Nov 25

Does the IRS Allow the Use of 401k Funds to Purchase Stock in a Business I Will be Involved in?

Yes, you may use your 401(k) funds to purchase stock in a business you will be involved in. The Internal Revenue Code and ERISA have firmly codified the ability to use retirement funds to invest in the stock of a sponsoring company as long as certain IRS and ERISA rules are followed.

Internal Revenue Code Section 4975(c) includes a list of transactions that the IRS deems “prohibited”. However, Internal Revenue Code Section 4975(d) lists a number of exemptions to the prohibited transaction rules. Specifically Internal Revenue Code Section 4975(d)(13) lists an exemption for any transaction which is exempt from section 406 of the Employee Retirement Income Security Act of 1974 (ERISA) by reason of Section 408(e) of such Act.

ERISA Section 408(e) provides that ERISA Section 406 shall not apply to the purchase by the Plan of qualifying employer securities (as defined in ERISA Section 407(d)(5)), provided that: (1) the acquisition or sale is for adequate consideration; (2) no commission is charged with respect to the acquisition or sale; and (3) the plan is an eligible individual account plan (as defined in ERISA Section 407(d)(3)). A 401(k) plan fits in to this definition.

Pursuant to ERISA Section 406, the acquisition or sale must be for “adequate consideration”. Except in the case of a “marketable obligation”, adequate consideration for this purpose means a price not less favorable than the price determined under ERISA Section 3(18), subject to a requirement that the acquisition or sale must be for “adequate consideration,” An exchange of company stock between the plan and its employer-sponsor would be a prohibited transaction, unless the requirements of ERISA Section 408(e) are met.

Does the IRS Allow the Use of 401k Funds to Purchase Stock in a Business I Will be Involved in?The exemptions in Internal Revenue Code 4975(d) shall not apply to items described in Internal Revenue Code Section 4975(f)(6). Internal Revenue Code Section 4975(f)(6)(A)) states that the exemption of Internal Revenue Code Section 4975(d) shall not apply i n the case of a trust described in Internal Revenue Code Section 401(a), which is part of a plan providing contributions or benefits for employees some or all of whom are owner-employees (other than paragraphs (9) and (12)) shall not apply to a transaction in which the plan directly or indirectly— (i) lends any part of the corpus or income of the plan to, (ii) pays any compensation for personal services rendered to the plan to, or ( iii) acquires for the plan any property from or sells any property to, any such owner-employee, a member of the family of any such owner-employee, or any corporation in which any such owner-employee owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. Therefore, since the Plan will be purchasing “qualified employer securities” directly from the newly formed corporation, the purchase of corporate stock will not be treated as a prohibited transaction pursuant to Internal Revenue Code Section 4975.

ERISA Section 407(b)(1) generally places limitations on the acquisition and holding of Qualifying Employer Securities (normally 10% of plan assets). However, the Section includes an exception for “eligible individual account plans” (ERISA 407(b)(1)). As set forth in ERISA Section 407(d)(3), a qualified profit sharing plan is included in the definition of “eligible individual account plans”. In addition, pursuant to ERISA Section 404(a)(2), these plans do not violate ERISA’s diversification and, to the extent it requires diversification, prudence requirements.

The IRA Financial Group’s retirement tax professionals will work with you directly to develop an IRS and ERISA fully compliant business acquisition or funding solution customized to your individual business, financial, and retirement needs.  Contact us today @ 800.472.0646!

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Sep 18

Can I Use My 401k Funds to Invest in a Business?

If structured correctly, yes you can use your 401(k) to invest in a business. IRA Financial Group’s in-house retirement tax professionals have spent the last two years developing an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax free! Unlike our competitors who have been offering this type of structure for many years, the IRA Financial Group has patiently waited for clear IRS guidance in order to develop a structure that would be fully compliant with IRS and ERISA rules and procedures. The Business Acquisition Compliance and Support Structure (“BACSS”) was designed as an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax free! The Internal Revenue Code and ERISA law firmly establishes that the use of retirement funds to purchase stock of a sponsoring company is permitted as long as certain IRS and ERISA rules are followed. Based on IRS guidance, it is important that a qualified retirement plan be adopted by the new company and that it be used and operated as such.  It is also required that the value of the stock being purchased by the new Plan be valued by an independent appraisal and that the qualified retirement plan be made available to all eligible company’s employees.  Because the IRS has stressed the importance of compliance, it is crucial to work with a company that is operated by a team of in-house tax and ERISA professionals who have worked at some of the largest law firms in the United States, including White & Case LLP and Dewey & LeBoeuf LLP, to ensure the legality of the structure.

Can I Use My 401k Funds to Invest in a Business?Please contact one of our 401(k) Experts at 800-472-0646 for more information.

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Mar 27

The Law Regarding the Use of a 401k to Fund a Business

The Internal Revenue Code and ERISA have firmly codified the ability to use retirement funds to invest in the stock of a sponsoring company as long as certain IRS and ERISA rules are followed.

Internal Revenue Code Section 4975(c) includes a list of transactions that the IRS deems “prohibited”. However, Internal Revenue Code Section 4975(d) lists a number of exemptions to the prohibited transaction rules. Specifically Internal Revenue Code Section 4975(d)(13) lists an exemption for any transaction which is exempt from section 406 of the Employee Retirement Income Security Act of 1974 (ERISA) by reason of section 408(e) of such Act.

Section 408(e) provides that section 406 shall not apply to the acquisition or sale by a plan of qualifying employer securities (as defined in section 407(d)(5), provided that: (1) the acquisition or sale is for adequate consideration; (2) no commission is charged with respect to the acquisition or sale; and (3) the plan is an eligible individual account plan (as defined in section 407(d)(3)). A 401(k) plan fits in to this definition.

The Law Regarding the Use of a 401k to Fund a BusinessPursuant to ERISA Section 406, the acquisition or sale must be for “adequate consideration.” Except in the case of a “marketable obligation”, adequate consideration for this purpose means a price not less favorable than the price determined under ERISA § 3(18),subject to a requirement that the acquisition or sale must be for “adequate consideration.” An exchange of company stock between the plan and its employer-sponsor would be a prohibited transaction, unless the requirements of ERISA § 408(e) are met.

The exemptions in 4975(d) shall not apply to items described in Internal Revenue Code Section 4975(f)(6). Section 4975(f)(6)(A) states that the exemption of 4975(d) shall not apply in the case of a trust described in Internal Revenue Code Section 401(a), which is part of a plan providing contributions or benefits for employees some or all of whom are owner-employees (other than paragraphs (9) and (12)) shall not apply to a transaction in which the plan directly or indirectly— (i) lends any part of the corpus or income of the plan to, (ii) pays any compensation for personal services rendered to the plan to, or (iii) acquires for the plan any property from or sells any property to, any such owner-employee, a member of the family of any such owner-employee, or any corporation in which any such owner-employee owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. Therefore, since the Plan will be purchasing “qualified employer securities” directly from the newly formed corporation, the purchase of corporate stock will not be treated as a prohibited transaction pursuant to Internal Revenue Code Section 4975.

ERISA Section 407(b)(1) generally places limitations on the acquisition and holding of Qualifying Employer Securities (normally 10% of plan assets). However, the Section includes an exception for “eligible individual account plans” (ERISA 407(b)(1)). As set forth in ERISA Section 407(d)(3), a qualified profit sharing plan is included in the definition of “eligible individual account plans”. In addition, pursuant to ERISA Section 404(a)(2), these plans do not violate ERISA’s diversification and, to the extent it requires diversification, prudence requirements.

Call us today at 800-472-0646 to learn more about how you can use your retirement funds to start a new business or grow an existing business tax-free, in full IRS compliance, and without penalties!

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Dec 05

Why Choose IRA Financial Group to Use Your 401k to Fund a Business

The IRA Financial Group was founded by a group of top law firm tax and ERISA professionals who have worked at some of the largest law firms in the country, including White & Case LLP and Dewey & LeBoeuf LLP.

The legality of using 401(k) retirement funds to purchase employer corporate stock is firmly established in the Internal Revenue Code and under ERISA law. Although codified under law, the IRS has been concerned that a number of promoters marketing this type of structure have not had the expertise to develop a structure that is fully compliant with IRS and ERISA rules and regulations. With this in mind, the IRA Financial Group’s in-house retirement tax professionals spent the last two years carefully studying IRS materials and guidance in order to design an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax-free!

How to Use My 401(k) Retirement Funds to Buy a BusinessThe Business Acquisition & Compliance Solution Structure (“BACSS”) was developed to specifically address and solve each of the non-compliant areas addressed by the IRS creating a business acquisition and funding solution that is in full compliance with IRS and ERISA rules and procedures. Unlike our competitors who have been offering this type of structure for many years, which according to the IRS, a significant portion have been found to be non-compliant, the IRA Financial Group has patiently waited for clear IRS guidance before offering a business acquisition structure that would be fully compliant with IRS and ERISA rules and procedures. Because the IRS has stressed the importance of compliance when using retirement funds to purchase a business, it is crucial to work with a company that is operated by a team of in-house tax and ERISA professionals who have worked at some of the largest law firms in the United States, including White & Case LLP and Dewey & LeBoeuf LLP to ensure the structure satisfies IRS and ERISA rules and procedures.

We have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will typically be ready for investment into your new or existing business within 14-21 days.

Call us today at 800-472-0646 to learn more about how you can use your retirement funds to start a new business or grow an existing business tax-free, in full IRS compliance, and without penalties!

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Oct 24

History of the Solo 401k Plan

401(k) plans are named after the section of the Internal Revenue Code in which they appear, and apply to private sector employers. A solo 401(k) plan, also called an individual 401(k), a one-participant plan, self-employed 401(k) or self-directed 401(k) plan is a qualified retirement plan that was designed specifically for the self-employed or small business owner with no employees. To many peoples surprise, the solo 401(k) plan is not a new type of retirement plan. The solo 401(k) plan is not a term of art or even fond in the Internal Revenue Code. The Solo 401(k) Plan, in general, has the same rules and requirements as company 401(k) plan, but is not subject to the complex ERISA rules which make employee 401(k) plans so costly. In other words, the solo 401(k) Plan is simply a 401(k) plan that is not subject to the ERISA rules because the adopting employer does not have any full-time employees, other than their spouse(s). The growth in the popularity of the solo 401(k) plan began with the enactment of the Economic Growth and Tax Reconciliation Relief Act of 2001 (EGTRRA) which armed the solo 401(k) plan with all the attractive features of the better known employer 401(k) plan.

The Solo 401K Plan has become the most popular retirement plan for the self-employed. This is exactly what the IRS envisioned when it created the Solo 401K Plan, also known as the Individual 401K or Self-Directed 401K Plan.

Pre-1978 – Deferred compensation arrangements (“cash or deferred arrangements,” known as CODAs) which allowed some compensation (and resulting tax liability) to be deferred, predate 401(k) plans by several decades and are viewed as their precursors.

The History of the Solo 401(k) PlanIn the 1950s, a number of companies, particularly banks, added to their profit-sharing plans a new feature that came to be called a “cash or deferred arrangement,” or CODA. Each year, when employees were awarded profit-sharing bonuses, they were given the option to deposit some or all of the bonus into the plan instead of receiving the bonus in cash. Even though the employee had the right to receive the bonus in cash, which normally would trigger immediate income tax, a CODA sought to treat any amount the employee contributed to the plan as if it were an employer contribution, and therefore tax-deferred.

In 1956, the IRS issued the first in a series of rulings allowing profit-sharing plans to include a CODA and still be eligible for the favorable tax treatment accorded employer contributions.

The Employee Retirement Income Security Act of 1974 (ERISA) contained sweeping changes in the regulation of pension plans, and created rules regarding reporting and disclosure, funding, vesting, and fiduciary duties. Although ERISA was aimed mostly at “assuring the equitable character” and “financial soundness” of Defined Benefit pension plans, the Act contained numerous provisions impacting Defined Contribution plans (like profit-sharing plans, and eventually 401(k) plans).

In 1962, after much deliberation, Congress enacted the Self-Employed Individuals Tax Retirement Act of 1962, extending some of the benefits of qualified plan participation to self-employed persons. Plans covering self-employed individuals were often called Keogh or H.R. 10 plans, after the principal sponsor and bill number in the House of Representatives.

The 1962 legislation required plans covering self-employed individuals to satisfy all of the qualification criteria for plans covering only common law employees and imposed numerous additional requirements and limitations.

Is the Solo 401(k) Plan Subject to ERISA?

The DOL regulations provide that a plan that covers only partners or a sole proprietor is not covered under Title I of ERISA. Pursuant to Department of Labor Regulations 2510.3-3(c) –

(1) An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, an

(2) A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership.

The provisions of Title I of ERISA, which are administered by the U.S. Department of Labor, were enacted to address public concern that funds of private pension plans were being mismanaged and abused. ERISA was the culmination of a long line of legislation concerned with the labor and tax aspects of employee benefit plans. The goal of Title I of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans.

The provisions of Title I of ERISA cover most private sector employee benefit plans. Employee benefit plans are voluntarily established and maintained by an employer, an employee organization, or jointly by one or more such employers and an employee organization. Pension plans–a type of employee benefit plan–are established and maintained to provide retirement income or to defer income until termination of covered employment or beyond. Other employee benefit plans are called welfare plans and are established and maintained to provide health benefits, disability benefits, death benefits, prepaid legal services, vacation benefits, day care centers, scholarship funds, apprenticeship and training benefits, or other similar benefits.

In general, ERISA does not cover plans established or maintained by governmental entities or churches for their employees, or plans which are maintained solely to comply with applicable workers compensation, unemployment or disability laws. ERISA also does not cover plans maintained outside the United States primarily for the benefit of nonresident aliens or unfunded excess benefit plans. In addition, ERISA does not cover plans involving self-employed business owners or entity’s with no full-time employees other than the business owner(s) and spouses(s) since the goal of Title I of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans of owners, for plans that only cover owners, there is no need for ERISA since there are no non-owner employees to protect.

Even though a solo 401(k) plan is not subject to Title 1 of ERISA, the ERISA rules are still looked at as a reference because a solo 401(k) Plan is still a qualified retirement plan.

1978 – The Revenue Act of 1978 included a provision that became Internal Revenue Code (IRC) Sec. 401(k) (for which the plans are named), under which employees are not taxed on the portion of income they elect to receive as deferred compensation rather than as direct cash payments. The Revenue Act of 1978 added permanent provisions to the IRC, sanctioning the use of salary reductions as a source of plan contributions. The law went into effect on Jan. 1, 1980. Regulations were issued in November of 1981.

1981 – The IRS issued proposed regulations on 401(k) plans that sanctioned the use of employee salary reductions as a source of retirement plan contributions. Many employers replaced older, after-tax thrift plans with 401(k)s and added 401(k) options to profit-sharing and stock bonus plans.

Although a tax code provision permitting cash or deferred arrangements (CODAs) was added in 1978 as Section 401(k), it was not until November 10, 1981 that the IRS formally described the rules for these plans. In the years immediately following the issuance of these rules, large employers typically offered 401(k) plans as supplements to their Defined Benefit plans, with few employers offering them to employees as stand-alone retirement plans. November 10, 1981 marks the birth of the modern 401(k) plan. After that date, companies began to add 401(k) contributions to their profit-sharing plans, convert after-tax thrift-savings plans to 401(k) plans, or create new 401(k)-type DC plans.

Within two years, surveys showed that nearly half of all large firms were either already offering a 401(k) plan or considering one.

Over the years, most notably in 1974 and 1981, the rules for plans covering self-employed individuals were liberalized and elaborated, and rules applicable to all plans, including those covering only common law employees, were tightened by subjecting them to some of the restrictions originally applicable only to plans covering self-employed persons.

In 1982, Congress adopted a unified system for all qualified plans, including those covering self-employed persons, finding the logic of a unified system so obvious that only a single sentence was sufficient to justify the change: “Congress believed that the level of tax incentives made available to encourage an employer to provide retirement benefits to employees should generally not depend upon whether the employer is an incorporated or unincorporated enterprise.

In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) took another step to spur saving through 401(k) and other DC plans. EGTRRA increased the annual Defined Contribution plan contribution limit, albeit not higher than the $45,475 limit in place in 1982. In addition, the restrictions placed on employee deferrals were loosened as the limit on pre-tax contributions was increased and additional “catch-up” contributions were allowed for employees age 50 and older. With the goal of preserving retirement accounts even when job changes occur, EGTRRA increased the opportunities for rollovers among various savings vehicles (401(k) plans, 403(b) plans, 457 plans, and IRAs). In addition, EGTRRA permitted 401(k) plans to offer a “Roth” feature for after-tax contributions.

Prior to 2002, most self-employed individuals tended to use a SEP IRA or SIMPLE IRA as a retirement vehicle. However, in 2002 the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) became effective and generally provided the small business owner with no employees or the self-employed the same advantages/benefits of a conventional 401(k) Plan.

EGTRRA includes various reforms that contributed to the growing popularity of the Solo 401(k) Plan versus the SEP IRA and SIMPLE IRA. Below is a list of several key EGTRRA provisions that led to growth in popularity of the Solo 401(k) Plan:

1. EGTRRA increased the deductible profit sharing contribution limit from 15 percent to 25 percent of employees compensation and changed the application of deferrals so that they are not counted against the employer’s maximum deductible contribution amount.

2. EGTRRA increased the annual contribution limit per plan participant to the lesser of an annual maximum dollar amount of 100 percent of the partcipant’s compensation. Prior to EGTTRA, an eligible participant of a Solo 401(k) Plan was not eligible to make employee deferrals.

3. EGTRRA created the designated Roth contribution option for 401(k) and 403(b) plans. This provision allowed plan participants to designate all or a portion of their employee deferrals as Roth (after-tax) contributions.

EGTRRA modified Internal Revenue Code Section 4975(f)(6) to allow for the expansion of the loan feature to apply to unincorporated business (a sole proprietorship). Legislation passed in August 2006, the Pension Protection Act (PPA), also aims to foster retirement savings and 401(k) plan participation. Among its many provisions, the Act makes the EGTRRA pension rule changes permanent and, additionally, makes some of the rules governing pension plans more flexible. For example, the PPA encourages employers to automatically enroll employees in their 401(k) plans and allows employers to offer appropriate default investments. These measures seek to increase participation in 401(k) plans and facilitate the best use of these plans’ options by workers.

The marketing for this type of plan is aimed at business owners who do not have any employees, other than themselves and perhaps their spouse. Many of the advantages of these Solo 401K plan generally vanish if the employer expands the business and hires more employees since the employer would now be required to adopt a conventional Solo 401K Plan and must include the new employee(s) in the plan. No matter what the plan is called, it must meet the rules of the Internal Revenue Code. If employees are hired and they meet the eligibility requirements of the plan and the Code, they must be included.

Thus, the Solo 401K Plan is an IRS approved plan that was initially established into law in 1962 but was greatly enhanced by the 2002 EGTRRA law. Now, the Solo 401K Plan is the most popular retirement plan for the self-employed or small business owner.

As of 2013, The 401(k) plan retirement system now holds $2.8 trillion in assets on behalf of more than 50 million active participants and millions of former employees and retirees. The number of workers covered by 401(k) plans continues to expand, which has been a result of rules attempted to encourage more employers, small and large, to open 401(k) plans by making them as simple and accessible as possible.

To learn more about the advantages of using a Solo 401(k) Plan, please contact one of our Solo 401(k) Plan experts at 800-472-0646 for more information.

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Oct 16

Why Use the IRA Financial Group to Establish Your Solo 401(k)?

Excellence: Our in-house retirement tax professionals have worked at some of the largest law firms in the United States, including White & Case LLP and Dewey & LeBoeuf LLP. Their tax and ERISA experience is unmatched in the industry and is the reason we are considered the leading facilitator of true “Checkbook Control” Solo 401K Plan structures.

Why Use the IRA Financial Group to Establish Your Solo 401(k)?Work directly with our in-house retirement tax professionals to set-up an IRS compliant Solo 401K Plan. Our clients have direct access to our in-house retirement tax professionals to ensure that the Solo 401K Plan is customized to satisfy the client’s retirement and investment objectives. In fact, we encourage our clients to contact our in-house retirement tax professionals with any tax and ERISA questions concerning the structure or a proposed investment to ensure full IRS compliance.

Our Solo 401K experts will take care of the entire set-up of your IRS compliant Solo 401K Plan. Our Solo 401K Plan experts and tax and ERISA professionals are on site greatly reducing the set-up time and cost. You will find that our fee for this service is significantly less than other companies that perform the same or similar services.

Leader: IRA Financial Group is the markets leading provider of Solo 401K Plans. We have helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investments.

Value: We strive to offer our clients customized Solo 401K Plans at a fair and reasonable price. Whereas our competitors are forced to outsource much or all of their tax work and consultation, each client of the IRA Financial Group is assigned to one of our in-house retirement tax professionals allowing us to offer customized Solo 401K Plans for significantly less than our competitors.

We provide the following all for one low price:

  • Free tax consultation with our in-house tax and ERISA professionals
  • Adoption Agreement
  • Basic Plan Document
  • EGTRRA Amendment
  • Summary Plan Description
  • Trust Agreement
  • Appointment of Trustee
  • Beneficiary Designation
  • Loan Procedure
  • Loan Promissory Note
  • Free tax updates
  • Free tax and ERISA support
  • Satisfaction Guaranteed!

Integrity: We are guided by the rules of ethical conduct in all that we do. Our relationships with clients are built on trust, respect, and confidentiality.

Innovate: We anticipate the changing tax and financial needs of our clients and creatively adapt our Solo 401K Plan tax solutions to address them.

Results: We are committed to our clients’ satisfaction and strive to meet and exceed our clients’ expectations.

IRA Financial Group will take care of everything. The whole process can be handled by phone, email, fax, or mail. Our expert tax and ERISA professionals are on site greatly reducing the set-up time and cost. Most importantly, you will find that our fee for this service is significantly less than other companies that perform the same or similar services.

Please contact one of our Solo 401K Experts at 800-472-0646 for more information.

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Oct 10

Solo 401(k) Asset Protection

Retirement accounts have become many Americans’ most valuable assets. That means it is vital that you have the ability to protect them from creditors, such as people who have won lawsuits against you.

In general, the asset/creditor protection strategies available to you depend on the type of retirement account you have (i.e. Traditional IRA, Roth IRA, or 401(k) qualified plan, etc.), your state residency, and whether the assets are yours or have been inherited.

Federal Protection for 401(k) Plan Qualified Plan for Bankruptcy

Effective for bankruptcies filed after October 17, 2005, the following rules give protection to a debtor’s retirement funds in bankruptcy by way of exempting them from the bankruptcy estate. The general exemption found in sec­tion 522 of the Bankruptcy Code, 11 U.S.C. §522, pro­vides an unlimited exemption for retirement assets ex­empt from taxation for Section 401(a) (tax qualified retirement plans—pen­sions, profit-sharing and section 401(k) plans). Thus, ERISA qualified plans as well as Solo 401(k) plans are afforded full bankruptcy exemption. What this means is that if a participant of a 401(k) Plan declares bankruptcy, his or her 401(k) plan assets will be exempt from the bankruptcy proceeding and could not be attached by the bankruptcy’s estates creditors.

Federal Protection for 401(k) Plan Qualified Plan Funds Outside of Bankruptcy

In the case of a debtor who is not under the ju­risdiction of the federal bankruptcy court but rath­er has become involved in a state law insolvency, enforcement, or garnishment proceeding, the 2005 Bankruptcy Act is inapplicable and the ERISA rules and state laws would govern.

Title I of ERISA requires that a pension plan provide that benefits under the plan may not be assigned or alienated; i.e., the plan must provide a contractual “anti‑alienation” clause. For the anti-alienation clause to be effec­tive, the underlying plan must constitute a “pension plan” under ERISA. Such a plan is any “plan, fund or program which…provides retirement income to employees.” ERISA §3(2)(A).. Therefore, a plan that does not benefit any common-law employee is not an ERISA pension plan. As a result, a Solo 401(k) Plan is not treated as an ERISA Plan.

In addition to the ERISA protection, the Internal Revenue Code Section 401(a)(13(A) provides that “[a] trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that benefits provided under the plan may not be assigned or alienated. Thus, a retirement plan will not attain qualified status unless it precludes both volun­tary and involuntary assignments.

Note – neither ERISA nor Code protections apply to assets held under individual retirement arrange­ments, simplified employee pension plans, govern­ment plans, or most church plans.

Furthermore, ERISA sec­tion 514(a) provides that ERISA supersedes state laws insofar as such laws relate to employee benefit plans. The ERISA anti-alienation and preemption provisions combine to make state attachment and garnishment laws inapplicable to an individual’s benefits under an ERISA-covered employee ben­efit plan.

Exceptions

There are a number of exceptions to ERISA’s and the Code’s anti‑alienation provisions:

1. Qualified domestic relations orders (“QDROs”), as defined in Internal Revenue Code Section 414(p), may be exempted (Internal Revenue Code §401(a)(13)(B); ERISA §206(d)(3)). This means that retirement plan assets are a marital asset sub­ject to division in divorce and attachment for child support.

2. Up to 10 percent of any benefit in pay status may be voluntarily and revocably assigned or alienated (Internal Revenue Code §401(a)(13)(A); Treas. Reg. §1.401(a)-13(d)(1); ERISA §206(d)(2)).

3. A participant may direct the plan to pay a ben­efit to a third party if the direction is revocable and the third party files acknowledgment of lack of en­forceability (Treas. Reg. §1.401(a)-13(e)).

4. Federal tax levies and judgments are exempt­ed. The Treasury Regulations under Code section 401(a)(13) provide that plan benefits are subject to attachment by the IRS in common law and com­munity property states.

In addition to the statutory exceptions noted above, several court decisions have held that an individual’s retirement plan benefits may be sub­ject to attachment for federal criminal penalties or restitution arising from a crime

Solo 401(k) Plans

A debtor’s plan benefits under a pension, prof­it-sharing, or section 401(k) plan are generally safe from creditor claims both inside and outside of bankruptcy due to ERISA and the Code’s broad anti-alienation protections. However, case law and Department of Labor Regulations have held that such a plan that benefits only an owner (and/or an owner’s spouse) are not ERISA plans, thus voiding the anti-alienation protections generally afforded to ERISA plans. Thus, state law will govern the protection afforded to Solo 401(k) Plans outside the bankruptcy context.

State Law Protection of Solo 401(k) Plan Assets Outside of Bankruptcy

Because case law and Department of Labor Regulations have held that such a plan that benefits only an owner (and/or an owner’s spouse) are not ERISA plans, thus voiding the anti-alienation protections generally afforded to ERISA plans, state law will govern the protection afforded to Solo 401(k) Plans outside the bankruptcy context.

Click here to find your state.

Asset Protection Planning

The different federal and state creditor protection afforded to 401(k) qualified plans and IRS inside or outside the bankruptcy context presents a number of important asset protection planning opportunities.

If, for example, you have left an employer where you had a qualified plan, rolling over assets from a qualified plan, like a 401(k), into an IRA may have asset protection implications. For example, if you live in or are moving to a state where IRAs are not protected from creditors or have in excess of $1million dollars in plan assets and are contemplating bankruptcy, you would likely be better off leaving the assets in the company qualified plan.

Note – If you plan to leave at least some of your IRA to your family, other than your spouse, the assets may not be protected from your beneficiaries’ creditors, depending on where the beneficiaries live. IRA assets left to a spouse would likely receive creditor protection if the IRA is re-titled in the name of the spouse. However, you will likely be able to protect your IRA assets that you plan on leaving to your family, other than your spouse, by leaving an I.R.A. to a trust. To do that, you must name the trust on the IRA custodian Designation of Beneficiary Form on file.

The Solo 401(k) Asset & Creditor Protection Solution

By having and maintaining a Solo 401(k) Plan, the people to whom you owe money – as a result of normal debt, bankruptcy or a civil court judgment – will likely not be able to reach your Solo 401(k) assets to satisfy the debt. However, Solo 401(k) Plan assets are not federally protected from divorce settlements or federal tax liens. As illustrated above, most states will afford Solo 401(k) Plans full protection from creditors outside of the bankruptcy context.

Please contact one of our Solo 401(k) Experts at 800-472-0646 for more information.

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Oct 07

The IRS Position on the ROBS Structure

The Employee Retirement Income Security Act of 1974 (otherwise known as ERISA) and the Internal Revenue Code clearly allow for the use of retirement funds to acquire or invest in a new or existing business as long as the transaction complies with IRS and ERISA rules and regulations.

Business owners have been using retirement funds to help acquire or invest in a business for a number of years. A number of promoters have promoted these types of transactions under the name “ROBS”. Even though this type of transaction is permitted under IRS and ERISA rules, the IRS believed a significant number of the promoters were not taking the necessary steps to structure a transaction that is in full compliance with IRS and ERISA rules.

The October 1, 2008 Memorandum

On October 1, 2008, Michael Julianelle, Director, Employee Plans, signed a “Memorandum” approving IRS ROBS Examination Guidelines. The IRS stated that while this type of structure is legal and not considered an abusive tax avoidance transaction, the execution of these types of transactions, in many cases, have not been found to be in full compliance with IRS and ERISA rules and procedures. In the “Memorandum”, the IRS highlighted two compliance areas that they felt were not being adequately followed by the promoters implementing the structure during this time period.

The first non-compliance area of concern the IRS highlighted in the “Memorandum” was the lack of disclosure of the adopted 401(k) Plan to the company’s employees. The IRS believed that in too many instances the promoter was establishing a 401(k) Plan that was not adequately disclosed to all employees. Internal Revenue Code Section 401(a)(4) provides that under a qualified retirement plan, contributions or benefits provided under the plan must not discriminate in favor of highly compensated employees. In addition, the promoters were encouraging the business owner who had used their retirement funds to purchase company stock to not provide the same benefit to their employees.

The second non-compliance area of concern the IRS highlighted in the “Memorandum” was establishing an independent appraisal to determine the fair market value of the business being purchased.

Internal Revenue Code Section 4975(c)(1 )(A) defines a prohibited transaction as a sale, exchange or lease of any property between a plan and a disqualified person. Internal Revenue Code Section 4975(d)(13) provides an exemption from prohibited transaction consideration for any transaction that is exempt from ERISA Section 406, by reason of ERISA Section 408(e), which addresses certain transactions involving employer stock. ERISA Section 408(e), and ERISA Regulation Section 2550,408e promulgated thereunder, provides an exemption from ERISA Section 406 for acquisitions or sales of qualifying employer securities, subject to a requirement that the acquisition or sale must be for “adequate consideration.” Except in the case of a “marketable obligation”, adequate consideration for this purpose means a price not less favorable than the price determined under ERISA Section 3(18). ERISA Section 3(18) provides in relevant part that, in the case of an asset other than a security for which there is no generally recognized market, adequate consideration means the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan and in accordance with regulations.

An exchange of company stock between the plan and its employer-sponsor would be a prohibited transaction, unless the requirements of ERISA Section 408(e) are met (the acquisition or sale of the qualifying employer securities must be for adequate consideration).

Therefore, valuation of the purchase corporate stock is a relevant issue. Since, in some cases, the company may be newly established, there could be a question of whether the stock is indeed worth the value of the purchase price exchanged. If the transaction has not been for adequate consideration, it would have to be corrected, for example, by the corporation’s redemption of the stock from the plan and replacing it with cash equal to its fair market value, plus an additional interest factor for lost plan earnings. In addition, the IRS asserts that a valuation-related prohibited transaction issue may arise where the start-up enterprise does not actually “start-up.” Many promoters have been advising clients that they do not need to secure appraisal which would seemingly contradict the IRS’s position outlined in the “Memorandum”. In addition, the promoters who have provided clients with a valuation have been providing clients with a single line valuation statement generally approximating available retirement funds, which the IRS considers inadequate.

The August 27, 2010 IRS Public Phone Forum

On August 27, 2010, almost two years after publishing the “Memorandum”, the IRS held a public phone forum open to the public which covered transactions involving using retirement funds to purchase a business. Monika Templeman, Director of Employee Plans Examinations and Colleen Patton, Area Manager of Employee Plans Examinations for the Pacific Coast spent considerable time discussing the IRS’s position on this subject. Monika Templeman began the presentation reaffirming the IRS’s position that a transaction involving the use of retirement funds to purchase a new business is legal and not an abusive tax-avoidance transaction as long as the transaction complies with IRS and ERISA rules and procedures. The concern the IRS has had with these types of transactions is that the promoters who have been offering these transactions have not had the expertise to develop structures that are fully compliant with IRS and ERISA rules and regulations. The IRS added that a large percentage of the transactions they reviewed were in non-compliance largely due to the following non-compliance issues: (i) failure by the promoters to develop a structure that requires the new company to disclose the new 401(k) Plan to the company’s employees and, (ii) the failure to require the client to secure an independent appraisal to determine the fair market value of the company stock being purchased by the 401(k) Plan. The IRS concluded by stating that a transaction using retirement funds to acquire a business is legal and not prohibited so long as the transaction is structured correctly to comply with IRS and ERISA rules and procedures.

The IRA Financial Group’s Solution

In light of the 2008 “Memorandum” and the most recent IRS comments outlined on the August 27, 2010 public phone forum, the IRA Financial Group’s in-house tax and ERISA professionals spent the better part of two years studying IRS materials and guidance in order to design an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax-free! Unlike our competitors who have been offering this type of structure for many years, which according to the IRS, a significant portion have been found to be non-compliant, the IRA Financial Group has patiently waited for clear IRS guidance before offering a structure that would be fully compliant with IRS and ERISA rules and procedures.

BACSS was developed to specifically address and solve each of the non-compliant areas addressed by the IRS creating a business acquisition and funding solution that is in full compliance with IRS and ERISA rules and procedures. Because the IRS has stressed the importance of compliance when using retirement funds to purchase a business, it is crucial to work with a company that is operated by a team of in-house tax and ERISA professionals who have worked at some of the largest law firms in the United States, including White & Case LLP and Dewey & LeBoeuf LLP to ensure the structure satisfies IRS and ERISA rules and procedures.

Contact us today at 800-472-0646 to learn more about how you can use your retirement funds to start a new business or grow an existing business tax-free, in full IRS compliance, and without penalties!

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Sep 10

The Law Concerning Solo 401k Plans

The Employee Retirement Income Security Act of 1974 ( ERISA) ( Pub.L. 93-406, 88  Stat. 829, enacted September 2, 1974) is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA contained sweeping changes in the regulation of pension plans, and created rules regarding reporting and disclosure, funding, vesting, and fiduciary duties. Although ERISA was aimed mostly at “assuring the equitable character” and “financial soundness” of pension plans, the Act contained numerous provisions impacting plans (like profit-sharing plans, and eventually 401(k) plans). For example, ERISA contained a provision that allowed plans to delegate investment responsibility to participants and thereby relieve the plan sponsor from investment responsibility, which today is the basis for participant-directed 401(k) plans.

The law concerning the Solo 401k PlanIn 1978, Congress amended the Internal Revenue Code by adding section 401(k), whereby employees are not taxed on income they choose to receive as deferred compensation rather than direct compensation. The law went into effect on January 1, 1980. Although a tax code provision permitting cash or deferred arrangements (CODAs) was added in 1978 as Section 401(k), it was not until November 10, 1981 that the IRS formally described the rules for these plans.

The “one-participant 401(k) plan” is an IRS approved type of qualified plan, which is suited for business owners who do not have any employees, other than themselves and perhaps their spouse. The “one-participant 401(k) plan” is not a new type of plan. It is a traditional 401(k) plan covering only one employee. The plans have the same rules and requirements as any other 401(k) plan. The surging interest in these plans is a result of the EGTRRA tax law change that became effective in 2002. The law changed how salary deferral contributions are treated when calculating the maximum deduction limits for contributions to a 401(k) plan. This change created an opportunity for some people to put away additional amounts toward their retirement.

It was not until the late 1990s that the regulatory climate began to change for 401(k) plans. In 1996, as part of a package of reforms aimed at bolstering small businesses— the Small Business Job Protection Act of 1996 (SBJPA) , Congress acted to encourage employers to offer retirement plans, including 401(k) plans. The SBJPA simplified nondiscrimination tests and repealed rules imposing limits on the contributions that could be made to a retirement plan by an employee that also participated in a DB plan. In addition, starting in the late 1990s, the IRS issued a series of rulings allowing automatic enrollment.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) contained many provisions that affected qualified retirement plans in a positive way. Two of the most significant changes were the increase in the maximum salary deferral amount for 401(k) plans along with a “catch-up” contribution and the ability to receive an allocation under the plan.

According to the IRS, there are approximately one million private retirement plans covering over 99 million participants.

IRS Publication 560 sets forth the general rules pertaining to a small business retirement plan, such as a Solo 401(k) Plan.

For additional information on the legality of the Solo 401(k) Plan, please contact one of our 401(k) Experts at 800-472-0646.

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Aug 25

The Plan Asset Rules

The Department of Labor (“DOL”) Plan Asset Rules were generally enacted to limit an investment fund participant from using his retirement funds to transact with the investment fund or its assets. The Plan Asset Rules set forth the circumstances that can cause assets owned by an entity to be deemed to be assets of an ERISA qualified plan (i.e. 401(k) Plan) or an IRA unless an exemption applies.  Under the Plan Assets Rules, if an IRA/401(k) Plan owns greater than 25% of an investment entity that is neither a “publicly-offered security” nor a mutual fund, the equity interests and assets of the “investment company” will be deemed assets of the IRA/401(k). This is sometimes referred to as the “Look- Through Rule”. Under the “Look-Through Rules, if a retirement plan owns 25% or more of any class of equity interests in an “investment company”, the Plan Asset Rules state that the assets of the entire “investment company” are deemed to be assets of the IRA/401(k).  In other words, if your IRA owns 25% or more of the membership interests of a LLC engaged in passive investments (i.e. private equity fund, hedge fund, or real estate fund), the assets of the LLC are deemed to be assets of the IRA. If the Plan Asset Rules cause the assets of an “investment company” to be deemed to be assets of the IRA/401(k), any transaction involving the “investment company” and a disqualified person will be a prohibited transaction.

Plan Asset Rules

The DOL’s Plan Asset Rules essentially define when the assets of an entity are considered ‘Plan” assets. Under the rules, IRAs are frequently viewed as pension plans subjecting them to the Plan Asset Rules. Under the Plan Asset Rules, if the aggregate plan (IRA/401(k)) ownership of an entity is 25% or more of all the assets of the entity, then the equity interests and assets of the “investment entity” are viewed as assets of the investing IRA/401(k) for purposes of the prohibited transactions rules, unless an exception applies. Also, if a plan (i.e. IRA or 401(k)) or group of related plans owns 100% of an “operating company”, the operating company exception will not apply and the company’s assets will still be treated as plan assets.

In summary, the Plan Asset Rules can be triggered if:

  • 100% of an “operating company” is owned by one or more IRAs/401(k) and disqualified persons, in which case all the assets of the “operating company” are deemed Plan assets (assets of the IRA/401(k)), or
  • If 25% or more of an “investment company” is owned by IRAs/401(k) and disqualified persons, in which case all the assets of the “investment company” are deemed Plan assets (assets of the IRA/401(k)). In determining whether the 25% threshold is met, all IRAs/401(k) owners are considered, even if they are owned by unrelated individuals.

Exceptions to the DOL Plan Asset Regulations

The Plan Asset look-through rules do not apply if the entity is an operating company or the partnership interests or membership interests are publicly offered or registered under the Investment Company Act of 1940 (e.g., REITs). They also do not apply if the entity is an “operating company,” which refers to a partnership or LLC that is primarily engaged in the real estate development , venture capital or companies making or providing goods and services, such as a gas station, unless the “operating company” is owned 100% by a Plan and/or disqualified persons. In other words, if an IRA or 401(k) Plan owns less than 100% of an LLC that is engaged in an active trade or business, such as a restaurant or manufacturing plant, the Plan Asset Rules would not apply. However, the IRA or 401(k) Plan investment may still be treated as a prohibited transaction under Internal Revenue Code Section 4975. In addition, the Unrelated Business Taxable Income may apply to subject to the IRA or 401(k) Plan to tax on the income or gains generated from the operating business.

How can the Plan Asset Rules Impact my IRA/401(k) Plan Investments ?

The Plan Asset Rules are typically only triggered if your IRA/401(k) Plan assets will own greater than 25% of an investment company (i.e. a passive investment fund) or will own 100% of an operating company (i.e. gas station). In general, the majority of investments involving IRA/401(k) Plan funds will not cause the Plan Asset Rules to trigger a prohibited transaction. For example, any direct purchase of real estate, precious metals, tax liens, or lending transaction not involving a disqualified person will likely not trigger the prohibited transaction rules or Plan Asset Rules. Even if the Plan Asset Rules were to apply, as long as a disqualified person is not involve in a transaction with the investment entity, the prohibited transaction rules would not apply.

Consequences of a Transaction Falling under the Plan Asset Rules

If your Self Directed IRA LLC or 401(k) Plan investment involves an investment in one of the following: (i) an “operating company” that your IRA will own 100% of, or (ii) an investment company in which 25% of more of the “investment company” is owned by IRAs/401(K) Plans and disqualified persons, then all assets of the entity are deemed owned by the IRA/401(k) and all transactions between the investment entity or its assets and a disqualified person may be prohibited.

Note: The fact that a transaction does not trigger the Plan Asset Rules does not mean that the transaction may not be deemed a prohibited transaction under Internal Revenue Code Section 4975. In other words, a transaction that does not fall under the Plan Asset Rules can still be treated as a prohibited transaction.

The following are a number of examples that demonstrate the scope of the Plan Asset Rules.

Example 1: A general partner of a hedge fund wishes to invest his Self Directed IRA LLC in the hedge fund he manages. If the percentage of IRA ownership, including what it would be after the General Partner invests his IRA in the fund, equals or exceeds 25% of the equity interests, then the fund’s assets are considered “plan asset.” That means that a transaction between the general partner, as a disqualified person, and the fund, could be deemed a prohibited transaction because the assets of the fund are viewed as assets of his IRA, since a disqualified person cannot transact with the assets of his plan or IRA. Accordingly, the General Partner cannot receive benefits from his IRA investment into the fund. Thus the General Partner would not be permitted to receive any management fees associated with the IRA’s ownership interest in the fund because he would be receiving a personal benefit from his IRA. Note – the General Partner’s IRA investment in the fund may also be deemed a direct or indirect prohibited transaction under Internal Revenue Code Section 4975.

Example 2: Jane ‘s Self Directed IRA LLC owns 100% of ABC, LLC, which operates a retail store. ABC, LLC makes a loan to Jane. The loan is subject to the Plan Asset Rules and will also be considered a prohibited transaction pursuant to Internal Revenue Code Section 4975. Note – any income generated by ABC, LLC that is allocated to the Self Directed IRA LLC would also likely be subject to the Unrelated Business Income tax.

Example 3: Steve’s Self Directed IRA LLC owns 15% of ABC, LLC, an investment company. Allan’s IRA owns 20% of ABC, LLC. Steve and Allan are unrelated. Since IRAs (Plans) own greater than 25% of ABC, LLC, an “investment company”, assets of ABC, LLC are Plan Assets and deemed owned by each IRA. Thus, if ABC, LLC makes a loan to Steve’s father, the loan would be a prohibited transaction under Internal Revenue Code Section 4975.

Example 4: Robert’s Self Directed IRA LLC invests in ABC, LLC, which will purchase a gas station, an “operating company”. Robert will take an annual salary of $50,000 to run the gas station. The payment of the salary would be a “prohibited transaction” under Internal Revenue Code Section 4975 (self dealing indirect prohibited transaction). Note – any income generated by the as station that is allocated to the Self-Directed IRA LLC would also likely be subject to the Unrelated Business Income tax.

Please contact one of our Retirement Experts at 800-472-0646 for more information.

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