Using your 401(k) to start a NEMT business (ROBS): the new C corporation, the plan, and what the IRS checks

A ROBS, short for rollover as a business start-up, lets you put retirement savings into a NEMT company without taking a withdrawal. You form a new C corporation, the corporation sets up a 401(k) plan, you roll an old retirement account into that plan, and the plan buys stock in the company. The company ends up with cash for vans and start-up costs, and the plan owns the shares.

The IRS does not call a ROBS an abusive tax avoidance transaction. It does examine them, and most of the ROBS businesses it studied failed or were on the way there. This guide covers how the structure works, what the IRS checks, what the plan files every year, and how lenders and Medicaid treat a company that a retirement plan owns. For every other way to pay for a start-up, see NEMT business funding.

How does a ROBS pay for a NEMT start-up?

The retirement money moves into a new plan, the plan buys the company’s stock, and the company spends the cash. The IRS describes the order in its October 1, 2008 guidelines memo and on its ROBS project page.

1. Form a new C corporation. The IRS describes the plan buying the stock of a new C corporation, which pays its own income tax and files Form 1120. The LLC guide covers how other company types are taxed.
2. Adopt a 401(k) plan. The memo describes a profit-sharing plan with a 401(k) feature, with terms that let the plan hold employer stock.
3. Roll your savings in. You move money from a prior employer’s plan or an IRA into the new plan, by direct rollover or trustee-to-trustee transfer. Because one tax-deferred account feeds another, no tax is due on the move. The rollover is reported on Form 1099-R.
4. The plan buys the stock. You direct the plan to buy newly issued shares of your corporation. The memo says the stock is valued to match the amount of plan assets the owner wants to access, so the size of the rollover is the owner’s choice.
5. The company spends the cash. The money pays for the business, which in the memo’s words can be a franchise or another kind of enterprise. For a NEMT company that means the first van, its conversion and the opening insurance deposit.

Here is an example with invented numbers. You roll $140,000 from a former employer’s plan into the new plan. The plan buys $140,000 of the corporation’s stock, so the corporation holds $140,000 in cash and the plan holds all of the shares. You work for the company and are the plan’s only participant until someone else qualifies.

Taking that $140,000 as a cash distribution would be taxed as ordinary income. Under age 59 and a half it would also carry the 10 percent early-distribution penalty unless an exception applies. The memo points to that tax as the cost a ROBS avoids.

What does the IRS say about a ROBS?

The IRS says a ROBS is not an abusive tax avoidance transaction, and it also calls the structure questionable because it can benefit only the one person who does the rollover. It opened a ROBS project in 2009 and still describes it on a page reviewed on November 16, 2025.

Three points from that page matter to an owner:

• A determination letter is not a shield. Promoters often get one to show clients the IRS approves. The IRS issues it based on whether the plan’s terms meet the Code. It gives no protection if you apply the terms wrongly or run the plan in a discriminatory way, and a plan operated that way can be disqualified.
• Most of the businesses failed. The IRS found that most ROBS businesses either failed or were on the road to failure, with high rates of bankruptcy, liens and dissolutions.
• The named problem areas. The IRS lists amending the plan after the stock purchase so other participants cannot buy stock, promoter fees, the valuation of the assets, and failing to issue Form 1099-R at the rollover.

The 2008 memo names two primary issues. The first is discrimination in benefits, rights and features, because the founder alone can buy stock. The second is a prohibited transaction caused by a weak valuation of the stock. In the cases examiners opened, some employees had never been told about the plan, some stock was unvalued or backed by thin appraisals, some annual reports had not been filed, and some companies had not survived or had spent the money on personal purchases.

A prohibited transaction is expensive. Under 26 U.S.C. 4975, the tax is 15 percent of the amount involved for each year in the taxable period, and 100 percent of the amount involved if the transaction is not corrected in that period. The memo says a plan buying employer stock must pay adequate consideration, which for stock with no public market means fair market value set in good faith. That is why the IRS cares about the appraisal when the company has no history yet.

Who has to be offered the plan, and the stock?

Employees who meet the plan’s eligibility rules must be able to join, and a stock option that only the founder ever receives invites a discrimination finding. Once the company hires drivers and dispatchers, five rules apply:

• Age and service. A plan cannot make an employee wait past the later of age 21 and one year of service (26 U.S.C. 410(a)). A year of service is 1,000 hours.
• Part-time drivers. For the 401(k) feature, a plan cannot make an employee wait longer than the earlier of that one-year rule and two consecutive 12-month periods with at least 500 hours each (26 U.S.C. 401(k)(2)(D)). A driver who averages 10 hours a week works about 520 hours a year, so a part-timer reaches that line in two years.
• Coverage. The plan has to benefit enough of the employees who are not highly paid. Section 410(b) sets three alternative tests, one of which is that the plan benefits at least 70 percent of them.
• The stock is a feature that gets tested. Under 26 CFR 1.401(a)(4)-4, the right to direct investments, and the right to a particular form of investment such as a class of employer securities, has to be available in fact, not only on paper, without favoring the highly paid. The memo says a one-time stock offering generally fails that standard and tells examiners to develop discrimination issues whenever the plan covers highly and non-highly paid employees and gives the others no stock option.
• Tell them. The memo says a plan must be a definite written program communicated to employees, and it flags new hires who never learned the plan existed.

Whether a driver is an employee at all is a different question, covered in 1099 or W-2 for NEMT drivers. The point here is narrower. A plan that keeps the stock option open to later hires and tells each new employee about it in writing answers the problem the memo describes.

What does the plan have to file every year?

The plan files a full Form 5500 every year, and the corporation files its own Form 1120. The IRS says promoters wrongly told some sponsors the short Form 5500-EZ exception for one-participant plans applied. That exception covers a plan holding $250,000 or less in assets that covers only an owner, or an owner and spouse, who wholly own the business. In a ROBS the plan owns the business through its stock, so the exception does not apply.

The shorter Form 5500-SF is also closed to this plan. Its 2025 instructions bar a plan that held employer securities at any time during the plan year. The details:

• When. The return is due on the last day of the seventh calendar month after the plan year ends, which is July 31 for a calendar-year plan. It is filed electronically on EFAST2.
• Late penalties. Under Code section 6652(e), the IRS penalty is $250 a day, up to $150,000 for the plan year. The Labor Department can also assess up to $2,739 a day under ERISA section 502(c)(2). The Labor Department’s May 27, 2026 notice made no inflation adjustment to its civil penalties for 2026.
• The bond. Once drivers or dispatchers join, the plan covers common-law employees and falls under Title I of ERISA (29 CFR 2510.3-3). ERISA section 412 then requires every plan fiduciary and everyone who handles plan funds or property to be bonded. The bond must be at least 10 percent of the funds handled, never less than $1,000, and capped at $500,000, or $1,000,000 for a plan that holds employer securities. Ask the plan administrator how that applies to a plan whose main asset is company stock.
• The stock value. The IRS lists valuation among the trouble spots. Each year the value of the stock should rest on the company’s real assets and results, not a one-page appraisal that matches the rollover.

How do SBA lenders treat a company a ROBS plan owns?

SBA allows it, with extra paperwork. SOP 50 10 8.1, published September 25, 2026 and effective October 1, 2026, says a business owned wholly or partly by a 401(k) plan, including a ROBS plan, may be eligible. The lender has to treat the plan sponsor’s failure to administer the plan properly as a risk to repayment, because disqualification brings adverse tax consequences.

The lender must:

• Record that the applicant is using a ROBS plan for the equity contribution or another purpose, and which purpose.
• Take the full, unconditional guaranty of the plan’s sponsors, whatever share of the company they hold.
• Collect a favorable IRS determination letter, the C corporation formation documents, the plan adoption documents, the stock purchase documents and the corporate resolutions.
• Get the borrower’s certification, before any disbursement, that the company and the plan comply with IRS, Treasury and Labor Department requirements.

SBA does not review that compliance itself, and loan proceeds cannot pay for forming the 401(k) plan. The plan cannot guarantee the loan, so the sponsors sign personally. For the 10 percent startup equity rule and what else counts toward it, see the SBA loan guide.

What changes on a Medicaid ownership disclosure?

The plan holds the company’s stock, and the Medicaid rule does not say how to list a retirement plan as an owner. Under 42 CFR 455.101, a person or corporation with an ownership interest of 5 percent or more is disclosed, and an ownership interest means possessing equity in the capital, the stock or the profits of the provider. The corporation’s officers and directors are disclosed too, whatever shares they hold.

Disclosure under 42 CFR 455.104 is due with the provider application, when the provider agreement is signed, at revalidation if the state asks, and within 35 days after any change in ownership. In a ROBS that last deadline matters when the plan sells shares or a later hire buys some. Call the state’s enrollment unit before you file and ask how it wants the plan’s trust and its trustee listed. The LLC guide lays out everything else Medicaid collects about owners and managers.

What happens to the savings if the company struggles?

The savings are worth what the stock is worth. The IRS found that some owners lost both their retirement assets and the business, and in many cases the money was used up before the company began offering its service.

NEMT adds a payment lag to that risk. A new company pays for vans, insurance and drivers before the first broker deposit. Under MTM’s Pennsylvania provider agreement, a properly submitted uncontested invoice is paid within 30 days after online electronic submission, and trips run with a driver or van that is not credentialed go unpaid. How long Medicaid takes to pay and the cash flow guide show how to count the weeks before the first deposit, and what it costs to start a NEMT business sets the budget the rollover has to cover.

A plan loan is the other way to use retirement money. The IRS limits one to the lesser of 50 percent of the vested balance or $50,000, to be repaid within five years in payments at least quarterly, and a missed payment turns the balance into a taxable distribution. A loan is capped far lower than a rollover, but the rest of the account stays invested.

What to ask a ROBS provider before you sign

Ask for the answers in writing before any money moves. The IRS says promoters market ROBS aggressively and that large recurring promoter fees were a factor in some of the losses.

• Who values the stock, and from what? A valuation should rest on the company’s actual assets and plan, not on a figure that happens to equal the rollover.
• Who files each year? Get a name for the Form 5500, the Form 1120 and the plan’s annual valuation.
• What are the fees, and who pays them? The memo says promoter fees paid out of the stock proceeds may be prohibited transactions.
• How will later hires be offered the plan and the stock? The answer should be a written offer for every eligible employee.
• What does a determination letter cover? Only the plan’s terms. Operation is on you.

Have an attorney experienced in ERISA review the documents before the rollover, because the IRS can disqualify a plan that is run wrongly after a clean approval.

Keeping driver hours in one place

Whether a part-time driver has reached the 500-hour mark is a records question. HealthRide’s driver reports show each driver’s hours from real clock-ins for any dates you choose. The person who administers the plan can check those hours against the company’s own pay records when deciding who has become eligible. See reports.