Ending your ROBS 401(k) plan requires following a series of steps to ensure you’re in compliance with the IRS. If it’s not carefully executed, the termination of a ROBS 401(k) can result in fines from the IRS due to filing mistakes or other errors. Communicating with your ROBS administrator, outside legal counsel, and your certified public accountant (CPA) will be essential to this process. In this article, we’ll outline steps that every business needs to follow, along with specific steps for a stock buyback, selling your business, or when your business closes its doors.
1. Contact Your Plan Administrator
The first step in terminating a ROBS 401(k) is to contact your plan administrator and inform them of the intention to exit the ROBS structure. The administrator often manages your regulatory filings with the IRS and United States Department of Labor (DOL) for 401(k) plan compliance. The plan administrator will provide you with information about your 401(k) plan balances and the participants that would need to be reimbursed for owed funds.
2. Contact Outside Counsel
Once you contact your plan administrator, you should then contact outside legal counsel. The attorney will go through several steps as part of the termination process:
- Helping draft a resolution for your corporation’s board of directors to terminate the 401(k) plan
- Informing all participants that the plan is terminating
- Determining whether the ROBS 401(k) plan is compliant with federal and operational requirements prior to its termination
- Offering guidance on whether IRS Form 5310, a formal request for a plan determination letter, is required to be filed
- Consulting with a CPA regarding tax filing information that may need to be filed for the 401(k) plan
3. When a ROBS 401(k) Needs to be Terminated
Business owners decide to terminate their ROBS 401(k) plan for three reasons. Two scenarios involve stock buybacks. This occurs in situations where the current owner decides to sell their business to a new owner or when the owner decides to buy stock that the 401(k) plan owns in the business. The third scenario involves the closing of the business.
Stock Buyback Without a Sale of Your Business
If you’re planning to maintain ownership of your business but want to buy out your ROBS 401(k) plan’s ownership of your business, the C corporation (C-Corp) can buy back stock from the plan. This often happens when the owners of the business choose to convert corporation status from C to S, or when a corporation chooses to convert to a limited liability company (LLC).
A business appraisal should be done to establish a fair market value of the company’s stock. A corporate resolution from the board of directors, outlining the stock purchase from the 401(k) plan, will be required. Once that occurs, the stock buyback can take place. It can be a single buyback or a phased buyback over a period of time, based on the arrangement made between you and the corporation’s board. The proceeds from the buyback will be returned to the plan as part of the owner’s 401(k) account. Your company’s 401(k) plan can stay open after this takes place. Keep track of the stock transactions and utilize your plan administrator to help ensure that your records are in compliance.
Stock buyback and corporation conversion should include the use of outside legal counsel and a CPA to manage the process. In the CPA’s case, they’ll advise you of any potential tax consequences with conversion from a C-Corp status and whether an LLC or S corporation (S-Corp) will fit your business’ needs better. The legal counsel will ensure the process is done within the framework of your state’s corporation laws.
Selling Your Business
If you’re terminating your ROBS 401(k) plan due to selling your business, a business appraisal or valuation needs to be conducted. Either of these will determine the present value of your business and will set the value of the company’s stock. The appraisal or valuation should be done through a third party and based on accurate financial data from the business. Once that valuation takes place, the sale can take place through either a stock sale or an asset sale:
- Stock sales occur when the buyer purchases an ownership interest in the corporation with no changes to staff or operations taking place. Each shareholder in the company receives a portion of the sale proceeds. Since the 401(k) is also a shareholder, proceeds from the sale go to the plan, which can then be rolled into an IRA once you officially exit the business.
- Asset sales involve the sale of the physical assets of the business to another corporation or business entity. An asset sale can also include the company’s customers, contracts, or any other nonphysical assets if it is outlined in the contractual agreement. The proceeds of the sale will pay off any of the company’s liabilities, with the remainder distributed to the owners. If you have not dissolved your ROBS 401(k) prior to the asset sale, the plan would receive a portion of those funds.
Closing Your Business
Should the business close for any reason, a certified appraiser still needs to assess the value of your business prior to liquidation. The appraisal would be used as part of your regulatory filing process. The business must buy back the stock from the ROBS 401(k) plan at the current market value, if any. The value of any stock is deposited into all eligible employees’ 401(k) plans.
4. Complete Final Reporting Obligations
Failing to properly unwind your ROBS 401(k) can result in stiff penalties from the IRS. Your plan administrator and outside counsel will guide you through the final process when you sell your business assets or close your business. This involves the following steps:
- Having a copy of the adopted board resolution that shows the Board of Directors of your corporation agreeing to terminate the ROBS 401(k) plan and announcing the date of termination
- Determining whether you need an IRS determination letter, obtained by submitting IRS Form 5310
- Producing a copy of your corporate stock ledger, showing that the corporation bought back your shares of stock that the 401(k) had initially purchased
- Ensuring there are copies of all 401(k) plan and bank account statements that show the plan assets have been distributed and that the balance of the plan is zero
- Completing 1099 distribution forms for all eligible employees, if necessary
- A census form showing all employee information for the plan year
- A year-end summary for the final plan year
This information is submitted as part of the final IRS Form 5500. Generally, your plan administrator or ROBS provider will submit this form to the IRS and DOL on your behalf but you’ll still need to sign off on the form before submission.
Why Using a ROBS Administrator Is Important
For all of the scenarios we’ve outlined, a ROBS administrator is going to be your lifeline through each step of the process. The ROBS administrator will guide you through the necessary filings and deadlines as you unwind your ROBS 401(k), ensuring that you’re in compliance.
While researching this article, one of the common themes we heard from ROBS providers is that business owners don’t communicate with them when they close or sell their business. The providers noted that not being in the loop and being unable to advise businesses about what to do often increased the risk of businesses being fined by the IRS or DOL for failing to be in compliance with reporting.
To help you stay in compliance with the IRS, we recommend that you use Guidant to help administer your ROBS plan. Guidant provides access to free outside legal counsel as you set up and terminate your ROBS plan. If you haven’t set up a ROBS yet or are looking for a new administrator, consider Guidant for your ROBS 401(k) plan servicing needs.
Ending a ROBS 401(k) plan is complex and requires diligence with following IRS guidelines to avoid possible fines. Actively engaging your ROBS administrator, outside legal counsel, and your CPA should help the process run more smoothly and help you get all necessary compliance and regulatory paperwork submitted on time.