401(k) plan termination

Definition

Shutting the seller's retirement plan before close so it is never inherited.

Why It Matters

In a stock sale the company keeps its retirement plan and the plan's compliance history comes with it, so buyers routinely require the seller to adopt a termination resolution dated before closing. Adopted after, the buyer's own 401(k) counts as an alternative plan under the IRS rule, so the old plan cannot pay out on termination, and folding it into the buyer's plan brings its defects along. In an asset sale the plan stays behind and the rehired staff simply enroll in yours. Ask which shape applies the week the LOI is signed, and get the resolution date in writing.

In numbers: A plan holding $2M for 30 employees takes 60 to 90 days to wind down, and the resolution has to be dated before the closing date to keep it off the buyer's books.