Entrepreneursʻ 401(k)

The Challenge to small business owners...
Financing a small business is the most difficult challenge for an individual. This problem is further compounded by the current credit crunch that has had a debilitating effect on entrepreneurs access to capital. It is easy to get caught in the trap of taking on too much debt. It is also painful to pay taxes and penalties on withdrawals from retirement plan accounts. A wide variety of solutions exist, but many are not practical. Some because they have not been tested, others because they have not been streamlined and automated. The biggest challenge is dealing with the regulatory compliance issues that can be paralyzing and overwhelming for the small business owner. In other words, do you want to be spending your time jumping through regulatory hoops or making a profit in your business?

The solution….
We have developed a solution that enables entrepreneurs to utilize their retirement money as a business capitalization source without incurring taxation or penalties which normally occurs when accessing 401(k), IRA and eligible retirement funds. Our structure handles the tough fiduciary and regulatory requirements so you can focus on your business. This does not mean it will be easy, nor does it mean you will not have responsibilities. It just means our processes and structure can make it happen.

There are provisions within Federal Code that permit individuals to purchase “Qualifying Employer Stock” (meaning stock in their own corporation) with their existing retirement plan money. In other words, a person can invest their retirement money into an existing business tax and penalty free, grow the business, and eventually sell it down the road for a profit (hopefully) at retirement. Through the Hawaii Prosperity Entrepreneurs Plan (HPEP), we can assist prospective small business owners with solutions and strategies designed to help them realize their dreams of business ownership. If this sounds like what you are looking for, we can help you do it….we can help you do it right!

The HPEP is a qualified 401(k) plan that provides a way for individuals to finance their dream of business ownership. This is accomplished by performing a non-taxable roll-over transferring 401(k), 403(b), 457, IRA, pension and other eligible retirement plan assets into the Pension Liquidity Trust, which is subsequently used to purchase stock in a corporation. The HPEP is ideal for individuals who want to purchase an existing business, and are willing to follow a set of rigid procedures to do it right. The HPEP has obtained a favorable determination letter from the Internal Revenue Service, and employs an expert/professional trustee, and seeks in every way to strictly adhere to all associated regulation required to claim exemptions to certain Federal rules, without such, would prevent such a transaction from taking place. This is where the unique expertise of the professionals at HPEP makes the difference.

How it works:
The following is a simple explanation of the steps a person must go through to use their 401(k), IRA or other retirement assets to purchase an existing business:
1. A due-diligence interview occurs with a trained representative of HPEP.
2. Following the initial interview, if all parties agree (“all parties” mean you, your legal and accounting advisors, the HPEP professionals, etc.) that HPEP is a prudent solution, paperwork is then completed, and a deposit is made to begin the process.
3. The details of the purchase are worked out between yourself, your advisors and the seller.
4. Data (financial and other) on the existing business is obtained, reviewed, investigated and then given to an independent business appraiser to determine a Fair Market Value for the business.
5. No more than 30 days prior to the closing of your business, your funds are rolled or transferred from your current plan into HPEP. Funds will reside in the Trust Account for no more than 30 days (the account is not an interest bearing account) until the closing date—at which time the amount required to fund the transaction are wired to the appropriate account. Any excess funds will be invested in HPEP mutual funds selected by the plan’s Registered Investment Advisor. The balance of the fee will be paid to HPEP at this time.
6. Stock certificates are prepared by you or your legal counsel, and forwarded to the Trustee of the plan.
7. After the transaction, you will be contacted by one of our associates to get you and your employees enrolled and set up to make new and ongoing 401(k) contributions. The plan is a safe harbor plan, so you WILL be required to match your employee’s contributions.
8. Congratulations...you have just accomplished a very significant and valuable transaction. Using your retirement funds to purchase an existing business and take control over your financial destiny.

How much does the HPEP program cost?
• Plan Adoption: HPEP adoption and implementation cost is $6,250. An upfront deposit of $2,250 is required to start the process. The remaining $4,000 is due at time of closing. Speak with a HPEP representative to receive further explanation of fees, processing, etc.
• Monthly Trustee & Administrative Fee: The current combined monthly fee for the Trustee, plan management, compliance oversight, Annual IRS Form 5500 preparation and general plan administration is $210.

How much can be saved by using HPEP?
• Because everyone is unique, you must speak with your tax/legal advisor to determine the exact initial savings. However, as an example, if you were to rollover $100,000 to the HPEP, and assuming you were in the 28% tax bracket, your savings would be as follows:
- $100,000 x 28% = $28,000
- $100,000 x 10% (penalty if applicable) = $10,000
- $100,000 x state income taxes if applicable
In this example, the initial savings would be $38,000 plus any state or local income taxes. The reality is that tax and penalties can rise as high as 50% on amounts distributed from retirement accounts. As you can see, these savings provide an attractive incentive to use HPEP.

What responsibilities do I have?
• You are required to obtain an initial fair market valuation (appraisal) of the business you will be purchasing.
• You will be required to enroll ALL of your qualifying employees. The plan provides for immediate eligibility.
• You will be required (within a reasonable period of time) after your transaction to begin submitting payroll and contribution information to the trustee (along with contribution dollars). We will show you how this is to be done.
• You will be required to match a portion of your employee’s contributions (if they make any)
• You will be required to distribute communications, summary plan descriptions, and other updates/communications to your participants from HPEP’s trustee.
• You will be responsible for paying the monthly administration and operational expenses associated with plan management.

For your Tax and Legal Advisors:
(ERISA—Employee Retirement Income Security Act of 1974) The Statutory Authority for certain Qualified Plans (such as a 401(k) plan) to purchase Qualifying Employer Securities: EXEMPTIONS FROM PROHIBITED TRANSACTION RULES:
IRC 4975(d)(13) and ERISA 408(e) exempt transactions that are handled according to strict guidelines to be exempt from the prohibited transaction regulations.
The rules defining Qualifying Employer Stock can be found in section 4975(e)(8) of the Internal Revenue Code.
To satisfy the exemption requirements of ERISA 408(e), a plan that permits the purchase or sale of “Qualifying Employer Securities” must satisfy certain requirements, which are:
• The acquisition or sale is for “adequate consideration” (as determined by Fair Market Value appraisal) (ERISA 408(e)(1));
• No commission is charged for the transaction (ERISA 408(e)(2); and
• The plan is an “eligible” defined contribution plan (ERISA 408(e)(3)(A)
ERISA 407(b)(1) states that purchase and holding of Qualifying Employer Securities (normally 10% of plan assets) does not apply to 401(k) plans which are “eligible individual account plans” [(ERISA 407(b)(1), ERISA 407(d)(3)]. In addition, these plans do not violate ERISA’s diversification and to the extent it requires diversification —prudence requirements (ERISA 404(a)(2)).

OTHER STRUCTURAL/OPERATIONAL REQUIREMENTS
1) Plan states that ALL employees are immediately eligible to participate. However, this does not mean employees can invest in your company stock. This would not be prudent in most cases. The plan document restricts rollovers and subsequent stock transactions less than $50,000.
2) Ongoing contributions must be made to the plan
3) The plan is a safe harbor matching plan, therefore the matching formula is 100% on the first 3% contributed by each employee (including owner) and 50% on the next 2%. The matching will never exceed 4% of employee (of those who contributes) wages.
4) 5500 is completed and filed by HPEP professionals for all co-sponsors (clients)
5) Continued interaction between HPEP, trustee and your business