Glossary
ROBS & Plan Terms
| Term | Definition |
|---|---|
| ROBS | Rollover for Business Startups — a legal mechanism to use retirement savings as tax-free startup capital through a C-Corporation and 401(k) plan |
| 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 |
| 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 |
| Plan Highlights | A plain-language summary of plan terms provided to plan participants (required disclosure) |
| Form 5500 | Annual return filed with the DOL for employee benefit plans. Required for all 401(k) plans with assets |
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 |
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 |
| Par Value | The nominal value assigned to each share of stock. For new ROBS companies, stock is typically issued at $1.00/share par value |
| 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 |
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.