How to Choose the Right ROBS Provider When Financing a Business

Personal Finance
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By Mark Nolan

Learn more about Mark on NerdWallet’s Ask an Advisor

Entrepreneurs looking to start or recapitalize a business are always thinking about securing enough capital. Recently, the Rollover as Business Startup, or ROBS, 401(k) plan has become a common financing option.

The plan has been used for more than a decade, but ROBS became increasingly popular after 2008, when the IRS clarified that the plan allows the use of 401(k), IRA or other retirement funds to start or buy a business, without taxes or penalties. Another factor in the plan’s usage was the decreased availability of traditional funding sources from banks and other financial institutions.

That popularity has also led to a surge in the number of ROBS providers, which range from established companies that have specialized in the plan’s transactions for years to newer companies and professionals that provide the service along with other products and offerings.

To establish the plan, entrepreneurs work with a provider that handles the setup, which includes creating a C corporation and rolling over funds from a retirement account to a new 401(k) plan that allows the funds to be used for business financing.

For aspiring entrepreneurs considering a ROBS transaction, it can be difficult to discern which company is the best to work with. Below are five factors to consider when choosing a ROBS provider.

Expertise

While the IRS recognizes the legitimacy of using a ROBS plan, businesses can be cited for compliance violations, such as not making the 401(k) plan available to employees or failing to file the annual report for the 401(k) plan.

For this reason it’s important to work with a company that specializes in ROBS transactions, rather than a provider that simply dabbles in them. Ideally, the provider would allow you to work directly with an attorney and other compliance professionals who can ensure that you satisfy the plan’s requirements.

Pricing

It’s important to minimize business expenses. For this reason, select a provider that offers a ROBS 401(k) plan at a fair price. Look for providers that don’t pay broker referral fees, as this will typically result in higher initial setup fees, and don’t charge maintenance fees in the first year, since ongoing compliance requirements don’t typically begin until the second year.

Speed

Quick access to retirement funds can be imperative for entrepreneurs with time-sensitive business needs, such as meeting a closing deadline. Therefore, choose a responsive ROBS provider with quick service to ensure that your transaction is completed as fast as possible. In particular, look for a ROBS provider that is well-versed in the process of transferring your money from an existing account to a new ROBS 401(k) plan, as this is the step that typically takes the longest.

Instructiveness

Given the compliance requirements of a ROBS plan, it’s important to work with a provider that emphasizes education, rather than sales, so that you can make an informed decision about how to fund your business. In particular, you should understand not just the initial plan requirements — for example, creating a C corporation and an IRS-approved plan — but also the ongoing requirements and costs.

Continuing support

Funding your business with a ROBS 401(k) is not a one-time transaction — it will be necessary to keep the plan in compliance. Therefore, choose a provider that can help you navigate the ongoing requirements. Consider whether your account representative has the requisite expertise to identify compliance issues that might apply, and whether this person can be helpful throughout the life of your plan.


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