The Accountant’s Guide to FranPlan.

When working with our clients in establishing a FranPlan as a part of a capitalization strategy, it is not uncommon for the client’s local accountant, attorney or other professional advisor to ask for additional information about how a FranPlan works. Local professional advisors often times have not heard of the FranPlan strategy. They may not be experienced in retirement plan design or familiar with the provisions of the Internal Revenue Code (IRC) and Employee Retirement Income Security Act (ERISA) that support the FranPlan. The following information is a useful guide.

WHAT IS FRANPLAN?
FranPlan is a “qualified” defined contribution retirement plan. It is virtually identical to the tens of thousands of 401(k) Profit Sharing plans that have been established by US corporations. In order to be a “qualified” plan, both the form of the plan and its operations must conform to the requirements of Section 401(a) of the IRC.

In a nutshell, once a qualified FranPlan is established by a new corporation, the following sequence of events occurs:

• The Individual Manager/Shareholder/FranFund Client becomes an employee of the corporation and is, therefore, eligible to participate in the new retirement plan.
• As an employee/participant, the individual is entitled to “roll over” or transfer directly to his or her new retirement plan monies held in a qualified retirement vehicle or IRA.
• Once the rolled over funds are held by the trustee (the individual acts as trustee) of the new plan, they are invested (not “distributed” or “paid out”) by the trustee in common stock of the new corporation, which is the plan sponsor.
• The new corporation uses the proceeds from its initial stock offering to undertake business operations.
• The new plan operates in accordance with its intended primary purpose as a qualified retirement vehicle.

ISN'T THE PURCHASE OF STOCK BY THE RETIREMENT PLAN ESTABLISHED BY THE CORPORATION A "PROHIBITED TRANSACTION"?
The purchase of common stock of a “Plan Sponsor” by the Plan Sponsor’s retirement plan is exempt from the prohibited transaction rules under Section 4975(d)(13) of the IRC and Section 408(e) of ERISA if:
(1) the purchase is for adequate consideration,
(2) no commission is charged, and
(3) the purchasing plan is an eligible individual account plan as defined in section 407(d)(3) of ERISA. (The FranPlan Document includes language qualifying it as an “eligible individual account plan.”)

Concerning the Prohibited Transaction rules of The Code and ERISA, a FranPlan transaction relies on the same exemption applicable to an “ESOP,” a very popular “employee ownership” device.

HOW DO I KNOW THAT MY CLIENT'S PLAN WILL BE "QUALIFIED"?
As part of our service package, FranFund will file each client’s FranPlan with the Internal Revenue Service (IRS) for a favorable “Determination Letter.” A favorable determination letter indicates that, in the opinion of the IRS, the terms of the plan conform to the requirements of IRC section 401(a). A favorable determination letter expresses the IRS’ opinion regarding the form of the plan document. In addition, the FranPlan Basic document is pre-approved by the IRS under the so-called “Volume Submitter” Program.

As noted above, a qualified plan must meet both form and operational requirements.  The IRS will not give an advance ruling on operational issues. FranFund offers continuing operational advice for a FranPlan in its role as a “Third Party Administrator” and will help its clients to operate and administer their plan in accordance with its written terms. In addition, FranFund will assist in the preparation of any required filings for the retirement plan, including the Form 5500 Series. Through our state-of-the-art administrative platform, our clients will have direct web-based access to their plan and participant records.