BE CAREFUL OUT THERE! DON’T be ROBBED BY ROBS

I can’t count the number of times in my many years of law practice, that a client or potential client has asked me how to fund a startup company, or where to get funds to buy an existing company, sometimes one that employs him or her.  These funds are usually very hard to come by since banks and other fund sources are quite wary of investing in such ventures.  So, a relatively new breed of promotors is out there promoting “ROBS” as a way to “rob” a retirement plan to fund such ventures.

“ROBS” has an unusual meaning in tax and employee benefit law.  It refers to the IRS’ acronym for an employee using retirement funds, usually from a 401(k) account, to acquire or startup a business.  “ROBS” stands for: “Rollovers as Business Start-Ups” and the IRS project to review such beasts.  Essentially, an employee forms a new corporation.  The new corporation adopts a retirement plan (401(k), and the employee quits the former company, rolls over his/her 401(k) to the new company’s plan and the new company’s plan then buys the stock of the new company, or funds the startup costs.  ERISA provides for certain exemptions from prohibited transactions for the use of retirement plan funds to acquire employer stock.  Pretty tricky, heh?  The problem is that these plans are “tricky” to administer and a lot of costs for professionals is usually involved.  For more about this, see Rollovers as Business Start-Ups Compliance Project.  So, in the final analysis, be very careful out there!