Donna Bordeaux explains ROBS plans, which let you roll over retirement savings into a business. You need a C corporation, a third-party administrator, and all rollover participants on payroll. Setup costs around $5,000, with monthly admin fees around $149. Selling the business later funnels proceeds back into the 401(k).
Questions this video answers
October 19, 2019.
Rollover for Business Startups.
Roth IRAs and Roth 401(k)s.
The business must be taxed as a C corporation.
Form 5500 must be filed each year with the U.S. Department of Labor.
Chapters
Foreign Good morning everyone and welcome to our session for today. I've got a couple of people joining in here so I'll give it just one more minute and we will get off to a prompt start. Okay, I hope everyone is doing well today. I am Donna Bordeaux with Campground Accounting and our topic today is the truth about Rob's Plans. The Good, the Bad and the Ugly and we're going to dive into that in just a moment. First off, our session for today will be recorded so if you'd like to share this with your friends or go back and re watch after, within just a few days we'll have this up on our YouTube page and you can re watch and we'll send you the link as well. So first off, I'll start off by telling you about us. I'm Donna Bordeaux. I'm a CPA with Campground Accounting. My husband Chad Bordeaux is also a CPA and an ohp, which is the designation that ARVIC provides for an outdoor hospitality professional. We operate a CPA firm that specializes in working with campground and RV park owners and family owned businesses. We are also avid campers so we camp across the United States. So this gives us a great perspective to see how the industry is operating, the current trends, and we're very interested in those as well as knowing how to help our park owners be even better owners and grow their businesses and maintain good tax filing status and minimize the impact of income taxes. We've been around for a good while now and we have a lot of resources that are available. If you'd like to follow us, we have a Facebook page for Campground Accounting as well as a YouTube page with a whole bunch of blogs and videos just like this one on different topics of interest to the RV and campground industry. So let's get started with what is a ROBS plan. ROBS is an acronym of course and even I myself forget sometimes what it stands for. It is a rollover for business startups. What this means is that you can use your retirement monies to help purchase the stock or investment in a business. Keep in mind that you must use a third party administrator, but not by means. A comprehensive list and fan fund. Those are the ones we see most often. The qualified retirement plans that you can use includes IRAs 401ks, SEC plans, thrift savings plans, 457 and 403 plans. These plans all have to be qualified pre tax retirement plans. Please note that you cannot use Roth IRAs or Roth 401ks in the Robs plan. Those can be used in other ways, but not within a Robs plan. Okay. A Robs plan is a designated process that the IRS maintains. And one of the restrictions is that you must be taxed as a C corporation. You don't have any other choice. So you cannot be a sole proprietorship, a partnership, an S corp. None of those options are available for you or a nonprofit. You must be taxed as a C corporation in this situation. Okay? C corporations are not flow through entities. They pay their own taxes. That tax rate currently is at 21%. It's a flat rate. So if you earn a dollar, you owe 21 cents. If you earn a million dollars, you'll owe 21% of that as well. Now keep in mind that the IRS has its eyes on these plans. The culprit is that many people have been taking advantage of the situation and using Rob's plans, but not following the rules and regulations that the IRS has set forth. The rules are actually set by the IRS and the Department of Labor because this is also dealing with ERISA law which is what governs 401k and retirement pension plans. Now one of the problem areas that we see a lot in dealing with these plans is that you cannot contribute, make money or contribute money or make these investments without doing it properly. It has a certain path that it must flow through and boxes must be checked. It's not a matter of just cashing out your 401k and depositing it into a checking account and making a business purchase. There are processes and procedures that have to be followed that are fairly strict. And if you violate these, you could contaminate or disqualify your entire retirement plan. That means that those dollars could be taxable yet again. Alright? So you want to be very careful. We also see that the IRS has its eyes on these plans because some people are not using third party plan administrators. If you're going to do this, you must use a third party plan administrator to do this. Also there are some pretty strict rules about who is able to do what. No lending of money can happen between the plan and the business owner. So there may not be any loans to or from a shareholder. So the tax return, if I look at that and it's a Robs plan and I see loans to or from shareholders, we have problems. So this is not just something you can just throw together and operate a business with without really having some pretty deep understanding of what you're doing. So make sure that if you're attempting to use a Robs plan, you are aware that you will have Kind of one hand tied behind your back when you're operating a business using this structure. Alright, a couple of other areas to be watching. First. This must be an active business. You cannot have absentee owners. There cannot be any passive component to the business. So it cannot own rental properties or oil royalties or things that are considered to be passive. This must be an active operating business and anyone who is involved in the business must be involved in it fully. So if I have a large retirement plan and I think, well, I'd like to buy a campground and let my son or daughter operate it, you cannot do that through a Robs plan. The person contributing that money from their retirement plan must be active in the business. That is a requirement, not an option. Next up, all rollover participants must be employees. So for example, I had a situation last week where a couple said, we're husband and wife, we would both like to use our retirement funds to contribute into the business. And my husband doesn't want to work in the business. I will operate it solely. If you're going to do this through a Robs plan, both the participants who are rolling those dollars into that plan must be active in the business. They will both need to be on payroll and receive a reasonable sale. Okay, next up, what do you do? What are the filing requirements? What are the specific things that might be a little different than a normal business? First off, the Form 5500 must be filed each year with the Department of Labor. You've maybe never seen this form before, but this is what a retirement plan will file each year with the Department of Labor. It kind of looks like an IRS form as well, but there is actually a little separation. It goes to the Department of Labor and not the irs. But this form is going to be an informational return that talks about who is in the plan, how much is invested in the plan, what is its value. This is the part that you're going to want to have that third party administrator assist you with. Most third party administrators will have a process where they will actually file this return for you. You will have to give them information and complete some survey information each year, but they will assist you with the filing of this return. Another issue that always comes up is how do we get money out of the business? Now the compensation strategy and distribution strategy is very different than it would be in any other type of business. The Robs plan puts restrictions on how you get money out of the business. And I'll cut to the chase, the only way to do this is through payroll. You may not take Distributions or draws from the C corporation. Those are called dividends and dividends are subject to duplicate taxes. Also you cannot take dividends because you're going to have to give your 401k who is all also a fictitious owner we'll call it will have to get equivalent dividends. Okay? So you may not take the normal form of distribution or draw that you might be used to. If you've owned a business before, every dollar that you take out of that business will also be subject to payroll taxes. It's also important to note that there should be no personal commingling of expenses or income and I do mean none. If there's one or two here or there, you better I suggest write a check back to the business to reimburse it if something accidentally happened. The C corporation structure with the Robs is very specific and you cannot have the normal process of utilizing that if a personal expense comes along here or there. You want to be very clear because a lot is at stake if your plan was to be terminated. Next up, selling the business. This is where the exit strategy comes in. With the Robs plan, the proceeds of selling the business become earnings for your 401k and for the ownership of the company. So a big difference from selling a normal business is that the proceeds are going to be subject to ordinary income and not capital gains. So again, ordinary income, not capital gains. Capital gains right now top out at 20% on your federal taxes. That's under current law today. That can always change. But under that 20% instead ordinary income goes up to 36% depending on your income. That difference is very critical when we're talking about selling the business because we're usually talking about hopefully some large dollar amounts that you've built up by then. If you're familiar with how a 401k works for the taxation, as the money is put into the 401k it is invested. And those investment earnings grow tax free. They grow tax free until you decide to take a distribution, until you decide to take the money out. So in this case, selling the business is no different than owning stock in a major company. If you own some Apple Stock with your 401k or Microsoft or Duke Energy, the proceeds of the sale of that will roll back in and become a part of the new balance of that 401. When you decide to take a distribution out of that 401k that is considered ordinary income and not capital gains. So you will not have the advantage of using capital gains rates in the sale of your business. If you're utilizing a Robs plan. Next up, exiting the Robs plan. Well, there's obviously the way we just talked about selling the business. But what if you want to exit the Robs plan without selling the business? Is that possible? Yes, it is. The process of exiting the Robs plan without selling the business involves buying the stock from your 401 buying it back. So if you have a low point in the valuation of the business, for example, in those first couple of years, if you are investing a good bit in maintenance and you are really just kind of making a turn with the business or making some big changes to the business, you may see that you don't earn a lot of money in those first couple of years and that will decrease the valuation of the business. Now hopefully that's just a temporary decline. But the this is a way that you can utilize an exit strategy for the Robs plan. The Robs plan may be the only way that you can get that campground purchased. So it may be a one of a kind solution to be able to do this if you can't obtain other financing. So that is a good solution at the time. But you're going to have to live with the consequences of what requirements there are of operating the business. So in some cases I help my clients choose to exit the Robs plan at a strategic point within a few years of purchasing. They may at that point also be able to refinance out of the robs. Also if the value is a low enough point, you may have the money to be able to buy it out. And that will mean that you would basically buy the stock of the business out. A valuation again, a third party valuation would be required and we can help facilitate that. You would buy the stock back from your 401k and from you personally or any other owners and basically deposit that money back into the 401k and call it a day. Now I will say that valuation if it's at a low point will probably mean that your 401k has taken a pretty big loss. But the strategy would then be to get that business back on track so we can start funding that 401k again and make up for the losses that we had in there and start stowing that money away again for your return. So the other thing that that can also alleviate is the monthly maintenance fees that you're paying on the robs. Typically we find that it takes about $5,000 to get that Robs plan in place. Those fees up front companies like Guidant will charge you $149 a month for each and every month going forward to maintain and administer your plan. So if you own that business for 30 years, you're going to be paying $150 a month times 12 months of a year for 30 years. So it's not a cheap way to go. So some people also choose to exit all right, so one thing I always recommend is doing the Robs Plan may be again a magical solution to buying that business, but it has some very long term effects. So consider looking at a Robs Analysis before you make a purchase or if you've already made the purchase, look at the Robs Plan analysis to determine if there's an exit point that you should be watching for. Our Robs Analysis that we do will look at the differences between the tax rates along the way and the costs that are incurred each month as you maintain that plan and it will compare to the long term costs of the Robs Plan structure versus facilitating how to exit that structure. Sometimes we find some pretty remarkable cases where it may be an excellent point to exit the Robs Plan well before you ever sell the business. Now one other point I'll mention is in looking at the Robs Plan, if you are doing the Robs Plan as a partial solution, I see a lot of cases with seller financing and a portion of the down payment is coming from a Robs Plan. If you were looking at Robs Plan with a small dollar amount, and when I say small I'm probably referring to less than 3 or $400,000, the cost is still the same to maintain that plan every month. So it may make it a little less likely that that is a great solution if you're doing a smaller dollar amount. Or it may also make it a better solution to exit that Robs Plan solution faster when you purchase the business. There may be a way that you could exit that Robs Plan very quickly if you're doing it with a smaller dollar amount because the valuation will typically take a dip after you first purchase the business and start doing the changes that you see fit in that business and spending some money on it. So the Robs Plan analysis is a great way to go. If you would like more information about this for your particular situation, I would happily create that for you and we can talk to you about what else involved in gathering that information. All right, A couple of other resources I mentioned this briefly. On the front end we have a full blog of information that deals with all different things affecting campground owners and common topics. Work campers, site lock fees, audits, wi Fi all kinds of good stuff. So check out our blog. It's at campgroundaccounting.com blog and also you can hop on over to YouTube and look up Campground accounting on the search there and you will find a bunch of videos. We generally try to do two to four videos a month and add those to our library there. So keep an eye on that. Please subscribe to that channel and that'll make sure that you see everything new that's coming out in the industry. All right, that wraps up our presentation for the Robs plan, but I'll be opening up the mic here for some questions in a moment. You also have a chat panel available to you within Zoom and I welcome you to ask your questions there. If you do have a question and would like me to unmute you, if you just put your name in that chat box, I'll unmute you. If I unmute, everybody will probably get some pretty big background noise. So I'll hang out here for a moment. Please let me know what questions you have. All right. I had one other question about the buyout of the Robs and the refinance issue I'll mention in the buyout structure. Again, it's a place where we want to plan when that perfect time is for you to buy out. We look for low points in the valuation to do that buyout. We also look for refinance sources. So if you've got seller financing involved, many times seller financing comes for a shorter term. It's not a 20 year loan. It may be a 20 year amortization, but a five year balloon where you're going to need to refinance that. We look at all of those pieces together to make sure that we're giving you the full solution. In our campground accounting business, our focus is on helping you take care of all of the books and records, the compliance issues, as well as being an advisor to you all throughout the process of the time that you own your campground. With our knowledge of the industry as well as our CPA side, we can generally provide you with pretty good focus on where to go next. And if we need some outside solutions to be involved, we'll point you in those proper directions as well. And also I'll mention a couple of upcoming things for you. If you are a potential buyer of a campground or you're fairly new in the industry, we will be exhibiting and I'll be teaching classes at arvic. ARVIC is the national association and that meeting will be coming up in November in Knoxville, Tennessee. Immediately following that, November's the big month is the Jellystone or Leisure Systems Conference in Charleston, South Carolina. I'll be there as well. Exhibiting then at the same time that that's going on is the KOA Conference. KOA will be in Savannah, Georgia, and that is the second week in November. We have a full listing of our upcoming events, of where we'll be and what things are going on in the industry on our website as well. So if you go to campgroundaccounting.com you'll be able to look at the upcoming events there and keep track of some fun things coming up in the industry. By all means, if you're at any of those events, please come find me. Say hello, tell me how things are going for you. All right, Very well. I will wrap this up. If you have any questions or concerns that you think of later or would like to speak with me privately, you can email me adonacampgrounding.com or you can schedule an appointment right through our website as well. So thank you for joining us today. I hope you've received some good information. Look forward to chatting with you soon.
