Starting a business with your retirement funds can be a game-changing move for many entrepreneurs. But with great financial power comes great regulatory responsibility. If you’re using a Rollovers as Business Startups (ROBS) strategy to fund your franchise or startup, staying compliant with IRS and Department of Labor (DOL) regulations is crucial. Here’s what you need to know to keep your business—and yourself—on the right side of the law.
Understanding Key ROBS Regulations
When using ROBS funding, your business must be structured and operated according to specific federal guidelines:
- Operate an Active Business:
The IRS and DOL require that your business be an operating company—not a passive investment. This means your business must provide goods or services directly to consumers. Fortunately, this includes nearly all franchise models. - Be a Legitimate Employee:
You must be a bona fide employee of your business. Since the company-sponsored retirement plan can only be used by employees, paying yourself a salary is a simple and effective way to satisfy this rule and show the IRS you’re working in the business.
Best Practices to Maintain ROBS Compliance
Benetrends experts often recommend three golden rules for maintaining ROBS compliance:
- Active C Corporation:
Your business must be a C Corporation and remain an active, operating entity. This ensures it continues to meet IRS definitions and avoids reclassification issues. - Proper Use of ROBS Funds:
All ROBS funds must be used exclusively for legitimate business expenses—not personal ones. This is a crucial area where entrepreneurs can easily make mistakes. - Retirement Plan Management:
Your retirement plan must operate like a traditional investment vehicle and be offered to all full-time, eligible employees—not just you.
Common Compliance Mistakes—and How to Avoid Them
One of the most frequent pitfalls is not distinguishing between personal and business-related expenses. If you’re unsure whether an expense is compliant, ask yourself:
“If the IRS reviewed this expense, would they consider it personal or business?”
If the answer leans toward personal, it’s best to consult your plan analyst before moving forward.
Staying Informed on Regulatory Changes
The good news? ROBS rules and regulations don’t change frequently. However, it’s still critical to stay in the loop. At Benetrends, we proactively keep our clients updated on any relevant regulatory updates. Additionally, our plan analysts are always available to answer questions and help you navigate compliance concerns.
ROBS can be a powerful funding strategy, but only if you follow the rules. By understanding key regulations, adopting best practices, and leveraging the expertise of your Benetrends plan analyst, you can ensure long-term compliance and business success.
Have questions? Don’t guess—call your plan analyst. That’s what they’re there for.
Michael Schonberg, Senior Consultant
Contact Michael: https://www.benetrends.com/michael-schonberg/