Can ERPA Own 100% Of The Stock?

Can the C Corporation be owned 100% by The Entrepreneur Retirement Plan and America?

 

The answer is technically yes, but is generally not the best solution. We recommend that the business owner own a minimum of 5% of the stock. Although there are also ERISA compliance reasons  for the split, for tax purposes, the split ownership is in place to maintain our options for business and tax planning looking forward….not just at closing.

With the vast majority of the company owned by the plan you still allow yourself the ability to dividend profits or sales proceeds into the plan should you wish. By having some ownership individually, you keep the option alive for buying plan owned stock back into treasury and the individual owning 100% of the company without the individual having to take personal savings to consolidate their ownership in the company.

If all stock is repurchased from ERPA, the 5% stock you owned in the beginning is now 100% of the outstanding stock. At that point of transition to individual ownership, you can make S elections or other restructuring options that were not previously available.

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.

Can The C Corporation Be Owned 100% By ERPA?

The answer is technically yes, but is generally not the best solution. We recommend that the business owner own a minimum of 5% of the stock. Although there are also ERISA compliance reasons  for the split, for tax purposes, the split ownership is in place to maintain our options for business and tax planning looking forward….not just at closing.

With the vast majority of the company owned by the plan you still allow yourself the ability to dividend profits or sales proceeds into the plan should you wish. By having some ownership individually, you keep the option alive for buying plan owned stock back into treasury and the individual owning 100% of the company without the individual having to take personal savings to consolidate their ownership in the company. If all stock is repurchased from ERPA, the 5% stock you owned in the beginning is now 100% of the outstanding stock. At that point of transition to individual ownership, you can make S elections or other restructuring options that were not previously available.

 

In closing, a client writes:

Shannon and I were totally unaware of this program. For us it was quite complex in the beginning but Fred Whitlock and Monty Walker were able to guide us through the maze and in the end it proved to be one of the best financial decisions we have ever made. Walker Business Advisory Services provided a 401(k) Safe Harbor Plan (ERPA) which allowed us to focus on building our business not on the complexities of a 401(k) plan and how to manage it. Monty Walker and his team of professionals do that!

 

Contact us for more information about your specific situation and the kind of business you are considering purchasing.

The Diversity of the Entrepreneur Retirement Plan of America

Employer Matching

If you make an elective deferral, your employer will make a matching contribution on your behalf in an amount equal to:

(a) 100% of your contributions that are not in excess of 3% of your compensation, plus

(b) 50% of the amount of your contributions that exceed 3% of your compensation but that do not exceed 5% of compensation. In its sole discretion, the company may also make matching and/or profit-sharing contributions. Note that all contributions, your own and any your employer may make on your behalf, will vest immediately.

Roth Deferral Option             

Your plan allows you to choose traditional and/or Roth deferrals. In a traditional 401(k) account, you receive a tax deduction when you defer earnings into the plan. Future withdrawals are then taxed as ordinary income.

In a Roth 401(k) account, you do not receive a tax deduction at the  time of deferral. But you will not pay any tax when you make qualified* withdrawals. The trade-off is between a tax deduction now and a tax exemption later. (The distinction here is identical to the difference between traditional and Roth IRAs).

The annual limit for your 401(k) deferrals, traditional and Roth combined, is $18,000 in 2015 ($24,000 for those 50 years of age and up). *Note: Most withdrawals of Roth contributions before the age of 59½ will be subject to the standard IRS penalty of 10%. Consult your tax advisor before withdrawing Roth assets from your 401(k) or retirement account.