_An Entrepreneur and “Qualified” Money ...
People become entrepreneurs because they decide to take control of their own destiny by starting or buying a business. They made the decision to "invest in yourself". But with this decision comes the very significant problem of getting the small business venture financed. In many cases, the entrepreneur’s invesable assets are held primarily in qualified retirement plans such as IRAs, pensions and 401(k) plans.
Qualified retirement assets enjoy one or another kind of preferred tax treatment, typically tax deferral until the assets are withdrawn from a given account. If improperly accessed, these qualified assets are exposed to a 10% penalty and often 40% or more in federal and state income taxes. Depending on a person’s tax bracket and the state of residence, total penalties along with federal and state taxes can approach 50%.
So, the question to be answered is...
“If you choose to invest in yourself, how can a person access his or her retirement funds to purchase or capitalize a business while preserving tax deferral and avoiding penalties?”
A Brief Background on the Evolution of Retirement Plans and Small Business Investments...
Fortunately, federal law provides for exactly that, as the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) enables entrepreneurs to access accumulated retirement money to capitalize their businesses.
EGTRRA relaxed the portability rules for retirement plans, allowing assets created in several types of retirement plans to be rolled into each other. For example, prior to passage of EGTRRA, a 401(k) Plan could only hold funds created in a 401(k) Plan. Under EGTRRA, funds created in other plans such as IRAs, defined benefit plans, traditional pensions, 403(b), etc...plans can be rolled into a single 401(k).
This ability to transfer funds between plan types expanded the planning opportunity for those who choose to invest in yourself to use retirement funds as a business capitalization source.
When a business establishes a retirement plan such as a 401(k), the business becomes a “plan sponsor.” Once the plan is active, investment options are made available to the plan’s participants, who then select their investment options, preferably with the guidance of fiduciary-minded investment professionals.
Retirement plans have had the ability to include the plan sponsor—that is, debt or equity issued by the company itself—as an investment option since the passage of the Employee Retirement Income Security Act of 1974 (ERISA). However, ERISA imposes certain restrictions on a retirement plan’s ability to invest in a plan sponsor’s securities. In addition, the law limits the amount of funds that can be invested in a sponsor’s securities for plans that are allowed to invest in such securities.
ERISA does not prohibit a plan’s acquisition or sale of qualifying employer securities of the sponsor and no limitation on the amount of funds that can be invested in a plan sponsor if the plan is an “eligible individual account plan.” An eligible individual account plan is defined as an individual account plan which is a profit-sharing, stock bonus, thrift, or savings plan. 401(k) plans fall under this definition.
When Investing in Employer Stock, Failure to Properly Manage and Administer a Retirement Plan Will Create a Compliance Storm with the IRS
On October 1, 2008, with the issuance of a Director Memorandum to its field agents, the Internal Revenue Service, for the very first time, addressed the use of retirement funds being used as a business capitalization source. In the Director Memorandum the IRS identifies the use of retirement money as a business capitalization source as an arrangement known as Rollover as Business Startups.
The IRS is, in part, looking for the following during a review a plan:
The memorandum highlights a big issue which is generally true for retirement plans...Compliance is not about being compliant when a plan is formed because being compliant at the start is the easy part. Compliance is about how the plan is managed and administered over time. Time will be the best indicator as to whether the entrepreneur established the plan to be a real retirement plan or whether the plan was established solely to benefit the entrepreneur. Individuals who self-deal or engage in other abusive tactics expose themselves to the long arm of the IRS. On the other hand, individuals who are compliant will hold up just fine under IRS scrutiny.
Find Out About the Compliant ERPA ...
The Entrepreneur Retirement Plan of America (ERPA) is a Multiple Employer Safe Harbor 401(k) and Profit Sharing Plan specifically designed to enable the plan to invest in an entrepreneur’s small business. This 401(k) plan is perfect for both existing and new businesses. An Entrepreneur can utilize the basic features of the plan by implementing the plan as the company’s sole retirement plan or its advanced features can be utilized to enable the plan to invest directly in the entrepreneur’s business.
The advanced features of the ERPA, which enable the plan to make an investment in the business, allow the entrepreneur to gain access to his or her accumulated retirement funds for business investment purposes without incurring tax liabilities or penalties. Invest in yourself with a plan that will stand the test of time.
Because the ERPA is managed by a professional team of trustees and fiduciaries, entrepreneurs who adopt the ERPA enjoy ongoing support in complying with Internal Revenue Service and Department of Labor rules and regulations.
People become entrepreneurs because they decide to take control of their own destiny by starting or buying a business. They made the decision to "invest in yourself". But with this decision comes the very significant problem of getting the small business venture financed. In many cases, the entrepreneur’s invesable assets are held primarily in qualified retirement plans such as IRAs, pensions and 401(k) plans.
Qualified retirement assets enjoy one or another kind of preferred tax treatment, typically tax deferral until the assets are withdrawn from a given account. If improperly accessed, these qualified assets are exposed to a 10% penalty and often 40% or more in federal and state income taxes. Depending on a person’s tax bracket and the state of residence, total penalties along with federal and state taxes can approach 50%.
So, the question to be answered is...
“If you choose to invest in yourself, how can a person access his or her retirement funds to purchase or capitalize a business while preserving tax deferral and avoiding penalties?”
A Brief Background on the Evolution of Retirement Plans and Small Business Investments...
Fortunately, federal law provides for exactly that, as the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) enables entrepreneurs to access accumulated retirement money to capitalize their businesses.
EGTRRA relaxed the portability rules for retirement plans, allowing assets created in several types of retirement plans to be rolled into each other. For example, prior to passage of EGTRRA, a 401(k) Plan could only hold funds created in a 401(k) Plan. Under EGTRRA, funds created in other plans such as IRAs, defined benefit plans, traditional pensions, 403(b), etc...plans can be rolled into a single 401(k).
This ability to transfer funds between plan types expanded the planning opportunity for those who choose to invest in yourself to use retirement funds as a business capitalization source.
When a business establishes a retirement plan such as a 401(k), the business becomes a “plan sponsor.” Once the plan is active, investment options are made available to the plan’s participants, who then select their investment options, preferably with the guidance of fiduciary-minded investment professionals.
Retirement plans have had the ability to include the plan sponsor—that is, debt or equity issued by the company itself—as an investment option since the passage of the Employee Retirement Income Security Act of 1974 (ERISA). However, ERISA imposes certain restrictions on a retirement plan’s ability to invest in a plan sponsor’s securities. In addition, the law limits the amount of funds that can be invested in a sponsor’s securities for plans that are allowed to invest in such securities.
ERISA does not prohibit a plan’s acquisition or sale of qualifying employer securities of the sponsor and no limitation on the amount of funds that can be invested in a plan sponsor if the plan is an “eligible individual account plan.” An eligible individual account plan is defined as an individual account plan which is a profit-sharing, stock bonus, thrift, or savings plan. 401(k) plans fall under this definition.
When Investing in Employer Stock, Failure to Properly Manage and Administer a Retirement Plan Will Create a Compliance Storm with the IRS
On October 1, 2008, with the issuance of a Director Memorandum to its field agents, the Internal Revenue Service, for the very first time, addressed the use of retirement funds being used as a business capitalization source. In the Director Memorandum the IRS identifies the use of retirement money as a business capitalization source as an arrangement known as Rollover as Business Startups.
The IRS is, in part, looking for the following during a review a plan:
- Permanence: Does the plan receive any form of ongoing contribution?
- Exclusive Benefit: The plan must be operated for the benefit of employees and their beneficiaries. Thus, as long as plan assets used to capitalize the business are not used for personal purposes and the plan is in fact operated to benefit the company’s employees and their beneficiaries, the exclusive benefit requirement should not be a problem.
- Benefits, Rights and Features Discrimination: The IRS has not specifically found that these plans typically discriminate against rank and file employees in coverage or contributions. So the IRS instead is looking at whether the plan is discriminating in favor of “highly-compensated employees.” The key issue to be reviewed here is the method by which the employer stock was offered and sold to the plan.
- Prohibited Transactions: The IRS will be looking at the employer stock transaction and whether the plan paid “adequate consideration.” This is where a valuation by an independent qualified business valuation is extremely important to confirm that the plan did not overpay for its employer stock investment. The IRS will also review the payment of plan implementation fees. The issue with the fees is to see if plan assets were indirectly used to pay the fees.
The memorandum highlights a big issue which is generally true for retirement plans...Compliance is not about being compliant when a plan is formed because being compliant at the start is the easy part. Compliance is about how the plan is managed and administered over time. Time will be the best indicator as to whether the entrepreneur established the plan to be a real retirement plan or whether the plan was established solely to benefit the entrepreneur. Individuals who self-deal or engage in other abusive tactics expose themselves to the long arm of the IRS. On the other hand, individuals who are compliant will hold up just fine under IRS scrutiny.
Find Out About the Compliant ERPA ...
The Entrepreneur Retirement Plan of America (ERPA) is a Multiple Employer Safe Harbor 401(k) and Profit Sharing Plan specifically designed to enable the plan to invest in an entrepreneur’s small business. This 401(k) plan is perfect for both existing and new businesses. An Entrepreneur can utilize the basic features of the plan by implementing the plan as the company’s sole retirement plan or its advanced features can be utilized to enable the plan to invest directly in the entrepreneur’s business.
The advanced features of the ERPA, which enable the plan to make an investment in the business, allow the entrepreneur to gain access to his or her accumulated retirement funds for business investment purposes without incurring tax liabilities or penalties. Invest in yourself with a plan that will stand the test of time.
Because the ERPA is managed by a professional team of trustees and fiduciaries, entrepreneurs who adopt the ERPA enjoy ongoing support in complying with Internal Revenue Service and Department of Labor rules and regulations.