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February 16, 2009

Rollovers as Business Startups- (ROBS)

Your Guide


Rollovers as Business Startups

use of retirement assets to finance a business, usually a start-up franchise.

(Before IRS guidance was issued, a ROBS – or R.O.B.S. was referred to on the ‘street’ as an ERSOP)


Use of retirement assets to finance a business, usually a start-up franchise. The transaction typically occur in the following order:

  • An individual establishes a business entity- usually a C- Corporation
  • The corporation adopts a qualified plan. The plan is usually a profit sharing plan, with a salary deferral 401(k) feature. Typically, the business has no employees at the time the corporation is established and the plan is adopted. The plan document usually allow 100% of plan assets to be invested in employer-stocks
  • The individual rolls-over retirement assets from a traditional IRA or employer-sponsored plan to the qualified plan established for the business
  • The individual-, who is the only participant in the plan, uses the plan balance to purchase 100 shares of the corporate stock. The Stock ‘certificate’ is placed in the qualified plan account and the cash is delivered to the individual in exchange for the certificate. The certificate is valued at the amount of cash (which is usually the entire balance) that is delivered from the plan to the individual
  • The individual uses the cash to purchase the franchise of cover start-up costs for the business
  • The qualified plan is then amended to eliminate the option of investing in employer-stocks. As a result, if any employees are hired, they do not have the option of purchasing stocks. This may be a moot point, as there are no more shares to purchase, since 100% of the shares were already sold to the business owner’s account.

Referring Cite

IRS Memorandum: Guidelines regarding rollovers as business startups

Additional Helpful Information

  • Individuals who want to engage in a ROBS should work with a qualified pension consultant, ERISA attorney, tax professional or other individual with similar practical experience, who is an expert in the area or prohibited transactions.
  • The IRS has expressed concern that ROBS may fail to meet compliance requirements, running the risk of causing a prohibited transaction and failure of the plan to satisfy regulatory requirements.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


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