ROBS Prohibited Transactions: A Practical Screening Guide

Screen a ROBS prohibited-transaction question in this order: identify every actor, classify the asset, describe the transfer or use, identify the direct or indirect benefit, cite the prohibition, and test every condition of the exemption being used.^[6][8][9] That sequence keeps the plan, the C corporation, the founder, family members, providers and lenders in their proper roles before money, stock, services, rent, loans, guarantees or correction steps move.

The IRS describes the common ROBS structure as a new C corporation sponsoring a qualified plan, rollover assets entering that plan, and the plan using those assets to purchase stock of the new corporation.^[1] That structure still depends on qualification rules, employer-stock rules, valuation, filing, tax rules and, when Title I applies, ERISA fiduciary and prohibited-transaction rules.^[2][10][18]

Title I coverage comes before reliance on ERISA conclusions. DOL regulation 2510.3-3 states that only employee benefit plans within ERISA section 3(3) are subject to Title I, and that a plan without employees is not covered by Title I; it also treats an individual owner and spouse as not employees of a wholly owned trade or business for this purpose.^[18] That boundary does not remove Code section 4975, qualified-plan, rollover, employer-stock, valuation, filing or corporate-tax analysis.^[9][10]

The IRS ROBS project warns that a favorable determination letter does not protect a sponsor that later operates the plan incorrectly, discriminates in operation or engages in prohibited transactions, and that those problems can lead to disqualification and adverse tax consequences.^[1] For covered plans, DOL says fiduciaries must run the plan solely in participants' and beneficiaries' interests, pay only plan expenses, avoid conflicts, and may be personally liable for losses or profits from improper use of plan assets.^[3]

This guide covers the prohibited-transaction screen for a ROBS plan: party-in-interest and disqualified-person mapping, plan assets, direct and indirect transfers, fiduciary self-dealing, qualifying employer securities, service and loan exemptions, employer-stock redemptions, compensation, rent, guarantees, provider fees, correction triage and Form 5330 mechanics. It does not decide a reader-specific transaction, value employer stock, draft plan language, prepare Form 5330, provide securities advice or replace plan counsel, a CPA, a qualified plan administrator or a valuation professional.

Use the valuation pages when the central question is fair market value or adequate consideration. Use annual-administration and form-specific pages when the central question is recurring filings, notices, coverage testing or plan operation. Use this page when a payment, stock transaction, service arrangement, lease, loan, guarantee, family relationship or correction could involve plan assets or fiduciary judgment.

The same person can wear several hats: participant, corporate employee, officer, director, trustee, named fiduciary, person approving invoices, or the individual whose account holds plan-owned employer stock. ERISA section 3 defines fiduciary status by function, including discretionary authority or control over plan management or plan assets, investment advice for a fee, or discretionary authority in plan administration.^[4] A title alone does not settle the issue.

Trace custody before tracing legality. Plan assets can include rollover cash in the trust, employer stock held by the plan, dividends or redemption proceeds owed to the plan, participant-loan receivables and other trust property.^[1][6][9] As a screening assumption, if the plan validly purchases qualifying employer stock for adequate consideration and the corporation issues the shares, the cash paid for those shares is treated in this guide as corporate cash for corporate use rather than as a continuing plan bank account; the validity of that stock issuance still has to be documented before anyone relies on it.^{[1][8][10][12]} Corporate assets can include that stock-purchase cash, inventory, equipment, receivables, franchise rights and operating cash. Founder assets are separate again. A personal bill does not become a plan expense because retirement-plan assets originally capitalized the company.

Family members, controlled entities, lenders, franchisors, landlords, sellers and providers belong on the map when they receive money, give credit, own collateral, receive referral compensation, provide services or benefit from a side agreement. ERISA section 406 and Code section 4975 both reach direct or indirect transactions in their respective frameworks.^[6][9]

The initial ROBS stock purchase is a plan transaction: rollover assets enter the plan, the plan buys stock in the sponsoring C corporation, and the corporation receives cash.^[1] For a covered plan, a sale or exchange between the plan and a party in interest needs exemption analysis under ERISA section 408(e), ERISA section 407, Code section 4975 and the DOL employer-security regulation.^{[6][7][8][9][12]}

The file should show the plan provision authorizing employer securities, the share class, rights, number of shares, price per share, valuation date, capitalization table, board approvals, trustee approval, cash received by the corporation, adequate-consideration support and no commission on the acquisition or sale.^[8][12] The IRS memorandum and ROBS project both identify valuation and promoter-fee concerns as examination issues.^[1][2]

Redemptions and later stock sales need the same care. If the corporation redeems plan shares so the founder can regain personal ownership, the plan is selling property to a related corporation. Underpayment can move value away from the plan; overpayment can distort corporate and tax records. If a buyer purchases corporate assets instead of plan shares, the stock value, debt payoff, liquidation steps and plan allocation still need support. For value-specific work, pair this screen with ROBS employer stock valuation.

Founder compensation is not automatically a prohibited transaction when the founder actually works for the C corporation and the corporation pays W-2 wages from corporate funds. The screen asks whether plan assets are being used, whether the pay is for real corporate services, whether corporate records and payroll tax filings support the payment, and whether a plan fiduciary diverted plan value for personal account.^[3][6][9]

Rent and leases depend on the payor, asset and relationship. Corporate rent to an unrelated landlord is usually corporate spending. A plan lease with a party in interest directly implicates lease prohibitions unless an exemption applies.^[6][9] Corporate rent to a building owned by the founder, spouse or controlled entity also deserves review because above-market rent can reduce the value of plan-held stock and expose a fiduciary conflict.

Corporate expenses belong to the corporation when they are genuine business expenses: franchise fees, equipment, payroll, inventory, insurance, marketing and corporate tax preparation. Plan expenses belong to the plan only when they are reasonable expenses for plan establishment or operation. DOL regulation 2550.408b-2 allows necessary services or office space only when the contract or arrangement is reasonable and no more than reasonable compensation is paid; it does not exempt fiduciary self-dealing or turn corporate bills into plan bills.^[8][11]

Personal expenses are the warning sign that should stop the workflow. Mortgage payments, personal credit cards, family vacations, tuition, groceries, home improvements and personal litigation are not plan expenses. If the plan pays them, the use-of-plan-assets and fiduciary self-dealing provisions are in view. If the corporation pays them, corporate tax, payroll, constructive-distribution, governance and plan-stock-value issues may still arise.^[6][9]

A participant loan is not the ROBS stock purchase. ERISA section 408(b)(1), Code section 4975(d)(1) and DOL regulation 2550.408b-1 describe exemption conditions such as reasonably equivalent availability, no greater availability for highly compensated employees, written plan provisions, a reasonable interest rate and adequate security.^[8][9][13] A special plan loan to the founder for startup capital should not be treated as harmless merely because the founder is a participant.

A bank loan to the corporation is different from a plan loan, but guarantees and collateral can pull plan assets into the review. Record the borrower, guarantor, collateral, lien, guarantee fee, who approved the debt, whose asset can be seized, and whether plan cash, plan stock or a participant account supports the obligation. A founder personal guarantee of a corporate bank loan is not the same as pledging plan assets for corporate or personal debt.

ROBS providers, TPAs, attorneys, trustees, appraisers, payroll providers, CPAs, brokers and consultants may serve the plan, the corporation or both. Each invoice should say which entity receives which service. Necessary plan services may fit the service exemption when the services are appropriate and helpful to the plan, the arrangement is reasonable and compensation is no more than reasonable.^[8][11]

Commissions and referral compensation need separate treatment. The employer-security exemption includes a no-commission condition for the acquisition or sale.^[8][12] The IRS ROBS project identifies promoter fees as a concern, and the service-provider regulation requires disclosure of direct compensation, indirect compensation and certain transaction-based compensation for covered service providers.^[1][11] A setup fee is not automatically prohibited, but a stock-closing success fee, undisclosed referral arrangement or plan-paid corporate service can change the analysis.

Hard cases often look indirect. The corporation pays rent to an LLC owned by the founder's spouse. A seller gives the founder a personal side benefit because the corporation buys the business. A franchisor or lender pays a referral fee to someone advising the plan. A sibling receives consulting fees from corporate cash after the plan-funded stock purchase. None of those facts answers the legal question by itself, but each belongs in the screen.

The direct-or-indirect language in ERISA section 406 and Code section 4975 is the reason to map family, ownership, control, side contracts, noncash benefits, referral fees and custody of proceeds.^[6][9] The question is not whether every related-party interaction is impossible. The question is whether the plan transacted, whether plan assets were used, whether a fiduciary personally benefited, whether an exemption fits and whether price and process protected participants and beneficiaries.

Related employers can also affect coverage and qualification. The IRS ROBS project identifies employee participation, discriminatory operation and amendments restricting employee stock purchases as ROBS issues.^[1] A useful review therefore includes ownership, payroll, eligible employees, plan documents and nondiscrimination facts, not just the check that triggered concern.

If a sensitive transaction already occurred, preserve evidence before moving money again. Export plan and corporate bank records, invoices, contracts, board minutes, trustee approvals, valuation files, payroll records, cap tables, custody records and communications approving the transaction. Then separate plan-asset restoration from corporate-tax, payroll, valuation, securities, fiduciary and qualification issues.

Code section 4975 imposes an initial tax equal to 15 percent of the amount involved for each year or part of a year in the taxable period on a disqualified person who participates in the prohibited transaction, other than a fiduciary acting only as such. If the transaction is not corrected within the taxable period, the additional tax is 100 percent of the amount involved.^[9] Those percentages are statutory mechanics; the amount involved, taxable period and liable filer require fact-specific analysis.

The December 2025 IRS Instructions for Form 5330 state that Schedule C is used for section 4975 prohibited-transaction tax and describe who must file, when to file, extensions, electronic filing rules and payment reminders.^[14] Filing Form 5330 does not by itself fix plan qualification, fiduciary restoration, valuation support, participant allocation or corporate records.

IRS correction resources identify the Self-Correction Program, Voluntary Correction Program and Audit CAP for plan errors.^[15] DOL exemption procedures explain that statutory exemptions require conditions to be met and administrative exemptions or authorizations protect only the described transactions and only when conditions are satisfied.^[17] For an actual ROBS file, the next step is coordinated review by ERISA counsel, a qualified plan administrator, a CPA and a valuation professional, with roles assigned before funds move.

The examples below are screening illustrations, not legal conclusions. Each states assumptions, formula and what the number does not prove.

Build a short transaction file before approval: relationship map, asset classification, custody trail, payor and payee, plan-document authority, corporate authority, valuation support, fee disclosures, exemption relied on, conditions checked, conflicts identified, recusal or independent review, and the professional responsible for final signoff.

Escalate before signing when the plan transacts with the corporation, founder, family member, controlled entity, fiduciary or service provider; plan assets secure debt; a commission is tied to employer stock; a redemption changes founder ownership; corporate funds pay personal expenses; a related lease lacks market support; a provider invoice combines plan and corporate work; or correction, Form 5330, disqualification or DOL exemption relief is being discussed.

For adjacent decisions, use ROBS annual plan administration for recurring plan operation and Can ROBS buy business equipment? for documented corporate purchases after capitalization.

These answers summarize the screening rules above; a real transaction still depends on the plan document, ownership map, valuation file, contracts and correction posture.

Sources were reopened for this July 31, 2026 revision using IRS, DOL, OLRC U.S. Code and eCFR materials. The Form 5330 source was the IRS Instructions for Form 5330 (12/2025). eCFR sections were checked through the eCFR dated API for July 31, 2026 where browser access redirected to the Federal Register access page. These sources support the screening framework; they do not approve any reader's plan document, stock value, provider invoice, family lease, loan, guarantee, redemption, correction method, Form 5330 amount or professional conclusion.

1. [1] IRS ROBS compliance project

   IRS page describing the common ROBS structure, determination-letter limits, prohibited-transaction concerns, valuation questions, promoter-fee issues, Form 5500/Form 1120 problems, employee-access issues and possible plan disqualification consequences.

2. [2] IRS EP ROBS guidelines memorandum

   IRS Employee Plans examination memorandum addressing ROBS case development, qualifying employer securities, adequate consideration, valuation, promoter fees, prohibited-transaction analysis and disqualification risk.

3. [3] DOL fiduciary responsibilities

   DOL fiduciary overview supporting fiduciary status, loyalty, prudence, exclusive-purpose duties, plan-expense limits, conflict avoidance, personal liability and restoration of losses or improper profits.

4. [4] ERISA section 3 definitions

   OLRC statutory text for plan, participant, beneficiary, fiduciary, party in interest, plan sponsor, adequate consideration, employer security, qualifying employer security and eligible individual account plan concepts.

5. [5] ERISA section 404

   OLRC statutory text for fiduciary duties of exclusive purpose, prudence, diversification unless clearly prudent not to diversify, and following plan documents only when consistent with ERISA.

6. [6] ERISA section 406

   OLRC statutory text for prohibited sales, exchanges, leases, lending, furnishing goods or services, transfers or use of plan assets for a party in interest, fiduciary self-dealing and fiduciary receipt of consideration.

7. [7] ERISA section 407

   OLRC statutory text for employer-security limits and definitions, including employer securities, qualifying employer securities and eligible individual account plan treatment.

8. [8] ERISA section 408

   OLRC statutory text for exemptions involving participant loans, necessary services, office space, qualifying employer-security acquisitions or sales, and exemption-procedure standards.

9. [9] Internal Revenue Code section 4975

   OLRC Code text for disqualified persons, direct and indirect prohibited transactions, exemptions, amount involved, taxable period, correction, the 15 percent initial tax and the 100 percent additional tax when correction does not occur.

10. [10] Internal Revenue Code section 401

    OLRC Code text for qualified-plan trust requirements, exclusive-benefit language, written plan operation and employer-security context.

11. [11] 29 CFR 2550.408b-2

    DOL regulation for service and office-space arrangements, including necessary services, reasonable contracts or arrangements, reasonable compensation and covered-service-provider compensation disclosure concepts.

12. [12] 29 CFR 2550.408e

    DOL regulation for the employer-security acquisition or sale exemption, including adequate consideration, no commission and eligible individual account plan concepts.

13. [13] 29 CFR 2550.408b-1

    DOL regulation for participant-loan exemption conditions, including equivalent availability, plan provisions, reasonable interest rate and adequate security.

14. [14] IRS Instructions for Form 5330

    Official IRS instructions for who files Form 5330 for section 4975 taxes, Schedule C, taxable-period reporting, due-date mechanics, extension mechanics and payment reminders.

15. [15] IRS correcting plan errors

    IRS EPCRS overview identifying SCP, VCP and Audit CAP as correction programs for plan errors and supporting the need to classify the correction route rather than assume an informal fix.

16. [16] IRS tax consequences of plan disqualification

    IRS page explaining that qualified-plan disqualification can create tax consequences for the trust, employer and participants.

17. [17] DOL exemption procedures under federal pension law

    DOL resource explaining prohibited-transaction exemption procedures, statutory and administrative exemptions, applicant burdens and reliance limits for exemptions and authorizations.

18. [18] 29 CFR 2510.3-3 employee benefit plan coverage

    DOL regulation for Title I coverage thresholds, including the rule that a plan without employees, such as a plan covering only an individual owner or owner and spouse, is not covered by Title I for that reason.