Why BORSA Plans Work So Well with Franchises
By: Bryan Uecker, QPA, QPFC, AIF, AIFA
For aspiring entrepreneurs, franchises offer a proven business model, brand recognition, and built-in support systems. But even with these advantages, securing the necessary funding can be a challenge. That’s where Business Owners Retirement Savings Account (BORSA) [more often referred to as Rollovers as Business Startups (ROBS)] plans shine. BORSA plans are particularly well-suited for franchises, offering a unique financing solution that aligns perfectly with the needs of franchisees.
1. A Well-Capitalized Start: Flexible Funding with the BORSA Plan
One of the most significant advantages of utilizing a BORSA plan for franchise funding is the ability to access your retirement savings to invest in your business, providing a strong capital foundation from the outset. Franchises typically require substantial upfront investment—including franchise fees, equipment, and initial operating costs—and the BORSA plan enables you to use your retirement funds to cover these expenses without incurring early withdrawal penalties or taxes.
For some clients, the BORSA plan can provide 100% of the required capital, allowing them to launch their franchise without the need for traditional debt financing. This approach offers the benefit of starting your business on solid financial footing, free from the immediate burden of loan repayments.
However, many clients find that a combination of capital from a BORSA plan and additional financing—such as SBA loans or other lending solutions—offers the greatest flexibility and financial strength. By leveraging both personal retirement assets and traditional financing, you can maximize your available resources, preserve liquidity, and potentially access more favorable loan terms. This hybrid approach is widely recognized in the franchise industry as a strategic way to ensure your business is well-capitalized from day one, while also maintaining positive relationships with lenders and financial partners.
2. Perfect Fit for Franchise Models
Franchises are an ideal match for BORSA plans due to their established systems and support, which can significantly reduce the risk of business failure. This makes them a safer bet for entrepreneurs who are leveraging their retirement savings to fund their venture.
3. Long-Term Growth Potential
Franchises often have a higher success rate compared to independent startups, thanks to their proven business models and brand recognition. By using a BORSA plan to invest in a franchise, you’re not only funding your business but also positioning yourself for long-term growth and profitability.
4. Retaining Full Ownership
Unlike seeking outside investors, a BORSA plan allows you to retain full ownership of your franchise. This means you have complete control over your business decisions while still benefiting from the franchisor’s guidance and support.
Final Thoughts
BORSA plans and franchises are a natural pairing, offering entrepreneurs a way to fund their business dreams with or without debt while leveraging the stability and support of a franchise system. However, it’s important to remember that BORSA plans come with strict compliance requirements and fiduciary responsibilities. Before diving in, consult with a BORSA provider or financial advisor to ensure this strategy aligns with your goals and financial situation. With the right planning, a BORSA-funded franchise can be the perfect path to entrepreneurial success.
- Published in Small Business, Starting a Business
Understanding Minimum And Maximum Funding Levels For Defined Benefit Plans
By: Bryan Uecker, QPA, QPFC, AIF, AIFA
Defined Benefit (DB) plans are a cornerstone of retirement planning for many employers and employees. These plans promise a specific benefit amount to participants upon retirement, making them a reliable source of income. However, maintaining a DB plan requires careful attention to funding levels, as both minimum and maximum funding requirements are heavily regulated to ensure solvency and compliance with federal laws. In this article, we’ll explore the concepts of minimum and maximum funding levels, why they matter, and how they impact plan sponsors.
Minimum Funding Levels: Ensuring Plan Solvency
What Are Minimum Funding Requirements?
Minimum funding levels are the least amount of contributions that an employer must make to a DB plan to ensure it remains solvent and capable of meeting its future obligations. These requirements are governed by the Employee Retirement Income Security Act (ERISA) and enforced by the IRS. The goal is to protect plan participants by ensuring that the plan has enough assets to pay promised benefits
How Are Minimum Contributions Calculated?
Minimum contributions are determined based on actuarial calculations that
consider:
- The present value of future benefits owed to participants.
- The plan’s current assets.
- Assumptions about factors like interest rates, employee turnover, and life expectancy.
For example, the Pension Protection Act of 2006 (PPA) requires plans to become 100% funded over time, meaning the plan’s assets must equal its liabilities. If a plan falls below this threshold, the employer must make additional contributions to close the funding gap.
Consequences Of Falling Below Minimum Funding
If a DB plan is underfunded, the employer may face:
- Excise taxes for failing to meet minimum funding requirements.
- Increased premiums to the Pension Benefit Guaranty Corporation (PBGC), which insures private-sector DB plans.
- Potential restrictions on benefit accruals or lump-sum distributions until the funding shortfall is addressed.
Maximum Funding Levels: Avoiding Overfunding
What Are Maximum Funding Limits?
While minimum funding ensures solvency, maximum funding limits prevent employers from over-contributing to a DB plan. Overfunding can lead to tax complications, as contributions to a DB plan are tax-deductible only up to certain limits. The IRS sets these limits to prevent excessive tax sheltering.
How Are Maximum Contributions Determined?
The maximum funding level is based on the actuarial value of the plan’s liabilities and the IRS-imposed limits on benefits. For 2025, the maximum annual benefit for a participant is the lesser of:
- 100% of the participant’s average compensation for their highest three consecutive years, or
- $280,000 (adjusted annually for inflation).
Employers must work closely with actuaries to ensure contributions do not exceed these limits.
What Happens If A Plan Is Overfunded?
Overfunding can create challenges for plan sponsors, especially if the plan is terminated. Excess assets in the plan may be:
- Reallocated to participants in a non-discriminatory manner, though owners may not benefit if their formula is maxed out.
- Transferred to a 401(k) plan and used as profit-sharing contributions for up to seven years.
- Reverted to the employer, but this triggers taxation as corporate income and an excise tax of 20-50%.
Balancing Minimum And Maximum Funding
Why Is Balancing Funding Levels Important?
Striking the right balance between minimum and maximum funding is critical for plan sponsors. Underfunding can jeopardize the plan’s ability to meet its obligations, while overfunding can lead to inefficiencies and tax penalties. Proper funding ensures:
- The plan remains solvent and compliant with regulations.
- Contributions are optimized for tax efficiency.
- The employer avoids unnecessary financial strain.
Strategies For Managing Funding Levels
- Regular Actuarial Reviews: Actuaries can help monitor funding levels and adjust contributions as needed.
- Liability-Driven Investing (LDI): This investment strategy matches plan assets with liabilities, reducing volatility and maintaining consistent funding levels.
- Funding Relief Measures: Legislation like the American Rescue Plan Act (ARPA) and the Infrastructure Investment and Jobs Act (IIJA) has provided funding relief by lowering minimum contribution requirements and extending interest rate smoothing provisions.
Conclusion
Defined Benefit plans require careful management of funding levels to ensure compliance with federal regulations and the long-term stability of the plan. Minimum funding levels protect participants by ensuring the plan can meet its obligations, while maximum funding limits prevent over-contributions and tax inefficiencies. By working with actuaries, leveraging modern investment strategies, and staying informed about legislative changes, plan sponsors can effectively manage their DB plans and provide valuable retirement benefits to their employees.
- Published in ROBS 401(k), ROBS 401k Provider, Small Business, Starting a Business
The Evolution of Defined Benefit Plans: Traditional to Cash Balance
By: Bryan Uecker, QPA, QPFC, AIF, AIFA
The landscape of defined benefit plans has undergone significant transformation since American Express established the first private pension plan in 1875. Traditional defined benefit plans dominated the retirement landscape through the 1960s and 1970s, but their popularity began declining in the 1980s due to increasing administrative complexity and cost concerns.
Both traditional defined benefit plans and cash balance plans fall under the defined benefit umbrella, but they differ in key aspects:
Traditional Defined Benefit Plans
- Provide retirement benefits as monthly life annuities
- Calculate benefits using a formula based on service years and compensation
- Have declined significantly since the 1980s due to:
- Tax Reform Act of 1986
- Complex regulatory requirements
- Liability volatility from interest rate fluctuations
- Administrative costs
Cash Balance Plans
- Present benefits as account balances
- Grow through annual pay credits and interest crediting rates
- Gained legal clarity through:
- The Pension Protection Act of 2006
- Additional regulations in 2010 and 2014
Choosing Between the Plans
Traditional Defined Benefit Plans Best Suit:
- Smaller or owner-only operations
- Organizations requiring minimal participant communication
- Employers focused on tax deduction benefits
Cash Balance Plans Are Ideal For:
- Larger organizations needing clear participant communication
- Employers seeking predictable liabilities
- Companies wanting simpler investment management
Current Trends
Cash balance plans have seen remarkable growth, now representing nearly 50% of all defined benefit plans. Their popularity is particularly strong among small and mid-size businesses, with 92% of these plans being implemented in firms with fewer than 100 employees.
“How accurate does my valuation need to be?”
Key Considerations
Both plan types share common requirements including:
- Minimum contribution requirements
- Annual reporting obligations
- Nondiscrimination testing
- Participant notice requirements
The choice between them should align with the sponsor’s specific needs, size, and financial objectives. The trend toward cash balance plans reflects their appeal as a “rebranded” version of traditional defined benefit plans, offering similar benefits with improved clarity and predictability for both employers and employees.
This evolution in retirement plans demonstrates how the industry has adapted to meet changing needs while maintaining the core objective of providing secure retirement benefits. The success of cash balance plans, particularly in professional services sectors, shows how rebranding and restructuring can revitalize a declining product while maintaining its essential purpose.
- Published in ROBS 401(k), ROBS 401k Provider, Small Business, Starting a Business
Do You Need a Formal Valuation for Your BORSA/ROBS Plan? Here’s What Business Owners Should Know
By: Bryan Uecker, QPA, QPFC, AIF, AIFA
Introduction
If you’re using a Business Owners Retirement Savings Account (BORSA) or Rollover as Business Startup (ROBS) to fund your business dreams, you’ve probably wondered about valuation requirements. As a business owner, understanding when and how to value your BORSA/ROBS plan assets isn’t just about checking a box—it’s about protecting your investment and staying compliant with IRS regulations. Let’s break down everything you need to know about BORSA/ROBS plan valuations in plain English.
Why Valuations Matter in Your BORSA/ROBS Plan
Think of your BORSA/ROBS plan valuation like a regular health check-up for your business. It’s essential because:
- It helps ensure your retirement funds are being managed properly
- It keeps you compliant with IRS regulations
- It protects you from potential penalties and prohibited transactions
- It provides crucial information for making business decisions
When Do You Need a Formal Valuation?
The Simple Answer: It Depends on Your Activity
Not every BORSA/ROBS plan needs a formal valuation with an independent appraiser every year. Here’s when you might be able to use a less formal approach:
- You’re running a single-participant plan
- Your plan hasn’t made any contributions during the year
- You haven’t processed any distributions
- There haven’t been any investment changes
- You haven’t conducted any transactions involving employer securities
When to Get Formal
However, certain situations definitely call for a more formal valuation approach:
- During Major Transactions
- When making contributions to the plan
- When processing distributions
- During transactions involving employer securities
- For Complex Assets
- When dealing with hard-to-value assets
- If you’re planning significant business changes
- When the IRS might request additional documentation
Real-World Implications
The IRS has found that many BORSA/ROBS arrangements face challenges within their first three years. One common pitfall? Improper valuations. To avoid becoming a cautionary tale, consider these best practices:
Best Practices for BORSA/ROBS Valuations
- Annual Review
- Schedule regular valuations
- Document your valuation method
- Keep detailed records
- Professional Support
- Consider working with valuation experts
- Consult with BORSA/ROBS specialists
- Maintain relationships with financial advisors
- Documentation Requirements
- Keep detailed records of all valuations
- Maintain proof of your methodology
- Store copies of all relevant paperwork
Common Questions from Business Owners
“How accurate does my valuation need to be?”
Your valuation needs to reflect the true fair market value of your business assets. This isn’t about guesswork—it’s about using legitimate, defensible methods.
“What happens if I get it wrong?”
Incorrect valuations can lead to:
- IRS penalties
- Compliance issues
- Potential plan disqualification
- Tax complications
Tips for Success
- Stay Organized
- Keep a calendar of valuation deadlines
- Maintain clear documentation
- Track all business changes that might affect valuations
- Plan Ahead
- Budget for professional valuations when needed
- Consider timing of major business decisions
- Think about future exit strategies
Conclusion
While BORSA/ROBS plan valuations might seem daunting, they don’t have to be. The key is understanding when you need a formal valuation and when a less formal approach will suffice. Remember, the goal is to protect your investment while staying compliant with IRS requirements.
Take Action
- Review your BORSA/ROBS plan’s current valuation status
- Schedule any needed valuations
- Consult with professionals if you’re unsure
- Document your valuation process
Remember, your BORSA/ROBS plan is more than just a funding mechanism—it’s a crucial part of your business and retirement strategy. Treating valuations with the attention they deserve will help ensure your long-term success.
- Published in ROBS 401(k), ROBS 401k Provider, Small Business, Starting a Business
SOLO 401(k) PLANS
By: Bryan Uecker, QPA, QPFC, AIF, AIFA
With the growing gig economy and more individuals choosing self-employment, solo 401(k) plans are gaining significant interest. Understanding these retirement plans and their unique benefits can help eligible small business owners maximize their retirement savings.
What is a Solo 401(k) Plan?
A solo 401(k), also known as a one-participant plan, is a 401(k) plan designed for business owners and their spouses. These plans are exempt from many of the more complex rules that apply to larger 401(k) plans, such as nondiscrimination testing, because they don’t cover any non-owners.
Solo 401(k) plans are popular among small business owners because they are easy to manage while allowing participants to make substantial contributions—up to the IRS 415(c) limit each year—without the restrictions larger plans typically face.
Who Qualifies for a Solo 401(k) Plan?
A solo 401(k) plan is only available to businesses with no employees other than the owner(s) and their spouses. If a business employs a non-owner who is eligible to participate in the plan, it no longer qualifies for a solo 401(k), even if the employee chooses not to participate. Failing to meet this requirement can result in IRS penalties, including corrective contributions or plan disqualification.
The plan loses its solo status the moment a non-owner becomes eligible for participation, so it’s crucial to notify your 401(k) provider in advance to ensure a smooth transition.
Additional considerations:
• If your business is part of a controlled group or affiliated service group (ASG), you cannot exclude their employees to qualify for a solo 401(k).
• Starting January 1, 2024, long-term part-time (LTPT) employees cannot be excluded from the plan, even if they don’t meet the plan’s typical eligibility requirements.
401(k) Rules That Don’t Apply to Solo Plans
Because solo plans don’t cover non-owners, they are exempt from many rules aimed at ensuring fairness for employees. These rules include:
• Nondiscrimination testing: Solo plans automatically pass the 410(b) coverage, ADP/ACP, and 401(a)(4) nondiscrimination tests, since they only cover Highly-Compensated Employees (HCEs).
• Top-heavy testing: Although all solo plans are top-heavy, the top-heavy minimum contribution requirement is irrelevant because there are no non-key employees to allocate funds to.
• Participant disclosures: Solo plans are not required to provide Title I disclosures, like Summary Plan Descriptions or Summary Annual Reports, which apply to other 401(k) plans.
• Form 5500 filing: Solo plans are exempt from filing Form 5500 unless their assets exceed $250,000 by the end of the plan year.
• Fidelity bond: Since solo plans are not subject to ERISA, there’s no requirement for a fidelity bond, which protects against losses from fraud or dishonesty in ERISA-covered plans.
401(k) Rules That Do Apply to Solo Plans
Even though solo plans are simpler, they must still comply with some key rules:
• Contribution limits: The IRS limits for 2025 are:
– 415(c) limit: $70,000 + $7,500 catch-up
– 402(g) limit: $23,500 + $7,500 catch-up
• Form 5500-EZ: If plan assets exceed $250,000 by the end of the plan year, you must file Form 5500-EZ.
• Participant disclosures: Some disclosures, like the 404(a)(5) fee notice or safe harbor 401(k) notices, apply if relevant to your plan.
Solo 401(k) Plan Design Considerations
Most solo 401(k) plans have low fees due to their simplicity, but some providers may limit features such as participant loans or in-service distributions to maximize profits. While this may not concern some business owners, others might find these limitations restrictive.
If you have a high income, consider making “mega backdoor” Roth IRA contributions to your solo 401(k). This strategy allows you to make large after-tax contributions to the solo plan and then roll them over to a Roth IRA for tax-free retirement distributions. To use this strategy, your solo plan must allow voluntary after-tax contributions and in-service distributions.
Deadline to Adopt a New Solo 401(k) Plan
Thanks to the SECURE Act of 2019 and SECURE 2.0, the deadlines for adopting and contributing to a solo 401(k) have been extended:
• Adoption deadline: You can adopt a solo plan retroactively and make profit-sharing contributions up until the tax return due date (including extensions). For instance, if your 2024 tax return is extended to September 15, 2025, you have until that date to adopt a solo 401(k) for 2024.
• Contribution deadline: Sole proprietors and owners of single-member LLCs can make retroactive employee contributions to a new solo plan by the tax return due date (excluding extensions).
Maximize Your Solo 401(k) Plan
Solo 401(k) plans offer significant benefits to business owners, including large contribution limits, “mega backdoor” Roth contributions, and lower costs compared to traditional 401(k) plans. However, it’s essential to choose a 401(k) provider that offers flexibility in plan design, allowing you to fully maximize the benefits of your solo 401(k). Avoid providers with restrictive features that could limit your ability to get the most from your plan.
- Published in Small Business, Starting a Business
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