In many respects, ROBS plans are a terrific way to fund a new business. But, as we have discussed in prior blog posts, a ROBS company must make sure to operate the plan as a qualified retirement plan, with all the requirements that entails.
One such compliance task is the annual Form 5500 filing. Unfortunately, we have found that many professionals within the industry mistakenly tell ROBS owners that they don’t need to file a Form 5500. This is incorrect.
With limited exceptions, all qualified retirement plans must file a Form 5500 (Annual Report) with the Department of Labor each year.
A narrow exception to the Form 5500 filing requirement is for a plan that only covers a company owner (or an owner and the owner’s spouse) and that has less than a certain amount of plan assets. The one-participant plan exception is found in the instructions to the Form 5500-EZ (Form 5500-EZ’s are filed with the IRS for one-participant plans). While it may seem possible for a ROBS plan to meet both of these conditions, in fact, the ownership condition for the exception cannot be met by any ROBS plan because the one participant must wholly, and directly, own the company sponsoring the plan. Because the ROBS owner owns the company indirectly, through their plan account, they can never be the only owner of the company sponsoring the plan. The IRS expressly addresses this issue on its website:
Many ROBS sponsors did not understand that a qualified plan is a separate entity with its own set of requirements. Promoters incorrectly advised some sponsors they did not have an annual return filing requirement because of a special exception in the Form 5500-EZ instructions for ‘one-participant’ plans. The exception applies when plan assets are less than a specified dollar amount (currently $250,000) and the plan covers only an individual, or an individual and his or her spouse, who wholly own a trade or business. In a ROBS arrangement, however, the plan, through its company stock investments, rather than the individual, owns the trade or business. Therefore, this filing exception does not apply to a ROBS plan, and the annual Form 5500 is still required.
—From the IRS website page for Rollovers as Business Start-Ups Compliance Project, emphasis added, as visited on February 27, 2023
The fact that a ROBS plan is not a “one-participant” plan not only disqualifies a ROBS plan from the exemption from filing a Form 5500-EZ, it means that a ROBS plan cannot file on a Form 5500-EZ at all because that form is only for “one-participant” plans. Furthermore, Form 5500-SF may not be used by plans that hold employer securities, so that is also not an option for a ROBS plan. Therefore, only Form 5500 is available to a ROBS plan.
Don’t despair if you have missed filings. If you are one of the many ROBS owners who did not file required Form 5500s, or filed on the incorrect form, you may be able to fix that under the DOL’s delinquent filer program, which permits filing with reduced and capped penalties.
So know that ROBS plans are always, always required to file a Form 5500. Don’t let anyone tell you differently.