speak to Outside Counsel. This discussion covers topics related to the operation of your 401(k) plan. The discussion about winding down your plan might be covered. However, any time over an hour will be at your own expense if it goes over your annual hour and/or involves an appraisal. Your Outside Counsel will outline the steps needed to terminate your plan and ensure you are not hit with a taxable distribution.
- CPA They’ll help you make sure all your books are in order, the corporation is correctly closed, and that any state and federal tax returns are filed.
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.
Your Final Reporting Obligations – The Final Form 5500
A final Form 5500 is always due for the last plan year after the distribution of all plan assets. Your 401(k) plan won’t be considered terminated by the IRS or DOL until you file a final Form 5500. If you’re working with Guidant, we’ll assist you with the final plan testing and reporting. We can prepare the final Form 5500, and we can prepare IRS Form 1099 for any distributions taken from the plan.
Once you distribute the assets of the plan to the plan participants, you’ll need to contact your ROBS provider right away to inform them of the final distribution date. You’ll have 30 days from the date of the final distribution to provide a series of closing items. These items ensure you meet government filing deadlines, complete the plan termination correctly, and that you don’ t continue to be charged for Plan Administration services.
- 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.
If Guidant is your ROBS provider, we’ll continue to 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. You can reach us at 888.472.4455 x3350 or [email protected].