The Capital Investment Blues: Unwinding ROBS Funding for a Startup

If you’re considering funding a startup or franchise, then you may already be ready for the huge gamble of turning a 401(k) into capital investment for a business: potentially losing the retirement account altogether. But are you committed?

The method described above — called a Rollover as Business Startup (ROBS) — injects capital into a business from your 401(k) account. Part of the Employee Retirement Income Security Act of 1974 (ERISA), the ROBS has been popular for years.

ROBS Capital Investment Process

The potential payoff is tantalizing, which is why so many aspiring entrepreneurs are willing to put all their chips on the table. Unfortunately, few realize just how difficult it is claw those chips back if they’re dealt a bad hand.

A mishandled ROBS is fraught with tax pitfalls. What’s more, the mere act of initiating a ROBS may draw unwanted attention: this type of capital investment is immediately suspicious in the eyes of the IRS. And then you remember that it’s your retirement you’re betting.

That retirement risk brought a longtime business client of mine to my door seeking help to unwind his ROBS. After struggling with the ROBS’ administrative hassle (which is often underestimated), the reality that his entire financial future was dependent on a new business in a sputtering economy was just too much.  

If you’re feeling the heat from a ROBS that you might want to unwind, remember that our door is always open. We’ll talk you through the issues and get you where you want to go. If you’re not sure, call us anyway and we’ll connect you to one of the clients who we’ve helped out of this ERISA nightmare. They’ll show you the path down from the cliff.

Before signing off, I’ll leave you with some background on the ROBS, pulled from a 2009 small business guide that my clients have found helpful.

Let’s start with ROBS 101

For best results, fertilize with low interest rates.

ROBS: For the investor in need of a green thumb.

ROBS plans are touted by business brokers and franchise sellers all over the Internet and arranged by investment firms specializing in capital investment.

ROBS firms charge a fee to walk clients through the process of creating a C corporation. The new corporation starts its own 401(k) plan or profit sharing plan, which must offer employees the option to purchase stock in the company. The new business owner then rolls over funds from an existing 401(k) into the newly created corporation’s plan.

Because the assets are moved from one tax-exempt vehicle to another, business owners avoid taxes and penalties.

The sole participant in the plan (e.g., the owner of a new company) can then direct the investment of the 401(k) account balance into a purchase of employer stock in the new corporation. The transferred funds are used to either purchase a franchise or fund the new business — essentially creating tax-free working capital.

But is it too good to be true?

A ROBS may be legal, but it operates in a grey area of IRS codes and regulations. To keep a ROBS transaction legal, the business owner must heed a slew of IRS regulations and avoid making certain prohibited transactions. The penalties for not complying with the rules are staggering.

For example, if the IRS determines the deal is a prohibited transaction, it can trigger excise taxes. If you run afoul of these prohibited transactions, you can run up 110 percent — or more — in penalties.

ROBS deals must be done very carefully and no two cases are exactly the same. This is not something to try with internet software or any law firm that simply “prepares documents at your specific direction,” as they say. You want an attorney who is well-versed in ERISA law before venturing into any ROBS deals.

It can also become expensive money. Clients who have used these usually need to hire a “plan administrator”, someone to be sure that all I’s are dotted and T’s crossed. That is an ongoing fee. It also could complicate recruitment of new talent. Anyone added to the payroll has to be given the right to access to the profit sharing plan. Remember: it was funded with your money.

So what does the IRS think?


memo issued by the IRS on Oct. 1, 2008, appears to cast a chill on the ROBS strategy. The 13-page memo concludes that:

“ROBS transactions may violate the law in several regards. First this scheme might create a prohibited transaction between the plan and its sponsor. . . . Additionally this scheme may not satisfy the benefits, rights and features requirement of the Regulations. . . . For this reason employee plans specialists are directed to open ROBS cases as described herein.”

The IRS looks closely at each case for different things, such as to make sure companies that use ROBS funding offer stock ownership to all employees of the business. Failure for that to happen would violate nondiscrimination rules.

Another red flag is when the rollover amount equals the business’ stock value. Such math, in the view of the IRS, usually indicates the rollover’s intent is to be used as business seed money only, rather than to be used as a bona fide employee retirement vehicle.

ROBS proponents insist that rollovers performed by reputable companies operate under IRS guidelines and will not raise agency suspicions. In any case, ROBS is not a strategy to be taken lightly. It requires careful thought and scrutiny because you’re putting your retirement plan at risk. It also takes work to get out.

As always, good luck, good hunting and call us if you need us.


The Fisher Law Office is renowned for its experience in estate planning, probate administration, asset protection, and business development. Annapolis attorney Randall D. Fisher has practiced for over 20 years, maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.

Find out how to reach Randy via or find him at, on Twitter @thefisherlawoffice, or at

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6 Responses to The Capital Investment Blues: Unwinding ROBS Funding for a Startup

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  3. Mary Ann Castro says:

    I opened a ROBS in 2006 and am looking for any kind of advice.

    I had been laid off from my job after 24 years in 2005 and decided to look into a franchise. While exploring franchises I stumbled onto Guidant and thought it was an answer to my prayers, just too good to be true. I had an attorney and accountant review the Guidant process along with speaking to Frank Selden my Guidant outside counsel. They did not come up with many red flags, one being I would have to pay corporate taxes. The upfront costs were a little steep for a small account like mine (under $100,000) $5000.00 for Guidant and $3,000.00 for my accountant and attorney. The Guidant recordkeeping fees would be $800.00 a year paid quarterly. I entered into contract with Guidant in Feb. 2006 and my nightmare began.

    Being that my account was under $250,000 there would not be a 5500 form to be filed, a Business Valuation would not be a requirement, I would not need a fidelity bond, I would not need workers comp. ins.

    In 2008 I learned that I am in a ROBS program. I now have to file a form 5500. I now had to have a business Valuation at $1,500 a year. I now have to have a fidelity bond. Now I have to have Workers Comp. Ins., and I have to Pay $708.00 a year based on $31,700 income because it is based on the owner being a plan and not an officer even though I made less than $20,000 a year. Now with more and more that has to be done my accountant is costing more and more. And the Guidant recordkeeping fees have gone from $800.00 to 1,188 a year $99.00 per month. At this point I am paying over $5,000.00 a year to maintain this program. This is between Guidant and my Accountant/payroll firm.
    I took my problems to my local Chamber of Commerce and met with a SCORE committee of local business men. At first glance they thought that my accountant/payroll firm was abusing the situation charging over $3,000.00 a year to meet Guidant/IRS requirements including a Business valuation. Now I find out that the Business Valuation that was done inflated my stock price making it impossible for me to get out of this situation. I had to fire my Accounting/Payroll firm because they didn’t have an explanation of the valuation and how it was done. They were putting things into a loan which is not acceptable. They refused to email explanations so I couldn’t keep records. It was hard to get an itemized bill which lead to more confusion on my part. I had to fire the firm.
    Now I find out that the Business Valuation that was done inflated my stock price making it impossible for me to buy back my stocks to get out of this situation. I had to fire my Accounting/Payroll firm because they didn’t have an explanation of the valuation and how it was done. They were putting things into a loan which is not acceptable. They refused to email explanations so I couldn’t keep records. It was hard to get an itemized bill which lead to more confusion on my part. I had to fire the firm.
    I do understand that it is the IRS requirements and rules that Guidant has to abide to and the IRS does not care what has to done or how much it costs a person as long as the ROBS is compliant. The case remains that this is not what I thought I was signing up for in 2006. It is not my fault that Guidant sold me a plan that they had misunderstood some of the IRS rules that has ended up costing me thousands of dollars (over 25,000 in five years).
    It has been aggravating and exhausting to talk to anyone in Guidant because each person only knows their one little piece and doesn’t know the whole picture. Just my question about the high price I had to pay for workers comp. ins. lead me from one dept. to another saying that this had to be wrong and send me to someone to fix the problem. I called the IRS and they read me the rule which Frank Selden said was correct and I couldn’t get out of paying the $708.00 bill which used to be under $300.00. I don’t talk to anyone over the phone from Guidant because it gets me nowhere and then I don’t have a record of what is being discussed.
    I resent that the only attorney I can talk to is Frank Selden because he helped get me into this and doesn’t care how the changes affected me. I know that the outside legal counsel that Guidant provides is $500.00 an hour. I have tried to speak to other attorneys and once they hear it is a ROBS account they don’t want anything to do with it because they think that ROBS are unethical.
    I feel completely abused. This has been a nightmare.
    I don’t think this kind of program is for small businesses like mine. Even my CPA said he would not recommend a ROBS for anyone investing less than 500,000. I would not recommend Guidant or a ROBS to anyone for any price.
    I now find out if you want to take any stocks from your 401k there is a requirement that you have to provide a full appraisal (business valuation) which is $1,800.00. Guidant didn’t know the cost and had to refer me to an outside appraisal firm. Guidant has now increased their monthly fee from $99.00 to $120.00 because they will do a limited appraisal for the purpose of annual reporting which they say is a $1,700.00 value. As usual the numbers don’t add up. They are also offering a referral CPA services . If clients try to get any services on their own it will be very hard.
    I read that maybe your firm could recommend other clients that have been able to unwind form a ROBS.
    Any information, advise, guidance would be very much appreciated.
    Thank You,
    Mary Ann Castro

    • Randy Fisher says:

      Mary Ann,

      As I looked at your comment, the only thing I could think it “what a nightmare!” It reads like a law school exam. Call my office when you have a moment to set up a common time when we can talk. I will give you the name of a client going through this now who has indicated he would speak to others. We can discuss other issues you have outlined, as well.

      Randy Fisher
      Fisher Law Office

  4. We are beginning the unwinding of our ROBS as well. I appreciate any advice!!

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