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Tuesday, June 13, 2017

What Happens to the 401(k) Plan When You Sell Your Business?


As with many things, the answer to the question, “What happens to the 401(k) plan when I sell my business?” is, “It depends.”

The 401(k) plan is an entity separate and apart from your business. The business entity is the sponsor of the 401(k) plan.  Therefore, if you sell the equity in your business and the business entity continues to exist in the hands of the buyer, the 401(k) plan would generally continue to exist and continue to be sponsored by the business entity.

On the other hand, if the business is sold via a sale of assets, ordinarily the sponsorship of the plan would remain with the old business entity (now a shell). The seller could negotiate with the buyer regarding the 401(k) plan being continued with a change of sponsor.  However, most buyers would be reluctant to assume responsibility for the plan.

The reason is that 401(k) plans are covered by many legal requirements enforced by both the Internal Revenue Service and the Department of Labor. A new sponsor of an existing plan would to a great extent assume responsibility for past compliance with the legal requirements. Generally, there is no easy way to assure the buyer that an existing plan is completely compliant. Therefore, the buyer will generally not want to assume sponsorship of the plan. That reluctance can also be a factor even when the business is sold by equity transfer.  Although ordinarily with a sale of the entity there would be no question about sponsorship of the plan, a buyer may require a seller to terminate the 401(k) plan prior to the sale. Generally, it is not complicated or expensive for the buyer to establish a new 401(k) plan. 

Considering selling your business? Contact your local Armanino expert for more information.

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