Valuation Is The Cornerstone

I know that you think that I am becoming repetitious but it is imperative that you understand that a valuation is the cornerstone of what we do and must be provided even in a start-up.

We continue to insist that any time employer stock is transacted a valuation from a certified, licensed, independent 3rd party valuation company must take place. As a matter of fact on August 10th 2010 the IRS Employee Plans Division conducted a phone forum on Abusive Tax Avoidance Transactions and Emerging Compliance Issues addressing specifically this and other issues. The IRS stated that stock in ROBS transactions is currently being exchanged without any real attempt to determine its value. The stock is said to be equal in value to whatever happens to be available to exchange for it which creates a prohibited transaction. Good luck with that.

If you are ever audited questions will arise as to what determined the true value of the purchase. We eliminate that risk. So I will repeat myself  “STAY COMPLIANT”.

Enrolling In ROBS

Enrolling in ROBS is an extremely complex process. So is running a C corporation, the type of corporation required for ROBS. The risk of violation is extremely high to the extent that the Small Business Administration warns that using the complex tax strategy is likely to draw increased scrutiny from the IRS.
The most extreme risk is that during an audit, the IRS finds violations and negates the whole ROBS transaction. If the IRS finds fault with the ROBS arrangement and voids it, all of the rolled-over funds would become taxable distributions, forcing the individual to pay back taxes for every year since they filed the initial ROBS transaction, plus a penalty tax. Most small businesses can’t survive that. So, therefore, why would you choose anyone else other than
Walker Advisory to administer your ROLLOVER process?
Remember Walker Advisory is the only service provider that shoulders all liability and responsibility for matters that relate to the plan because we are the Fiduciaries/Trustees of the plan. Now, you, the entrepreneur, can focus on building your business and sleep soundly knowing that the IRS/DOL will not appear at your doorstep early in the morning.

More Than Just A Tip….

November 26, 2010 – IRS Retirement News for Employers Fall 2010 Edition – An overview of the ROBS Compliance Project is presented. The IRS states that, “ROBS plans ARE NOT considered an abusive tax avoidance transaction.”
Problems identified in the overview are administrative in nature and include:

 

◦ Failure to file Form 5500

◦ Failure to file federal corporate tax return

◦ Failure to issue 1099-R on rollover in ROBS plan

◦ Nonexistent or superficial business valuations

◦ Payment of implementation fees from rollover funds

◦ Benefits, Rights or Features failures

◦ Employers often do not understand that a qualified plan is a separate entity with its own set of requirements

◦ Employers in some cases have been incorrectly advised that they do not have an annual filing requirement

 
The question you need to ask yourselves is “do I, as an entrepreneur, want to assume all the responsibility and liability of administering a 401(k) Plan or should I place that task in the capable hands of the professionals at Walker Advisory.”
You are welcome to contact us here for more information.

Know Your Responsibilities

Under ERISA (click here for DOL page on ERISA), a Fiduciary is a Person Who:

  • Exercises discretionary authority or control over management of the plan, or exercises any authority or control over the management or disposition of its assets
  • Provides investment advice for a fee or other compensation (direct or indirect) as to any monies or other property of the plan, or has any authority or responsibility to do so
  • Has discretionary authority or discretionary responsibility in the administration of the plan
  • Is named as such by the plan sponsor in the plan document (a “named fiduciary”)
  • Is a named fiduciary who has been designated as having the authority to carry out certain fiduciary duties and responsibilities (a “designated fiduciary”)

Note: A person may be a limited fiduciary if he or she only has the ability to exercise authority and control over only certain aspects of a plan.

Do you, as an entrepreneur, want these responsibilities? Do you, as an entrepreneur, want to be exposed to the long arms of the IRS or Dept. of Labor? Do you, as an entrepreneur, want these liabilities?

I don’t think so.

If you are ready to discuss this further about using your retirement plan (IRA, 401k, 403 b, 457 or other) to buy an existing business then you are welcome to contact us here.

Pay Attention To The Rules When Making Contributions

Contribution posting requirements state that all contributions must be deposited to the participant accounts by the end of the 7th business day after the date on their paychecks. In order to facilitate this, we advise that contributions be posted on the same day as the payroll date.

If that’s not possible, then they should be posted no later than the 3rd business day after the pay-roll date. History shows that this allows enough time for Aspire to place and settle the trades within the 7 business day window.

The Department of Labor takes the view that delays in depositing contributions to trust constitute a breach of fiduciary duty and a prohibited transaction. With penalties for fiduciary breaches of 20% and a 15% prohibited transaction excise tax, every employer should be motivated to make deposits timely.

When posting employee contributions, please make sure that you are posting them to the correct source type. You could have Employee Deferral (pre-tax) or Employee ROTH (after-tax) depending on what your employees have selected on the enrollment form. You could even have an employee that has chosen to contribute an amount to both types. So just double check before you submit your transactions by clicking the Print button and reviewing the report that generates. This could save time and money down the road since our book-keeper, Aspire, charges a fee for data entry  corrections.

Form 5500 Reporting

For those that are invested in the Qualified Employer Securities (QES), you are required to have a stock value calculation pre-pared after 12/31 of each year for Form 5500 reporting purposes. When a private investment such as the QES is held by your plan this is the only way to value that investment since it is not based on publicly traded stock.

The completed Stock Value Calculation should be sent to us no later than 6/30 of each year so that we have time to prepare the Form 5500 filing that is due by 7/31 of each year. The IRS, Department of Labor, and Pension Benefit Guaranty Corporation jointly developed the Form 5500-series returns for employee benefit plans to satisfy annual reporting requirements under ERISA and the Internal Revenue Code.

Reminders will send out  after the first of each year to let you know it’s time to start preparing to submit your paper-work to the valuation company that you plan to use.

Beware….

Part 1:

Taxpayers’ “rollover as business startup” account wasn’t valid retirement plan.

Powell v. U.S., (Ct Fed Cl 3/16/2016) 117 AFTR 2d ¶ 2016-515

The Court of Federal Claims has denied taxpayers’ claim for refund, rejecting their argument that their Individual Retirement Account (IRA) withdraws were nontaxable distributions that were rolled over into a “Business Owner’s Retirement Account” or BORSA essentially a variation of  a “Rollover As Business Startup” (ROBS) account. The court found that, because there was no written plan in existence under which the IRA distributions were reinvested, the arrangement couldn’t be a qualified trust under Code Sec. 401.

Background

In general, an IRA is a trust (or custodial account) created for the exclusive benefit of an individual or his beneficiaries on which no tax is paid on the income earned  on the contributions until the retirement savings are distributed.

An IRA requires, among other things a written plan and designation of an appropriate trustee (Code Sec. 408(a), Reg. § 1.408-2(b) ) There is no immediate tax if distributions from an IRA are rolled into another IRA or eligible or other eligible retirement plan (i.e. trust,government Code Sec. 457  plan, Code Sec. 403(a) annuity or Code Sec. (403(b) tax-shelter annuity). For the rollover to be tax-free, the amount distributed from the IRA  generally must be re-contributed to the IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA (Cod Sec. 408 (d)  (3) )

There are certain requirements for qualification  which must be met by all qualified plans. In general, Code Sec. 401(a) prescribes the requirements for qualification of a trust forming part of a pension, profit sharing or stock bonus plan. One such requirement is that a plan be a definite written program. Failure to meet one of the Code Sec. 408 (a) requirements disqualifies the plan.

We are the most client focused organization providing these services. We strive  to maintain compliance and we would never knowingly expose a client simply to save a dollar. Additionally, since we assume the Trustee, Fiduciary and Plan Administration responsibilities, the IRS and DOL look directly to us in the event a compliance  matter arises with the plan. Thus, we are bound by regulation to support, represent and defend our clients which is significantly greater than any form of guarantee such as the guarantee offered by others.

Remember “focus on retirement development  –  respect the Plan 1st and foremost  and then respect the Plan as an investor not just a conduit if it ends up holding investments in your company.”

 

Part 2:

IRS’s requested from the Powells documentation on the existence of the IRA which allegedly received the distributions, and specifically sought its written plan and the identity of the trustee, which they failed to provide. At oral argument before the court, Mr. Powell conceded that there was no written agreement and no trustee. He admitted that they purchased the property in their individual capacities and held it individually until 2012, when it was sold to a corporation. The property had never been held in trust or in an IRA account. Mr. Powell’s understanding was merely that any money withdrawn from an IRA and invested in a business still counted as being in an IRA. The taxpayers also conceded that they did not follow the formal steps required for a ROBS. No corporation was created for purposes of running a qualified retirement plan. The entity which appeared to currently hold title to the property was created in 2012.

 

 Parties’ positions: The taxpayers argued that they had rolled over the $78,000 distribution into a valid retirement plan, making the distributions nontaxable. They argued that this other retirement account was a one-participant plan with less than $250,000 worth of assets which wasn’t required to file an annual report until its final year of existence. On the other hand, IRS argued that the taxpayers failed to show that the real estate investment in question met the requirements of a qualifying IRA under Code Sec. 408 . And, even if their claims were construed to be based on a one-participant retirement plan, they failed to show evidence supporting the existence of such a plan.
Court’s conclusion: The Court of Federal Claims held that the taxpayers weren’t entitled to a refund. There wasn’t a nontaxable rollover of the IRA distributions. Rather, the taxpayers withdrew money from their IRAs to purchase land in their individual capacities. The land was not purchased through or held by another IRA. As no IRA existed into which the taxpayers could have rolled the 2004 IRA distributions, IRS properly classified the distributions as income. The Court agreed with IRS that, under Code Sec. 401 and its regs, one-participant retirement plans need written trust instruments and must meet certain other formalities. And while it may be true that one-participant plans with less than $250,000 worth of assets aren’t required to file annual reports until their final year of existence, to be plans in the first place, such entities need trust instruments and a definite written program and arrangement.
While the Powells may have had a business plan concerning the real estate purchased with the IRA distributions, there wasn’t a written plan for an IRA through which the investment was made. With no written plan in existence under which the IRA distributions were reinvested, the arrangement could not have employed a qualified trust under Code Sec. 401 . The Court also noted that, because the corporation which currently held the investment property wasn’t in existence when the IRA distributions were made and the proceeds reinvested, it couldn’t have played a role in a ROBS transaction.
You can now clearly see that attempting to accomplish something of this complexity on you own can have catastrophic results. You need to seek the expert advise of Walker Advisory.  Contact us today.

Know The Facts

I just completed a phone call with a business intermediary and one of the items we discussed was the use of retirement monies as a source of business capital. Specifically, we discussed our plan, the Entrepreneur Retirement  Plan of America (ERPA) compared to plans provided by other service providers.

A significant part of the discussion centered on the cost of ERPA versus the plan provided by other groups. I can state with confidence that upon evaluating the total ALL-IN costs to implement and maintain ERPA versus the other groups,  ERPA’s ALL-IN cost is lower and the client’s exposure is significantly less because we assume all plan responsibility by serving as the plan’s ERISA 3(21) Trustee and Fiduciary and the ERISA 3(16) Plan Administrator.

A specific item of discussion dealt with the issue of business valuations which was discussed in a previous email. A fully compliant business valuation is specifically required by ERISA which is enforced by the Department of Labor (DOL), the IRC and the Internal Revenue Service (IRS). They noted that and I quote:

 

“Stock is exchanged without any real attempt to determine its value. The Stock is said to be equal in value to whatever happens to be available to exchange for it which creates a prohibited transaction.”

 

Walker Advisory requires that a fully compliant business valuation be prepared as we know this to be a regulatory requirement. It protects the client. If the client has a business valuation report as a part of a loan then we simply get a copy for our file at NO COST to the client.  If the client is not required to procure a business valuation for other purposes, such as a loan, then the client is required through us to have a business valuation prepared and if it is a start up then a business calculation is required by us. The cost for this report is based on the business valuator who will produce a fully compliant IRS, DOL valuation/calculation.

Since we assume the Trustee, Fiduciary and Plan Administration responsibilities, the IRS and DOL look directly to us in the event a compliance matter arises with the plan. Thus, we are bound by regulation to support, represent and defend our clients which is significantly greater than any form of guarantee such as the guarantee offered by others.

Be sure to take a moment and read our articles about which qualified retirement plans can work with the Plan.

When you are ready, be sure to contact us to discuss your specific retirement plan and the business you which to purchase.

What The IRS Is Looking For During A Plan Review

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

  • Permanence: Does a plan receive any form of ongoing contribution?
  • Exclusive Benefit:  The plan must be operated for the benefit of the employees and their beneficiaries. Thus, as long as the plan assets used to capitalized the business are not used for personal gain 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
  • 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.
  • Prohibited Transactions:  The IRS will be looking at the employer stock and whether the plan paid “adequate consideration.” This is where a valuation by an independent qualified business valuator/appraiser 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 the 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 is why entrepreneurs find peace of mind with Walker Business Advisory Service’s ERPA (Entrepreneur Retirement Plan of America) because it is properly designed, implemented and administered.  ERPA can withstand any scrutiny that may be brought against it.
  • Compliance is not about being compliant when a plan is being 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 prohibited transactions expose themselves to the long arm of the IRS. On the other hand, individuals who are compliant will more than likely hold up under IRS scrutiny.

 

For more information on specific retirement plans then you are welcome to read some of our articles.

 

When you are ready to discuss your plan to purchase a business with your retirement plan then be sure to contact us so that we can discuss the benefits of the ERPA plan.

Annual Stock Value Calculation for Form 5500 Reporting

For those that are invested in the Qualified Employer Securities (QES), you are required to have a stock value calculation prepared after 12/31 of each year for Form 5500 reporting purposes. When a private investment such as the QES is held by your plan this is the only way to value that investment since it is not based on the stock market.

The completed Stock Value Calculation should be sent to us no later than 6/30 of each year so that we have time to prepare the Form 5500 filing that is due by 7/31 of each year. The IRS, Department of Labor, and Pension Benefit Guaranty Corporation jointly developed the Form 5500 series returns for employee benefit plans to satisfy annual reporting requirements under ERISA and the Internal Revenue Code.

Walker Advisory will send out reminders after the first of each year to let you know it’s time to start preparing to submit your paperwork to the valuation company that you plan to use.