ROBS 401k Rules: What You Need to Know
You've spent 30 years building your 401k. Now you're thinking about using it to start a business—maybe a franchise, maybe something you've always dreamed of doing. ROBS makes that possible without paying early withdrawal penalties. But the IRS has strict rules. Here's the straight talk on what you can and can't do.
The Non-Negotiable Requirements
These aren't suggestions—they're requirements. Miss any of these, and you could owe taxes and penalties on your entire 401k. The IRS doesn't care that you didn't know.
C-Corporation Structure
Your business MUST be structured as a C-Corporation. LLCs, S-Corps, sole proprietorships, and partnerships cannot use ROBS.
Active Employment
You must be a bona fide employee of the company, providing legitimate services. Passive ownership alone is not sufficient.
Fair Market Value
Company stock must be purchased at fair market value, determined by an independent valuation at the time of purchase.
Qualified 401(k) Plan
The company must sponsor a 401(k) plan that specifically allows investment in employer securities (company stock).
Non-Discrimination Rules
The 401(k) plan must be available to all eligible employees, not just the owner. Cannot discriminate in favor of highly compensated employees.
Timely Compliance
Annual Form 5500 filing required. Quarterly contributions if you have employees. Regular valuations of company stock.
What Will Get You in Trouble
These are the things that get people audited and penalized. Some seem like common sense; others trip up people who don't know the rules. Do any of these, and you could lose the tax benefits on your entire 401k.
You CANNOT Do These Things
Personal Use of Business Assets
Using company vehicles, property, or equipment for personal purposes without paying fair market rent.
Loans to Disqualified Persons
The company cannot lend money to you, your family members, or other disqualified persons.
Selling Personal Assets to the Company
You cannot sell your personal property (car, equipment, real estate) to the company at any price.
Guaranteeing Company Debt Personally
The 401(k) funds cannot be used as collateral for loans, and you generally cannot personally guarantee company debt.
Paying Below Fair Market Salary
You must pay yourself reasonable compensation for work performed. Working for free or below-market rates is problematic.
Transactions with Family Members
Hiring family members at inflated salaries or conducting business transactions with them at non-arm's-length terms.
Using Funds Before Stock Purchase
The retirement funds must purchase company stock first. You cannot use the funds directly before the stock purchase completes.
What You CAN Do with ROBS Funds
Once the 401(k) purchases company stock and the funds are in the C-Corporation, you can use them for legitimate business purposes.
Legitimate Business Uses
Ongoing Compliance Requirements
Annual Form 5500 Filing
Every year, the 401(k) plan must file Form 5500 with the Department of Labor. This reports plan assets, participants, and compliance status. Missing this deadline can result in penalties of $250/day.
Annual Stock Valuation
The company stock held by the 401(k) must be valued annually by a qualified independent appraiser. This determines the value for participant statements and any stock transactions.
Corporate Tax Returns
As a C-Corporation, you must file Form 1120 annually. The company pays corporate income tax on profits (21% federal rate as of 2026).
Reasonable Compensation
You must pay yourself W-2 wages for services rendered. The IRS scrutinizes ROBS companies to ensure owners aren't avoiding payroll taxes by taking too little salary.
401(k) Contributions for Employees
If you have employees participating in the 401(k), their deferrals must be deposited within 7 business days (small plans) or as soon as administratively feasible.
Non-Discrimination Testing
Annual testing to ensure the plan doesn't unfairly favor highly compensated employees. Required tests include ADP/ACP tests and top-heavy testing.
Penalties for Non-Compliance
Failure to follow ROBS rules can result in severe penalties from the IRS and DOL.
Plan Disqualification
The entire rollover becomes a taxable distribution. You'd owe income tax on the full amount plus 10% early withdrawal penalty if under 59½.
Prohibited Transaction Tax
15% excise tax on the amount involved in the prohibited transaction. If not corrected within the tax year, an additional 100% tax applies.
Form 5500 Late Filing
$250 per day penalty for late filing, up to $150,000. DOL can also impose penalties up to $2,259 per day.
Fiduciary Breach
Personal liability for losses to the plan. Fiduciaries can be required to restore losses from their own assets.
Don't Risk Your Life Savings on DIY
You've spent 30 years building your 401k. The wrong setup—one missed filing, one prohibited transaction—and you could owe taxes and penalties on the entire amount. This isn't where you cut corners. A good ROBS provider handles: