December 10, 2010
Business Owners Retirement Savings Account

The BORSA is a legal structure which allows you to fund the purchase or recapitalization of an existing business, franchise, business start-up, or business property using your holdings in a "qualified plan" - a 401(a) pension, profit sharing 401(k), 403(b), 457, or IRA rollover. Through the utilization of a BORSA, these purchases can be accomplished without distributions, taxes, penalties, or the use of loans.

Promoters aggressively market BORSA arrangements to prospective business owners. In many cases, the company will apply to IRS for a favorable determination letter (DL) as a way to assure their clients that IRS approves the BORSA arrangement. The IRS issues a DL based on the plan’s terms meeting Internal Revenue Code requirements. DLs do not give plan sponsors protection from incorrectly applying the plan’s terms or from operating the plan in a discriminatory manner. When a plan sponsor administers a plan in a way that results in prohibited discrimination or engages in prohibited transactions, it can result in plan disqualification and adverse tax consequences to the plan’s sponsor and its participants.

IRS Initiates Compliance Project

IRS initiated a BORSA compliance project to:
  • Define traits of compliant versus noncompliant BORSA plans
  • Identify BORSA plans that are noncompliant and take action to correct them
  • and Use results to design compliance strategies focusing on identified issues and trends (for example, Employee Plans Compliance Resolution System, Fix-It Guides, Web-based information, newsletters, and speeches).

Using compliance checks, the IRS initially focused on companies that sponsored a plan and received a DL but didn’t file a Form 5500, Annual Return/Report of Employee Benefit Plan, or Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, and/or Form 1120, U.S. Corporation Income Tax Return.

Their contact letter to plan sponsors asked questions about the BORSA plan’s recordkeeping and information reporting requirements, including:
  • the plan’s current status
  • plan contribution history
  • information on the rollover or direct transfer of the assets into the BORSA plan
  • participant information
  • stock valuation and stock purchases
  • general information about the business itself
  • why no Form 5500 or 5500-EZ and/or Form 1120 were filed
  • We always invite a plan sponsor to furnish any other documents or materials that they believe will be helpful for us to review as part of the compliance check.

BORSA Project Findings

New Business Failures
Preliminary results from the ROBS Project indicate that, although there were a few success stories, most BORSA businesses either failed or were on the road to failure with high rates of bankruptcy (business and personal), liens (business and personal), and corporate dissolutions by individual Secretaries of State. Some of the individuals who started BORSA plans lost not only the retirement assets they accumulated over many years, but also their dream of owning a business. As a result, much of the retirement savings invested in their unsuccessful BORSA plan was depleted or ‘lost,’ in many cases even before they had begun to offer their product or service to the public.

Not Filing Form 5500 or Form 1120
Many BORSA 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 filing requirement because of a special exception in the Form 5500-EZ instructions. The exception applies when plan assets are less than a specified dollar amount and the plan covers only an individual, or an individual and his or her spouse, who wholly own a trade or business, whether incorporated or unincorporated. In a BORSA 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 BORSA plan and the annual Form 5500 or 5500-EZ (5500-SF for filing electronically) is still required.

Specific Problems with BORSA

Some other areas the BORSA plan could run into trouble:
  • After the BORSA plan sponsor purchases the new company’s employer stock with the rollover funds, the sponsor amends the plan to prevent other participants from purchasing stock.
  • If the sponsor amends the plan to prevent other employees from participating after the DL is issued, this may violate the Code qualification requirements. These types of amendments tend to result in problems with coverage, discrimination and potentially result in violations of benefits, rights and features requirements.
  • Promoter fees
  • Valuation of assets
  • Failure to issue a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., when the assets are rolled over into the BORSA plan
Topic: Advice