Michael D. Julianelle, the IRS director of employee plans, separately noted in an October 2008 memorandum that a number of ROBS transactions were noncompliant.

Julianelle says that during an examination, the IRS found "disqualifying operational defects" in most ROBS plans. Employees in some arrangements were not notified of the company profit-sharing plan or did not receive their share of the company stock in the plan. Plan assets were not valued or were valued with "threadbare appraisals." Annual reports were not filed. Several businesses failed or assets were used for personal and non-business purchases.

The Small Business Administration, which honored Guidant Financial Group in 2007 for its "outstanding success and support of small business," denies any affiliation with ROBS transactions. "We don't endorse this method of financing," says Michael Stamler, a spokesperson with the Washington, D.C.-based SBA.

The agency does, however, consider ROBS transactions acceptable as down payments on an SBA loan, Stamler says, adding that the 401(k) proceeds represent the business owner's equity stake in his or her firm.

Attorney Weinstock recommends that financial advisor clients avoid ROBS transactions altogether. "The problem with a ROBS transaction might not be the structure of the deal, but more so with operating and administering the deal after the transaction is completed," he says. "You could see more audits over the next few years."

While the IRS has not officially said these transactions are illegal, it will scrutinize ROBS setups case by case, he says.

Fischer, BeneTrends' CEO, is also a tax attorney, and he disagrees with these assessments. He says he has met with the IRS undersecretary of the Treasury about ROBS transactions.

"As long as the transaction is based on the rules set forth in the 2008 IRS memorandum, there is no problem," he says.

Fischer adds that only 1% of the 3,500 plans his firm administers have been audited by the IRS. None was fined. Nilssen of Guidant Financial also says that less than 1% of the businesses using his services have been audited. And again, none was fined.

William Brighenti, a CPA in Berlin, Conn., recommends that people determined to use a ROBS transaction do the following:
Hire an appropriate attorney to prepare the new retirement plan document.