ROBS & Plan Terms
| Term | Definition |
|---|---|
| ROBS | Rollover for Business Startups - a legal mechanism for using eligible retirement savings to capitalize a C-Corporation through a company-sponsored 401(k) plan without triggering an immediate taxable distribution |
| 401(k) Plan | An employer-sponsored retirement savings plan that allows employees to contribute pre-tax income. In ROBS, the plan also permits investment in employer stock |
| Qualifying Employer Securities | Stock issued by the employer that sponsors the plan. In ROBS, this is the C-Corporation stock purchased by the 401(k) plan |
| Trustee-to-Trustee Transfer | A direct rollover of retirement funds between plan trustees without the funds passing through the individual. No taxes are triggered |
| Plan Trust | The trust entity that holds 401(k) plan assets. It is the legal owner of the C-Corp stock purchased through the ROBS transaction. The founder’s plan account reflects the economic interest in those shares, and the Plan Administrator directs plan investment decisions subject to fiduciary duties. |
| Adoption Agreement | The document by which the C-Corporation formally adopts the 401(k) plan, specifying its terms and provisions |
| Trust Agreement | Establishes the trust that holds plan assets and defines the trustee’s fiduciary responsibilities |
| Funding Policy | The plan’s investment policy statement, including authorization to invest in employer securities |
| Summary Plan Description (SPD) | Participant-facing summary of plan terms and rights |
| Summary Annual Report (SAR) | Annual participant disclosure prepared from Form 5500 information |
| Plan Sponsor | The C-Corporation that sponsors the 401(k) plan |
| Form 5500 | Annual return filed with the DOL for employee benefit plans. Required for all 401(k) plans with assets |
| Plan Trust EIN | The Employer Identification Number assigned to the 401(k) plan trust, separate from the C-Corporation’s EIN. Required for annual Form 5500 filings. Nexus obtains it as part of plan setup. |
| Adoption Agreement (Execution Page / Addenda) | The Adoption Agreement is delivered in two parts: the execution page (pages 1-12) is the signable portion and is sent for electronic signature, while the addenda (pages 13+) contain detailed plan provisions as reference material. Both are stored in your document library. |
Tax & Compliance Terms
| Term | Definition |
|---|---|
| IRC 4975 | Internal Revenue Code section governing prohibited transactions for retirement plans. Violations trigger a 15% excise tax (100% if uncorrected) |
| ERISA | Employee Retirement Income Security Act - federal law governing employee benefit plans including 401(k)s |
| ERISA 408(e) | ERISA exemption allowing plans to acquire qualifying employer securities for adequate consideration |
| IRC 4975(d)(13) | IRC exemption for transactions exempt under ERISA 408(e) - the legal basis for ROBS |
| Prohibited Transaction | A transaction between a plan and a disqualified person that violates IRC 4975(c). Includes self-dealing, loans, property transfers, and kickbacks |
| Disqualified Person | A fiduciary, service provider, employer, or 50%+ owner with respect to the plan. As a ROBS founder, you are a disqualified person |
| Fiduciary | A person who exercises discretionary authority over plan management, assets, or administration |
| Excise Tax | A tax imposed on prohibited transactions - 15% of the amount involved per year, plus 100% if not corrected |
| Adequate Consideration | The fair market value standard for transactions involving plan assets. For publicly traded securities, it’s the market price; for private stock, it’s determined by good-faith fiduciary assessment |
| 409A Valuation | An independent appraisal of a private company’s fair market value under IRC 409A. Required for ROBS plan valuations after Year 1 |
| IRS Memo 2008-01-021 | IRS examination guidance for auditing ROBS transactions. Acknowledges ROBS as a recognized planning strategy while outlining audit procedures |
| QSBS (Qualified Small Business Stock) | Stock in a qualified small business that may be eligible for a federal capital gains exclusion under IRC 1202 (up to 100% exclusion after 5 years). Important: Shares held by a 401(k) plan trust do not qualify for QSBS treatment - QSBS requires direct individual ownership. Shares issued directly to founders (for example, via a fee reimbursement election in shares) may qualify if all other IRC 1202 requirements are met. |
Corporate Terms
| Term | Definition |
|---|---|
| C-Corporation | A standard corporation taxed separately from its shareholders. Required for ROBS because only C-Corps issue qualifying employer securities |
| S-Corporation | A corporation that elects pass-through taxation under Subchapter S. Cannot be used for ROBS because S-Corp stock does not work as qualifying employer securities for this structure |
| LLC | Limited Liability Company - a flexible business structure with pass-through taxation. Cannot be used for ROBS because membership interests are not the qualifying employer securities required for this structure |
| Par Value | The minimum nominal value assigned to each share of stock. The actual share purchase price is set based on the capitalization structure |
| Cap Table | Capitalization table - a record of all equity ownership, share classes, and transactions for the corporation |
| Share Class | A category of stock with specific rights (voting, dividends, liquidation preference). ROBS companies typically start with a single class of common stock |
| Board Resolution | A formal decision by the board of directors, documented in writing. Required for authorizing compensation, stock issuance, and other major corporate actions |
| Bylaws | Internal governance rules for the corporation - meeting procedures, officer duties, shareholder rights |
| Articles/Certificate of Incorporation | The founding document filed with the state to legally create the corporation |
| EIN | Employer Identification Number - the corporation’s tax ID, obtained from the IRS |
| Registered Agent | A person or entity designated to receive legal documents on behalf of the corporation in its state of incorporation |
Platform Terms
| Term | Definition |
|---|---|
| Nexus by Talcott Forge | Talcott Forge’s retirement-capital product line, currently focused on Nexus 401(k) and the ROBS setup and administration workflow |
| Client Setup Agreement | The service agreement between you and Talcott Forge for ROBS setup, reviewed and accepted before payment |
| Document Library | Your dashboard’s document section where all generated and signed documents are stored and downloadable |
| Electronic Signature | Documents requiring your signature are sent through our integrated e-signature platform and signed directly from your dashboard |
Case Law
| Case | What It Decided |
|---|---|
| Ellis v. Commissioner (2015) | Self-directed compensation without governance controls is a prohibited transaction. Salary itself is not prohibited - unchecked self-dealing is |
| Peek v. Commissioner (2013) | Personal guarantees on business debt are an indirect extension of credit to the plan - a prohibited transaction that disqualifies the entire plan |
| Swanson v. Commissioner (1996) | A corporation without shares or shareholders doesn’t fit the definition of a disqualified person - relevant to the timing of stock purchases |
Back to ROBS Overview
Return to the ROBS overview.