Some Helpful Tips

For those who question the validity of a VALUATION…….

For those individuals who desire to do just enough to document a file by getting sub-standard valuation work completed, such as threadbare valuations as referenced in the IRS October 1, 2008 Director Memorandum on the subject entitled Rollovers as Business Startups (ROBS) or choose to ignore the business valuation as being a compliance requirement, will find themselves at odds with the Department of Labor and the Internal Revenue Service if they are discovered.

Business Broker Testimonial

This is a testimonial/review of our services from a professional working for a well-known business brokerage firm:

“I have known Monty Walker for many years and his reputation and unique skills regarding Business Transactional Tax Issues have been extremely helpful to every client who has used his services. He is exceptional at what he does and is regarded as the authority on the subject of tax structure.  While I was aware of the services Monty provided to use retirement monies tax deferred and penalty free to capitalize a business or franchise , it was not until I started receiving newsletters from Fred Whitlock that I learned that Walker Advisory had a ROBS (Rollovers As Business Start-Ups) program that is totally turnkey . It offers an investment platform with 15 different investment options and 5 investment portfolios. In addition he is the trustee and fiduciary, shouldering all liability and responsibility not the client or the lending institution, which is unique and favorable to all parties involved. I believed this program was like ALL other programs offering a structure  using 401(k) funds to purchase businesses.

NOT SO. His program is a Safe Harbor 401(k) which is the most complete and compliant of all 401(k)s. The plan is audited annually by an independent accounting firm and all of this can be achieved for the same price as Benetrends or Guidant. It is actually less expensive if you take into consideration all that is provided to the client. I was taken aback to say the least. I now work even more diligently with Monty and Fred every opportunity I get because my clients can focus on building their businesses and not have to deal with the IRS or DOL. I have sent them over 8 clients this year and should have more than 12 buyers looking to utilize their services by the end of 2017.

Thank you Monty and Fred ……………the power of an email!”

Valuations

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 provide, 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 valuator must take place. As a matter of fact on August 10th 2010 the IRS Employee Plans Division presented a phone forum on Abusive Tax Avoidance Transactions and Emerging Compliance 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.”

Some Common ERPA Questions

1) How quickly can employer securities held in a plan be purchased back from the plan?
2) How long must a retirement plan be in place before being terminated?
It’s important to note that the existence of a plan and the investments it holds are separate issues.
The IRS’s view is that a retirement plan is meant to be permanent. This doesn’t mean that once in place the plan cannot be terminated. It means that the employer must be able to demonstrate an intent for it to be permanent. This is best accomplished by the passage of time. There is nothing in the regulations which dictates specifically how long a plan must be in place before being terminated to demonstrate that it was initially intended to be permanent. Facts and circumstances are used to assess permanency but in practice a plan being in place at least 3 to 5 years before a decision is made to terminate, is generally an indication of permanency. Obviously the longer a plan is in place the better.
So, to answer the question of how quickly can employer securities held in a plan be purchased back from the plan, the answer is employer securities are just an investment. The investment can be sold at anytime. Thus, there is no time requirement for employer securities to be held before being sold.
Just keep in mind that the plan needs to be kept in place long enough to meet the permanency test.  When you are ready to discuss how ERPA can work with your business purchase needs then you are welcome to contact us here.

Why A Business Plan Is Necessary

The Business Plan is a representation of the entrepreneur and the entrepreneur’s understanding and grasp of the business venture.

 

A Plan Trustee / Fiduciary must be able to prove, though the gathering of evidential information, that the entrepreneur was able to demonstrate the viability of the business as a prudent investment for a retirement plan. The Business Plan, along with other information such as a business valuation, is part of this evidential information.

 

It is important to remember that a Retirement Plan is a third party investor and it is necessary to present information to the plan to assist it in making a prudent investment regarding the small business investment opportunity. Remember, the IRS and DOL see a retirement plan as an independent party and the plan must be treated with the same level of respect as any other investor.

 

In the end, a retirement plan investment file should contain information similar to that which would have been provided had the plan been a person because a person would expect to be provided information necessary to make an educated informed investment decision.

Additionally, the Business Plan will go a long way in helping address inquiries and discovery issues in the event of an IRS or DOL audit.

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.

Keep Your Tax Advisors In The Loop

Entrepreneurs quickly learn that every business financial decision has a tax implication. Since most entrepreneurs are not trained accountants or tax experts, they generally depend on the guidance of a CPA for accounting and tax services and for overall general business advice.

 

Entrepreneurs who use retirement money as a source of business capital have unique issues they face which often conflicts with the traditional advice provided by most CPAs. This is because most CPAs have not received specialized retirement plan training. Additionally, entrepreneurs often do not fully inform their CPAs about having a retirement plan as an investor in their business which can lead to tax return filling errors. A client of ours had experienced problems with her CPA in many areas. One item in particular caused such a significant conflict between her corporation and her retirement plan that it could have led to the retirement plan’s investment in her corporation to become subject to tax and penalty. Walker Business Advisory identified the existence of the problem and then guided her CPA on how to correct the problem.

 

This service was provided at no additional cost.

 

Entrepreneurs who use ERPA gain the benefit of having a team managing the plan that understands not only the needs of business owners but also the unique issues associated with having a retirement plan as an investor.

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.

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.