Pharmacists interested in store ownership have a lot of questions about financing. For example, should they use their retirement funds such as in a 401(k) or IRA? Typically, you will pay significant penalties and taxes for early withdrawal, but a Rollovers for Business Start-Ups (ROBS) plan is one way to avoid that.
In this video, Bonnie Bond, CPA, talks about ROBS with Wendy Skemer of Benetrends, an organization that helps aspiring pharmacy owners set up these plans. They discuss how this financing option works, why you must start the entity as a C Corp, but also the flexibility for funding retirement and entity restructuring. This simple explanation of ROBS will help you consider your path to buying a pharmacy.
Sykes & Company, P.A. consults on financing options for pure pharmacy start-ups and existing pharmacy purchases.
See our video series on the many aspects of buying a pharmacy.
If you prefer to read this content, the video transcript is below.
Bonnie: So one of the questions that we get a lot, especially at our pharmacy NCPA Pharmacy Ownership Workshops, it deals with funding, and so when people are ready to start their store from the ground up or they’re ready to purchase the store, funding obviously is at the top of the list of things we have to get through.
One of the things we talk a lot about is ROBS plans. We get lots of questions on this, so we wanted to talk today with Wendy Skemer, who is from Benetrends, and she works directly with this particular plan, and I think she can shed some light on how these plans have to be established and set up. It’s not as clear-cut as just taking the money out of your retirement account. It has to be done very precisely, and so Wendy, thank you for joining us, and giving us some insight on this today.
Wendy: Thank you so much Bonnie. So what we’re talking about today is the Rollover for Business Start-up, the ROBS business financing, and it does offer folks the ability to utilize their existing retirement funds for this new venture if they’re starting a new pharmacy, if they’re buying an existing business, they can utilize those funds tax-deferred and penalty free.
I appreciate you having me here today and letting me share this with folks. I’ve been working with Benetrends for some time now since 2013. I really enjoy helping folks have this option and working with consummate professionals, like yourself Bonnie, helping folks make really good decisions, and I have a lot of clients that would not have been able to start, or expand their pharmacy, without the ability of utilizing this program. It’s really important to highlight Len Fischer when we talk about this program. He is the pioneer that in 1983, literally knocked on Washington’s door and said, this is statutory law. He’s an ERISA tax attorney, and with his brilliance, he started Benetrends and started the ROBS program. Not anybody who used any provider would have been able to utilize this program without what Len Fischer did in 1983, and still is helping folks today, utilize their retirement funds in this way.
A lot of us think about, Bonnie, to your point, you can’t just take that money out, right? If I take it out of my 401(k), boy I’m gonna have tax and penalty, and it’s gonna be not worth it for me. And here’s an example. I get calls like this, I’m sure you do, you have a great candidate for a business, and they have $200,000 in their 401(k). If they just pull that money out, the average individual under 59 and a half is going to pay approximately 10 to 40, 10% in penalty, excuse me, and then 30% on average in taxation in that year. So when you have somebody who’s looking at a retirement plan of $200,000, when they’re looking to open up their pharmacy, now they only have $120,000. In many cases that could be the difference between having the ability to do it and not, and we don’t want to give up that money.
So I want you to think about it, if you’ve left a job in the past and took your 401(k) and rolled it into another retirement plan, we’ve all done that, right? We know it’s tax-deferred and penalty free. Well, what if when you utilize that program, you were the company? So let’s say it’s Wendy Incorporated, my new pharmacy, and that’s the C corporation in which I’m able to invest in. So what happens is I create your pharmacy, or I should say Benetrends, we create your pharmacy as a corporate entity, as a C corporation. Benetrends will do that all for you. We get that set up for you, and then we customize a qualified retirement plan. We’re all used to our 401(k)s, most of us came from big corporate. Now you’re in a position where you can have a customized plan, that makes more sense for you and your business…
Bonnie: With that I wanna interject with you, Wendy. I think that’s a very key point that people need to understand, and something that we talk about a lot at the conference, is that when you do this, you cannot be an S corporation, to start off with, you must be a C-corp. Obviously when you get ready to do something like this, you can’t do it on your own. You have to go through a company like Benetrends to have this whole thing established, of which you’re gonna make sure that that’s done correctly, but I just wanna, people seem to have a hard time with that, that they don’t understand that, why they have to be a C-corp.
Wendy: Okay, and the reason behind it is because statutory law allows us to utilize our retirement funds to invest in common shares of stock in a C corporation. We are not permitted by statutory law to use those funds to invest in membership in an LLC or an S-corp. So thank you for highlighting that, yes. So once we have that C corporation established, we’ll customize your client’s retirement plan, whether it’s a profit sharing plan, a defined benefit plan or a full-service retirement planning company. When you utilize this program, you want to have the ability to have a variety of options. Once we customize your plan, as an employee of your C corporation, you’re permitted to roll over eligible funds from your previous employer’s 401(k). If you have a 457, some folks have SEP IRAs, or a traditional IRA, all of those funds are eligible, you can roll them into this new plan, tax-deferred, penalty free, the magic happens.
Now you have the ability to make an equity investment in your company, which what does that mean? It means, instead of having all of your retirement funds invested in the stock market, you can take some of that money and invest it in your company. So you’re going to literally buy privately held stock in your pharmacy, and in doing so you’re funded. When you buy that stock with your retirement funds, those funds will now wire transfer right to your corporate bank account, you’ll be able to start making all your business expense payments, and your retirement plan will now be issued the common shares of stock to represent that investment.
What plans are eligible? Again 401(k) plans are not eligible unless you left your employer. If you have an ESOP program, self-directed IRA, it’s really easy to think about it, as what plans are not eligible, and that would be a Roth IRA. Once we roll money into a Roth IRA, you can’t roll it out, otherwise most qualified retirement funds will be eligible for this program. The benefits are tremendous, that’s to your point Bonnie, the ability to utilize post, pre-tax dollars, excuse me, without having to touch my savings account and deplete that post-tax cash, or for many of us, the biggest asset we have is that 401(k). We don’t have that cash.
Bonnie: So once I have a pharmacist who moves that money over, everything’s established, they move the money over from their retirement plan. Is there anything that limits them, you know, to use that money for?
Wendy: Great question. As long as it’s for the benefit of the corporation, those funds are good for those purposes, so that includes paying a salary to your client, that includes advertising, setting up the business, whatever, car, advertising on that car, cell phones, computers, all the things that you need to run your business are all eligible to be funded through this. It’s just as if you invested cash.
Bonnie: Got it.
Wendy: So again, I want to highlight, it’s not just using a 401(k). Many of you might not be hiring a big team and might not need a 401(k), so there’s a good amount of options and what type of plan that would make sense for you to be able to participate in the program. I wanna just say, when you’re looking at doing this program, to Bonnie’s point, you do need a partner. A lot of folks say, why can’t I just do this on my own? Well, you want to have a customized plan, and most importantly, you want to be able to have a company that’s like an insurance policy for you, which is what we will do.
And one of the questions that comes up quite often, is what if at the end of the day I’ve done this for a couple years, and I want to convert to a different corporate entity, for whatever reason. Know that at any time, you can buy back your stock, so in other words, you can find out what the value of your business is, and literally pay back your retirement plan. Once your retirement plan is no longer invested in your C corporation, you are free, and it is compliant for you to convert to a different corporate entity. If you’re going to an LLC, it’s immediate, if you’re going to an S-corp, some states have a waiting period, Bonnie would be better prepared to answer that.
But when it comes to, what if I love this program, I found the right opportunity, I’m ready to move forward, what are the next steps? I highly recommend you set up a call of course with Bonnie, and then that, when you’re ready to look at doing the ROBS, we can help you here at Benetrends with getting you the engagement documents, of course, the payments up front, and getting everything set up and going through with you all that needs to happen. The program can be completed in three to four weeks. You know Bonnie, if there’s money in an annuity, or an existing 401(k), and we’re terminating, that could add a little bit of time. If you’re in California, add a week because it takes a little bit longer, but it’s a very streamlined process. Here’s my contact information, of course I wanna answer any questions you might have today, but please feel free to contact me to set up a consultation.
Bonnie: So the bottom line, Wendy, is the funds can be paid back, and that’s I think for a lot of the clients that I work with, that’s their end game, is to put that money back, but this is just an initial thing to get them going. They put the money back, so then if you do it all, and you do it through the correct methods here, through, like with you, with Benetrends, and then you can do this tax free, penalty free, the money can be replaced and then you move on from that, in complete control of your organization.
Wendy: Absolutely, absolutely, and let me just add one thing, while you’re in this program, you’re making contributions to the plan, just like you are in your current 401(k), so that plan is growing aside from the growth in your business.
Bonnie: Right, right, well Wendy, we very much appreciate your time today and your expertise, and again, definitely reach out to Wendy, if you have any questions further about looking into this. Also obviously you can set up a time to speak with me, or any of our staff here at Sykes & Company. You can go to the top of our web page and click on a time to schedule. You can see our schedules live there and schedule a time to talk with us. We appreciate your time, Wendy.