401k distribution to a ROBS - Lacerte entry

[qbteachmt]

You posted in the Lacerte SDK (software developer's kit) users' section, not in the Tax Talk or end user community, by the way.

@Just-Lisa-Now-  can you see and move this topic for Kimberley? Thanks.

"as it relates to the tax preparer."

It depends on which part you are preparing. All of it? The 1040 only?

"What liability does the preparer carry when recording this transaction?"

Which part? Are you helping establish the retirement plan?

Summary:

I establish a C Corp, and then a retirement plan for that entity. I roll my existing 401(k) to this plan, and it is used to "buy shares" which makes the funds available to the corporation. So there are three entities:

C Corp (1120)

Corporate retirement plan (5500)

Individual employee (1040)

As for "time frame" I believe it's treated as a regular rollover; I've looked into this a bit over the years and don't remember seeing a different rollover rule.

"with a distribution code 7 and both the distribution total and taxable total"

The Form 1099-R is for money out. The issuer doesn't know what is being done with the funds.

I found you a couple of resources that should be helpful:

https://www.irs.gov/retirement-plans/rollovers-as-business-start-ups-compliance-project

https://www.irs.gov/pub/irs-tege/robs_guidelines.pdf

https://www.nerdwallet.com/article/small-business/rollovers-as-business-startups-robs

[Just-Lisa-Now-]

@qbteachmt  I tried to move the entire discussion, but it only moved your reply, ugh! 

Now it wont even let me see the original post anywhere, what the heck is happening!??!

[qbteachmt]

"Now it wont even let me see the original post anywhere, what the heck is happening!??!"

That's what I wondered, because you have to specifically "apply to join" the SDK user group, which is an automated process. But you also might not have the authority in that section.

I flagged it, too, for the moderators. Thanks for trying.

[qbteachmt]

I got the @Kimberley topic copied, here is the original part:

02-17-2024 09:14 AM

It is my understanding that the 401K distribution used for a ROBS (rollover as business startup) is a non-taxable event.  I have not found much information on the requirements for this type of 401k distribution as it relates to the tax preparer.  

The client has a $171K distribution reported on a 1099R with a distribution code 7 and both the distribution total and taxable total showing as $171K.  In Lacerte, do we merely record this as an indirect rollover in the "To other than a Roth IRA" box?

Is there a time frame by which the distributed funds must be deposited into the ROBS?

Is a DL (determination letter) required for each of these transactions and if so, is that request the responsibility of the tax preparer or the agent assisting the taxpayer with the ROBS transaction, or the 401K administrator?

What liability does the preparer carry when recording this transaction?

[qbteachmt]

It is my understanding that the 401K distribution used for a ROBS (rollover as business startup) is a non-taxable event.  I have not found much information on the requirements for this type of 401k distribution as it relates to the tax preparer.  

The client has a $171K distribution reported on a 1099R with a distribution code 7 and both the distribution total and taxable total showing as $171K.  In Lacerte, do we merely record this as an indirect rollover in the "To other than a Roth IRA" box?

Is there a time frame by which the distributed funds must be deposited into the ROBS?

Is a DL (determination letter) required for each of these transactions and if so, is that request the responsibility of the tax preparer or the agent assisting the taxpayer with the ROBS transaction, or the 401K administrator?

What liability does the preparer carry when recording this transaction?

[sjrcpa]

ROBS are on the IRS watch list and may be a listed transaction.

I won't touch them.

They reek of prohibited transaction.

[Kimberley]

The client came to me with the ROBS transactions already done.  I've read what I could find including what was posted here already.  To my understanding, on the personal return, the 1099R needs to comply with the 60-day rollover requirement since the transfer is not showing as a "G" rollover.

On the corporate side, we have requested the following:

• evidence of the corporate retirement account 
• evidence of the date and amount of the contributed/rolled over funds 
• evidence of the addendum allowing the purchase of the stock
• evidence that at the time of the addendum there were no employees
• inquiry on the method used to value the stock
• evidence of the purchase of the stock including the date and amount
• evidence that the addendum allowing the purchase of the stock was reverted immediately after the stock was purchased

The corporation currently has no employees.  No business has yet been conducted.  The only assets (per the client and for which we are pending verification) is the bank account.  

Since this strategy was recommended by and effectuated by the client and their investment advisor, I am looking for the best way to ensure my potential liability.  With the above affirmed, am I covered?

[sjrcpa]

Check with your E&O carrier.

[sjrcpa]

So what's the business purpose of this transaction if the only thing done is put money in the bank?

[Kimberley]

The ROBS transaction involves taking a qualified retirement account (usually a 401K), distributing funds from it in a ROLLOVER to buy the stock of a new C corporation.  

Here's the basics as I understand them:

A C corporation is established

A C corp sponsored retirement account is established

Funds from the taxpayer's previously existing qualified 401K are rolled over into the new C corp plan.

Funds are distributed from the new C corp plan to purchase the corporation's stock.

There are other specifics that go into this - amendments that have to be written and then changed for HCE and 5500 requirements, but that's the basics. 

The purpose is to use the funds from an existing qualified account, distributed them tax-free through the rollover, and for the corp plan to be the holder of the c corp shares.

[sjrcpa]

I know how they are supposed to work.

What business is this corporation supposed to be doing?

Or is it just a shell?

[sjrcpa]

https://www.irs.gov/retirement-plans/rollovers-as-business-start-ups-compliance-project

[Kimberley]

Oh. My apologies.

The C corp was established to purchase a laundromat.  They have not yet done that.  Currently, there is only a bank account and stock.

[Kimberley]

Yes, I have read this.  Thank you!