Prohibited Transactions

ROBS can be a practical way to capitalize an operating business with retirement savings, but it works only if the plan and the company are kept inside the rules. This page is meant to make one of the most important rule sets easier to spot in real life: prohibited transactions.

The short version is simple: plan assets should support the business, not become a shortcut for personal spending, side deals, family benefits, or non-business investments. The counsel-reviewed guidance below gives the more formal version of that rule and examples of the situations to avoid.

Prohibited Transactions in ROBS 401(k) Plans

A ROBS 401(k) allows you to deploy your own retirement savings into a new or acquired business. Because you are using retirement assets, strict rules apply to prevent personal use and self-dealing. Transactions which violate these strict rules to use plan assets for the exclusive benefit of plan participants are called prohibited transactions. Both the IRS and the Department of Labor (DOL) regulate prohibited transactions.

No Personal Benefit Outside the Business

You cannot use the plan, or the business funded by the plan, to benefit yourself (or related parties) outside of legitimate business activity. If a transaction involving the C-Corp or plan provides you (or a related person) with a personal benefit outside of reasonable compensation for actual work performed, it is likely prohibited.

In a ROBS structure, you are both the plan participant and a fiduciary of the 401(k) plan. You are also typically an employee, officer, and shareholder of the C-Corp. These various roles mean the line between legitimate business activity and self-dealing requires careful attention and transactions that benefit you personally are closely restricted.

Common Prohibited Transactions in ROBS Structures

• Paying yourself an unreasonably high salary from the C-Corp to extract plan assets indirectly, or receiving personal perks or benefits from the C-Corp that are not part of a reasonable, documented compensation arrangement

• Paying yourself an unreasonably low salary from the C-Corp to effectively make “back door” contributions to the Plan

• Hiring a disqualified person to perform services for the C-Corp at above-market rates

• Using C-Corp funds or assets for personal expenses (e.g., personal vehicle, home office rent paid to yourself, personal travel)

• Lending money from the 401(k) plan or the C-Corp to yourself or a disqualified person

• Using the 401(k) plan as collateral or security for a personal loan

• Transferring property or assets between a disqualified person and the 401(k) plan or C-Corp

• Leasing property from yourself or a disqualified person to the C-Corp

• Having the C-Corp purchase real estate that you or your family use as a residence, vacation home, or personal office

• Directing the C-Corp to provide goods, services, or facilities to a disqualified person on terms that are not fair market value

Disqualified Persons

Certain individuals and entities are considered disqualified persons and they cannot transact with the 401(k) plan. In a ROBS arrangement, this includes:

• You, acting as the plan participant or plan fiduciary

• Your spouse

• Your lineal ascendants and descendants (parents, grandparents, children, grandchildren) and their spouses

• Entities you or these individuals control (directly or indirectly)

• Service providers to the plan (plan administrator, TPA, custodian, accountant, attorney)

The plan cannot engage in any sale, exchange, lease, lending, extension of credit, or furnishing of goods, services, or facilities with a disqualified person. This applies to both direct and indirect transactions.

Key distinction: siblings, aunts, uncles, and cousins. Siblings, aunts, uncles, nieces, nephews, and cousins are generally not disqualified persons under IRC Section 4975. However, they may become disqualified if they hold an ownership interest or fiduciary role in the plan or a related entity. When in doubt, consult your ERISA attorney.

Consequences of Prohibited Transactions

Violating prohibited transaction rules can result in:

• Disqualification of the retirement plan

• Immediate taxation of rolled-over funds (and potentially the full current fair market value of the company stock held in the plan)

• Additional penalties and interest

In practice, this does not mean every ordinary business decision is dangerous. It means the C-Corp should be run like a real operating company, with clean records, reasonable compensation, market terms, and a clear separation between company assets and personal assets.

If a transaction would personally benefit you, your family, a service provider, or another related party outside normal business activity, pause before moving forward. That is the moment to ask counsel or your tax advisor before money moves.

This information is presented for educational purposes only and should not be construed as tax, legal, or investment advice. These rules are highly fact-specific. Tax rules and IRS guidance may change, and tax treatment depends on individual circumstances. Whenever making an investment decision, please consult with independent legal, tax, and accounting professionals.