Can I Use My 403(b) To Buy An Existing Business?

After years in a profession such as education and some non-profit organizations, you may have built up a respectable retirement plan.  With certain changes happening, you may have asked yourself, “Can I use my 403(b) to buy a business?”  The answer is yes, if done properly.

Instead of just automatically cashing in a good portion, or all, of your account – and thus incurring possible tax penalties – you may be able to use your 403(b) to purchase an existing business if you take certain actions.  Please remember that compliance is a huge concern here, so you need advice on how to:

  • start the process
  • ensure that the business you want to buy is properly valued so that you know what you are about to acquire
  • stay compliant from year to year
  • how to structure your business entities to help you stay compliant and leverage your retirement plan’s benefits to help you grow your business

Here is some more information about the use of retirement plans, such as a 403(b), to purchase a business.  Please call Fred at the number listed at the top of the page to discuss your specific situation.

On October 1, 2008, with the issuance of a Director Memorandum to its field agents, the Internal Revenue Service, for the very first time, addressed the use of retirement funds being used as a business capitalization source. In the Director Memorandum the IRS identifies the use of retirement money as a business capitalization source as an arrangement known as Rollover as Business Startups.

The IRS is looking for defects of abuse in Retirement Plans. The exclusive, compliant and professionally managed ERPA, developed and implemented by Entrepreneur Retirement Benefits, LLC, helps entrepreneurs address potential defects before they occur!

The IRS is, in part, looking for the following during a review a plan:

1. Permanence: Does the plan receive any form of ongoing contribution?

2. Exclusive Benefit: The plan must be operated for the benefit of employees and their beneficiaries. Thus, as long as plan assets used to capitalize the business are not used for personal purposes and the plan is in fact operated to benefit the company’s employees and their beneficiaries, the exclusive benefit requirement should not be a problem.

3. Benefits, Rights and Features Discrimination: The IRS has not specifically found that these plans typically discriminate against rank and file employees in coverage or contributions.  So the IRS instead is looking at whether the plan is discriminating in favor of  “highly-compensated employees.” The key issue to be reviewed here is the method by which the employer stock was offered and sold to the plan.

4. Prohibited Transactions: The IRS will be looking at the employer stock transaction and whether the plan paid “adequate consideration.”  This is where a valuation by an independent qualified business valuator is extremely important to confirm that the plan did not overpay for its employer stock investment. The IRS will also review the payment of plan implementation fees. The issue with the fees is to see if plan assets were indirectly used to pay the fees.

It is not possible to make a blanket policy to disqualify these types of plans because retirement plans are in fact allowed to invest in employer stock. So the IRS is left to review plans on a case-by-case basis to identify any disqualifying defects. That’s why entrepreneurs find peace of mind with Entrepreneur Retirement Benefits, LLC’s ERPA. Because it is properly designed, implemented, and administered, the RSPT withstands any scrutiny that may be brought against it.

The memorandum highlights a big issue which is generally true for retirement plans…Compliance is not about being compliant when a plan is formed because being compliant at the start is the easy part. Compliance is about how the plan is managed and administered over time. Time will be the best indicator as to whether the entrepreneur established the plan to be a real retirement plan or whether the plan was established solely to benefit the entrepreneur. Individuals who self-deal or engage in other abusive tactics expose themselves to the long arm of the IRS. On the other hand, individuals who are compliant will hold up just fine under IRS scrutiny.

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