Uploaded by Tom Im

BORSA explanation

Suzy Granger
National Business Development Officer
DRDA CPAs & Business Consultants
Full Service CPA Firm – Accounting and
Audit, Tax, Consulting
SEC and Private Company Practice
Consulting Services for Entrepreneurs
Nearly 40 years of focus on Small to
Mid-Sized Businesses and their Owners
Based in the Internal Revenue Code
(IRC) and Section 408(e) of ERISA, a
self-directed 401(k) plan allows
individuals to access retirement
If they are being used to buy, start,
or recapitalize an active business.
A self-directed 401(k) plan is a structure that allows your
borrower to infuse equity from the following sources:
401(a): Pensions, Profit Sharing, ESOPs
403(b) Teachers’ Annuities
457 State, County & City (government only)
IRAs – most all
Rollover IRAs
EXCEPT Inherited Non-spouse IRAs or ROTH
Participants can invest in qualifying employer securities.
Once invested in the corporation, these monies can be
used for the purchase of an existing business, start-up,
franchise or pay normal corporate operating expenses
WITHOUT being deemed a distribution subject to tax
and/or penalties.
Form a new c corp – Newco
Newco establishes a 401(k) Profit Sharing Plan
Existing retirement funds rolled over into new 401(k) Plan
Participant in 401(k) Plan invests in stock of Newco
Prior Employer
Retirement Plan
Rollover Cash
Newco 401(k)
Corp Stock to
Newco 401(k)
Cash to purchase
C Corp
Corp Stock to
Cash to purchase
• Pizza Guy has $95,000 in an old IRA
• Pizza Guy pays our fee of $5,000 personally
• He rolls $95,000 into his new 401(k) plan and then invests all
$95,000 into his C Corp
• At that point the C Corp is worth $100,000 and has two
Shareholder #1: Pizza Guy, Inc. 401(k) PSP fbo Pizza Guy 95%
Shareholder #2: Pizza Guy Individually 5%
Shareholder #1 owns 95% of the company representing the
$95,000 that came thru the plan and Shareholder #2 owns 5% of
the company representing the $5,000 that came from him.
Pizza Guy’s Old
Retirement Plan =
Pizza Guy, Inc. 401(k) PSP fbo
Pizza Guy = $95,000
Pizza Guy, Inc. =
Plan 95%
Guy 5%
Pizza Guy Individually = $5,000
• As you know any shareholder of 20% or more must sign a
personal guarantee
• As per the SOP when retirement funds are being used as a
source of equity in an SBA loan the SBA recognizes that the plan
cannot sign a personal guarantee.
• In lieu of that the person rolling the funds into the plan will sign
his or her personal guarantee
• See SOP 50 10 (I) Subpart B, II Collateral B Guarantees item 5
pages 157 thru 158
The C Corp is your borrower and every shareholder of 20% or more
must sign a personal guarantee which means anyone who rolls
into the plan and their plan owns 20% or more of the company
must sign a guarantee
IRAs operate under a different set of rules. You cannot direct, you
cannot be materially involved, and you cannot derive a salary
using a self-directed IRA.
The rules are different for a self-directed 401(k). In a self-directed
401(k) the client does direct, is materially involved, and is required
to draw a salary.
An IRA can be used in a self-directed 401(k) but the IRA must first
roll into the 401(k) plan.
This program is beneficial to a borrower that has a minimum of
$50,000 in a qualified retirement plan(s) that are available.
Available meaning prior employer.
Your borrower can access:
All of a plan
A portion of a plan
Multiple plans
More than one person can roll in
As long as the combined amount is $50,000 or above.
Typically we see $100,000-$200,000 rolling and most of our clients
are borrowers putting down on an SBA 7(a) or 504 loan.
The SOP goes on to state that when using retirement funds as a
source of equity in an SBA loan the borrower cannot have the
historic, traditional structure of:
Eligible Passive Company (EPC)/Operating Company (OC)
With the dirt and the building being the EPC and the active
business the OC.
When using retirement funds in conjunction with SBA lending, the
dirt, the building, and the business must all be contained within the
C Corp.
• Fee to establish structure must come from an individual(s)
• Whoever rolls into the plan must be a W2 employee of the C
Corp and draw a salary
• Whoever rolls into the plan must continue to make regular, ongoing contributions into the 401(k) plan for their personal future
• Business Owner must maintain an Employee Census with the
names, birthdate, SSN, hire date and termination date if
applicable of all of their employees
• Business Owner must communicate the availability of the plan
to eligible W2 employees
• C Corp must file Form 1120 with IRS annually
• 401(k) must file Form 5500 with IRA annually
• C Corp must have an annual valuation
• DRDA Guarantee
• Visit www.drdacpa.com/borsa
• Visit www.whatisa401kborsaplan.com
• Call Suzy at 281-954-6023
• Email Suzy at suzy@drdacpa.com