Specialists in ERISA and Employee Benefits Law​

KLB Benefits

The Advantages and Tax Effects of Dividends Paid to the ROBS Plan Account

In addition to providing operating funds to the ROBS corporation, a ROBS investment is also permitted to earn money back from the corporation, in the form of corporate dividends paid on the stock. For a successful ROBS venture, paying out dividends can help the ROBS plan account grow and also provides valuable diversification opportunities.

It is not required for a corporation to pay dividends; that is a business decision reserved for the ROBS corporation’s board of directors. The relevant considerations would include the corporation’s particular financial condition at any given time, its plans for future growth, and its appetite for keeping cash reserves in the corporate bank account. Note that any dividends to be paid must come from profits remaining after payment of corporate income tax. (Compare this with the tax effect of a company’s Employer Contribution(s) to the retirement plan, which are tax deductible.)

When paying a dividend, the corporation pro rates the payment, in cash, to all shareholders; so if a plan owns 99% of the corporation, the plan would receive 99% of the total dividend paid out. The ROBS participant would then be able to invest the dividend in traditional (non-ROBS) 401(k) investments offered within their retirement plan. In this way, dividends help the ROBS owner leverage their company investment to diversify their retirement savings.

For example, suppose there is a single ROBS owner whose plan account owns 98% of the company; she also owns 2% of the company outside the plan. Business has been great, and the corporation finds itself with $30,000 of unneeded cash at the close of 2022, after paying expenses and taxes, etc.

The company’s board of directors meets, and decides to save some of that extra cash ($13,000), and to pay the rest ($17,000) as a dividend. A corporate resolution is prepared and signed, declaring a dividend of $17,000; to pay it, the corporation writes two checks – one to the plan for 98% of $17,000, which is $16,660, and one to the ROBS owner for 2% of $17,000, or $340. 

The retirement plan account will not owe any tax upon receiving its dividend payment, and any gain earned on the investments made with that cash in the future will remain tax-deferred until such time as the ROBS owner receives a distribution from her plan account.

In short, a corporate dividend payment, if any, would provide an important opportunity for a ROBS owner to diversify their retirement investments, which is a significant advantage to be considered when the corporation is planning what to do with any extra cash it may have at the end of a profitable year.