THE OPERATIONAL ISSUES
Fidelity Bond Requirment
You must obtain an ERISA Fidelity Bond for your new retirement plan. This can be purchased from your homeowner's insurance carrier in most cases. You are the Trustee of your new retirement plan and your retirement plan is the insured. Your investment in employer securities and employee losses must be insured for 100% of value. Most other investments must be covered for 10% of value.
You must enter into the Franchise Purchase Plan transaction with the intention of treating the retirement plan as required under Section 401(a) of the Internal Revenue Code. That is, you must not discriminate as to rights, benefits and features and you must be willing to make substantial and recurring contributions. While there is no precise definition as to what this means, we recommend that you make profit sharing contributions at least every 3 years, or make matching contributions to your employees who make salary deferrals.
As part of the Franchise Purchase Plan transaction, you will roll your IRA and/or retirement plan accounts into your new retirement plan and will buy employer securities. This is a right, benefit or feature under Section 401(a) of the Internal Revenue Code; therefore, all eligible employees must have the same right.
We recommend that annual meeting minutes be done for your new corporation and/or LLC. This is important in case of lawsuits against your corporation and/or LLC that try to enjoin you. We will do these minutes for you each year if you choose to have them done.
The purchase of employer stock by your retirement plan must be done at fair market value. Fair market value for the original issue is valued at the original purchase price. Any purchase of employer stock, after the original capitalization, must be revalued since the corporation is now operating a trade or business. You will be responsible for providing this valuation.
Your new corporation must be a C-Corporation. That is, you must not elect to be treated as an S-Corporation.
Trade or Business
Your new corporation and/or LLC must be engaged in a trade or business. You cannot use the Franchise Purchase Plan to finance personal expenses or a hobby.
Summary Plan Description
You must provide your employees with a copy of the Summary Plan Description included in your plan documents. Also, you must provide your employees with a Summary Annual Report which we will prepare as part of the annual administration.
You are required to file a version of IRS Form 5500 and the appropriate schedules for your new retirement plan. We provide that service and will send you a questionnaire each year to collect the information we need to complete these forms. You must provide us with the fair market value of the plan assets at the end of each plan year. Failure to file Form 5500 will result in a substantial penalty.
Filing Corporate Return
You will be required to file state and federal tax returns for your new corporation and/or LLC. Your CPA will help you with these filings.
If you are being told that you can get by with anything less, you are not being told all you need to know to insure that this transaction will comply with current federal tax law.
Beware of Marketing Organizations
There are many organizations that provide similar services, but beware, these are really marketing organizations that use boilerplate Internet services or outside sources to consummate the transaction. To insure that you will not have adverse tax consequences, you must insist that these services be provided by a qualified law firm experienced in tax and pension law.
Do Not Pay Too Much
Certain franchise brokerage businesses own companies providing similar services. These companies charge an excessive amount for this transaction since their brokers must refer their clients to these organizations or their employment contracts may be terminated. These brokers have a conflict of interest that costs you money.