WPASGL Quality Circle 2019 Seven Springs Mountain Resort, Seven Springs, PA

1. Creative Ways to Fund Your Entrepreneurial Passion – Leverage ESOP and 401(k) to Fund a Small Business WPASGL Quality Circle 2019 Seven Springs Mountain Resort, Seven Springs, PA March 14, 2019 2:00 PM – 3:15 PM Presented By: Monty W. Walker CPA, CGMA Walker Business Advisory Services

2. Retirement Money can be invested in a business WITHOUT triggering penalty or tax • Has been a part of the Employee Retirement Income Security Act of 1974 (“ERISA”) since its passage • Plan must be an Eligible Individual Account Plan (i.e. profit-sharing, stock bonus, thrift or savings plan) • 401(k) Plans fall under this definition

3. Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) • Became law on June 7, 2001 • Relaxed the portability rules for retirement plans • Assets in various different types of retirement plans now able to be rolled into each other

4. Rollovers as Business Start-Ups (ROBS) The IRS refers to retirement plans used to invest retirement funds in a small business as: Rollovers as Business Start-Ups (ROBS)

5. What is the position of the IRS? • November 26, 2010 – IRS Retirement News for Employers Fall 2010 Edition – An overview of the ROBS Compliance Project is presented. The IRS states that, “ROBS plans ARE NOT considered an abusive tax avoidance transaction.” Problems identified in the overview are administrative in nature and include: • Failure to file Form 5500 • Failure to file federal corporate tax return • Failure to issue 1099-R on rollover in ROBS plan • Nonexistent or superficial business valuations • Payment of implementation fees from rollover funds • Benefits, Rights or Features failures • Employers often do not understand that a qualified plan is a separate entity with its own set of requirements. • Employers in some cases have been incorrectly advised that they do not have an annual filing requirement

6. What is the position of the IRS? No additional ROBS specific announcements from the IRS since the completion of its ROBS Compliance Project and related overview provided in the IRS Retirement News for Employers Fall 2010 Edition

7. ROBS Process 3 Entrepreneur rolls/transfers $ to 401(k) 2 Establish 401(k) Plan 1 Form Corporation 5 Corporation issues stock to 401(k) 7 Corporation issues stock to Entrepreneur 4 401(k) Invests $ in corporation through purchase of common stock 6 Entrepreneur Invests $ in corporation through purchase of common stock 9 8 Bank loans $ to Corporation Corporation uses $ to purchase or start business

8. Investing in Entrepreneur's Business • Retirement plans, such as a 401(k) Plan, can invest in a entrepreneur’s business without creating a prohibited transaction and without being subject to tax and penalty. [IRC § 4975(d)(13) and ERISA § 408(e)]

9. Investment by be for Qualifying Employer Securities • For an investment in an entrepreneur’s business to not create a prohibited or be subject to tax or penalty, the investment must be for the purchase of --- Qualifying Employer Securities. [ERISA § 408(e)]

10. Qualifying Employer Security = Stock • Qualifying Employer Security is an employer security which is -------- Stock. [ERISA § 407(d)(5)] NOTE: LLC Member Interest and Partner Interest DO NOT QUALIFY as these are not stock.

11. S Corporations Not Allowed • The exemption provided in IRC § 4975(d)(13) does not cover S Corporation stock. [IRC § 4975(f)(6)(A)] • Accordingly, only C-Corporation stock is covered by the exemption.

12. SBA’s Position – ESOP & 401(k) Owners • The Small Business Administration’s Standard Operating Procedures SOP 50 10 5(J) effective January 1, 2018, Subpart B, Chapter 4, Section II.A.5 states: Employee Stock Ownership Plans “ESOP” and 401(k) Plans are acknowledged as being eligible owners of an Applicant. NOTE: This is located on Page # 185 of the SOP

13. SBA’s Position – Loan Guarantees • The Small Business Administration’s Standard Operating Procedures SOP 50 10 5(J) effective January 1, 2018, Subpart B, Chapter 4, Section II.A.5 states: When an ESOP or 401(k) owns 20% or more of a Small Business Applicant, the Plan or Account CANNOTguarantee the loan.The Plan or Account must meet all applicable IRS eligibility requirements. NOTE: This is located on Page # 185 of the SOP

14. SBA’s Position – EPC/OC Structure • The Small Business Administration’s Standard Operating Procedures SOP 50 10 5(J) effective January 1, 2018, Subpart B, Chapter 4, Section II.A.5 states: The application CANNOT BE structured as an EPC/OC. [13 CFR § 120.111(a)(6)] EPC – Eligible Passive Company OC – Operating Company SBA regulations require each 20% or more owner of the EPC and each 20% or more owner of the OC to guarantee the loan, and the regulation does not provide for an exception. NOTE: This is located on Page # 185 of the SOP

15. Summary • IRC § 4975(d)(13) exempts qualifying employer security transactions from the prohibitions of IRC § 4975(c) pursuant to ERISA § 408(e) • Exemption is only applicable to C Corporation stock due to IRC § 4975(f)(6)(A) removing S Corporation stock from the coverage of IRC § 4975(d)(13) • Business operates unimpeded to include borrowing from third parties, paying salaries to employees (including shareholders/plan participants), and engaging in other routine business transactions with disqualified persons such as corporate officers or shareholders making or guaranteeing loans to the business.

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17. About The Presenter • Works with Business Sellers, Business Buyers and their various advisors, such as Business Intermediaries, Accountants and Attorneys, to manage the unique financial, tax, planning and procedural matters associated with Buying and Selling a business. He does not serve as a Business Intermediary. He only provides Advisory Services. • Has a comprehensive business background in the private closely-held sector spanning over 30 years which includes experience in both startups and established entities • Professionally manages and administers retirement plans including plans which enable entrepreneurs to use their accumulated retirement money as a business capitalization source while preserving tax deferrals and without incurring penalties. His advisory services in the qualified money arena include solutions using of Self-Directed IRAs and Small Business Investment 401(k) Plans. • Developed and assists Entrepreneurs throughout the country with a unique proprietary comprehensive transaction planning review resulting in a deliverable entitled --- Transaction Structuring Report. • Works with clients throughout the country rendering advisory support for Business Transactions, Business Exit Strategies, Business Tax Planning and Business Transition Planning. • Subject Matter Expert for the International Business Brokers Association in the area of Business Transaction Taxation, Structuring and Planning. He is also an approved instructor for the International Business Brokers Association, the Texas Real Estate Commission and the Texas Department of Insurance. • Authored various business transfer taxation and structuring courses and various other business transfer related workshop topics which he instructs for these organizations. • Due to his background in the area of business planning and business transfers he is often referred to by his clients and colleagues as a --- “Business Transaction CPA” • Is a member of the American Institute of Certified Public Accountants, the International Business Brokers Association, the M&A Source, the Texas Association of Certified Public Accountants, the Texas Association of Business Brokers and Alliance of Mergers & Acquisitions Advisors • Certified Public Accountant, Chartered Global Management Accountant, Certified Business Intermediary Monty W. Walker CPA, CGMA, CBI (940) 322-5086 mwalker@walkeradvisory.com www.walkeradvisory.com