The 401(k) must be terminated before closing, not on it.

A 401(k) is one of the few items in a sale where a single date decides the outcome. In an equity sale where the buyer keeps its own plan, the terminating resolution should be adopted and effective before the closing date. Terminate on the closing date instead, and elective deferrals may not be distributable on account of the termination.

What happens to the 401(k) when you sell your business?

A 401(k) plan belongs to the legal entity that sponsors it. In an equity sale, the plan travels to the buyer with the company unless it is terminated or merged. In an asset sale, the plan stays behind with the selling entity, which has to wind it up. Every other question follows from that split.

Coverage testing gives the buyer time. After a qualifying acquisition, the minimum coverage rules provide a transition period running to the last day of the first plan year beginning after the transaction, on conditions. That relief does not suspend the successor plan rule.

Law: 26 U.S.C. 410(b)(6)(C).

You do not have that luxury. If the answer is termination, the date has to be fixed and executed while you still control the company.

Why must the termination be effective before the closing date and not on it?

The successor plan rule is the reason. A terminated 401(k) cannot distribute elective deferrals, QNECs, QMACs, safe harbor contributions or their earnings on account of the termination if the employer maintains or establishes another defined contribution plan at any time from the termination date until 12 months after all assets are paid out.

The regulation calls it an alternative defined contribution plan. ESOPs, SEPs, SIMPLEs, 403(b) and 457(b) plans do not count. One narrow exception: the other plan is disregarded if, at all times during the 24-month period beginning 12 months before the termination date, fewer than 2 percent of the employees eligible under the terminating plan were eligible under it. Where the buyer will enroll your workforce, that exception is gone.

Law: 26 U.S.C. 401(k)(10)(A); 26 C.F.R. 1.401(k)-1(d)(4)(i).

Read the timing honestly. The rule tests the employer, and after closing your company sits inside the buyer’s controlled group. Terminating first works because the test is applied as of the termination date, before the buyer was part of that group. The regulation does not say so in terms. It is the conservative date, and the one buyers ask for.

Apply it to a stock sale. The board terminates the plan effective on the closing date. Closing happens, the buyer’s 401(k) is live, and the plan cannot pay out deferrals on account of the termination. Accounts sit. Rollover paperwork gets rejected months later. The block is not a one-year wait. It lasts as long as the buyer keeps its plan, and the repair is usually a merger.

A resolution dated the closing date is not a near miss. It is the wrong side of the line, and the people who pay for it are your former employees.

That is why purchase agreements in equity deals routinely require the resolution to be adopted and effective at least one business day before closing, with executed copies delivered to the buyer. The covenant is the buyer’s idea. Performing it is yours, and the deliverable is a signed resolution.

Who signs the terminating resolution, and what date goes on it?

The plan sponsor’s governing body signs: the board of directors for a corporation, the managers or managing member for an LLC. The resolution states a termination date, and that stated date is the one the IRS tests against. It should fall at least one business day before the scheduled closing date.

The date is not a formality. On termination, the rights of affected participants to benefits accrued to that date become nonforfeitable to the extent funded, which in a 401(k) means their account balances. A determination letter request on termination must include the terminating resolution or amendment, and its date has to match the form. That request is optional, and plans this size usually skip it.

Law: 26 U.S.C. 411(d)(3); 26 U.S.C. 402(c)(3)(C); Form 5310 and instructions.

A complete termination package should:

• stop elective deferrals and employer contributions as of that date, which means coordinating the final payroll;
• fully vest the account balances of all affected participants, and allocate remaining forfeitures under the plan’s terms;
• adopt any amendments needed to bring the document current, since a plan cannot terminate into a document that was never updated;
• direct the administrator to distribute all assets as soon as administratively feasible;
• say how outstanding loans are handled, because an offset is taxable unless rolled over, and a qualified plan loan offset can be rolled over as late as the participant’s return due date; and
• name who signs distribution and filing documents after closing.

I read the plan document and the recordkeeper’s termination checklist before the buyer’s draft covenant, and I ask for the signed resolution rather than a description of it.

Do not backdate. A resolution signed after closing and dated before it is worse than a late termination: the first is a record you created, the second a mistake you can correct.

What happens to the 401(k) in an asset sale instead of a stock sale?

In an asset sale, the 401(k) stays with the selling entity, because the sponsor itself is not sold. You remain the plan sponsor and a fiduciary until the assets are distributed and the final annual report is filed. Employees who move to the buyer generally have a severance from employment, which is a distributable event.

The same-desk problem is gone. The statute allows distribution on severance from employment rather than separation from service, so an employee wearing the buyer’s badge the next morning has still severed employment with you. The limits are real. There is no severance if the person keeps working for a member of your own controlled group, and employees you retain have none.

Law: 26 U.S.C. 401(k)(2)(B)(i)(I).

Winding up has its own clock. Assets must be distributed as soon as administratively feasible, and distribution within one year of the termination date meets that standard. A plan that stops contributions but leaves money in the trust is frozen, not terminated, and must stay qualified while it sits. The final return/report is filed for the plan year ending when all assets have been distributed or legally transferred. Small plans generally file Form 5500-SF.

Law: Rev. Rul. 89-87; IRM 7.12.1 (Plan Terminations); 26 U.S.C. 6058; Form 5500 instructions.

• Do not dissolve the selling entity until the plan is distributed and the final report is filed. Someone has to be sponsor and to sign.
• Keep the ERISA fidelity bond and the service agreement in force through the wind-up. Bonding runs with handling plan funds, not with the sale.
• Watch the successor plan rule again if you keep operating another business. A new 401(k) for the retained company can be the alternative plan that blocks deferral distributions.

Does everyone become fully vested, and what is a partial termination?

Plan termination makes every affected participant fully vested in their account balance as of the termination date. A partial termination does the same thing for affected participants when a significant group of them leaves. Under Rev. Rul. 2007-43, a turnover rate of 20 percent or more creates a rebuttable presumption that a partial termination has occurred.

The numerator is participating employees with an employer-initiated severance during the applicable period, usually the plan year, longer if related severances span more than one. The denominator is participants at the start plus those who joined during it. Vested and nonvested both count, and the presumption is rebuttable.

Law: 26 U.S.C. 411(d)(3); 26 C.F.R. 1.411(d)-2; Rev. Rul. 2007-43.

This bites in the asset sale that moves most of the workforce while the plan continues for a retained business. Unvested match you expected to forfeit vests instead. That cost lands on you, not the buyer.

How do late 401(k) deposits show up in diligence?

Elective deferrals withheld from pay become plan assets as soon as they can reasonably be segregated from the company’s general assets. A plan with fewer than 100 participants at the start of the plan year has an optional seven-business-day safe harbor for depositing them. Late deposits are a fiduciary breach, and payroll records show them plainly.

The fifteenth business day of the following month is a ceiling in the regulation, not a deadline you are entitled to use. Once the money is a plan asset, keeping it in the operating account is a use of plan assets by the employer and a prohibited transaction. That is what the Department of Labor’s Voluntary Fiduciary Correction Program fixes.

Law: 29 C.F.R. 2510.3-102.

Diligence does not find late deposits by cleverness. It finds them by subtracting one date from another.

Correct it before a buyer’s adviser builds the schedule. The program was amended effective March 17, 2025 to add self-correction for delinquent contributions and loan repayments. As of October 2026 that route requires lost earnings of $1,000 or less, calculated with the Department’s online calculator, remittance within 180 calendar days of withholding or receipt, a plan not under investigation, and an electronic notice instead of a full application. Larger or older failures take a standard application, and excise tax relief is conditional, under the related class exemption.

Law: 90 Fed. Reg. 4192 (Jan. 15, 2025) (VFCP; PTE 2002-51 amendments).

Qualification failures are a separate track. Missed deferral opportunities, a document never restated, compensation defined one way and administered another: those run through the IRS correction system, set out in Rev. Proc. 2021-30, with interim guidance in Notice 2023-43 on self-correction of eligible inadvertent failures under SECURE 2.0 section 305. That remains operative as of October 2026, and an update has been directed, so confirm it before filing.

Law: Rev. Proc. 2021-30; Notice 2023-43.

A buyer who finds these first does not walk. That buyer asks for a specific indemnity, a larger holdback, or a price reduction sized to the worst case, not the real cost.

Should you merge the plan into the buyer’s plan instead?

Merging the target 401(k) into the buyer’s plan avoids the successor plan problem entirely, because nothing is distributed. The price is history. The merger carries your plan’s compliance record into the buyer’s plan, prior failures still have to be corrected, and protected benefits under your plan must be preserved in the surviving plan.

A buyer asked to absorb your plan will diligence it harder than one watching it terminate. Expect more questions, not fewer.

Law: 26 U.S.C. 411(d)(6); 26 C.F.R. 1.411(d)-3.

What should you do about the 401(k) before you sign the letter of intent?

The 401(k) belongs on the table before the letter of intent, not at signing of the purchase agreement. Four things answer most of the questions: the plan document with all amendments, the last three annual filings, three years of testing, and payroll registers matched line by line against trust deposit dates.

• Decide the question before you sign. Terminate, merge, or keep. Letters of intent at this size rarely mention benefit plans, so expect to raise it yourself. One sentence does it: the choice, and the day before closing as the effective date if the answer is terminate.
• Get the recordkeeper’s sequence in writing. Last payroll with deferrals, blackout dates, final true-up, when distribution packages go out, when the trust empties.
• Check whether the plan is a safe harbor design. A safe harbor plan terminated mid-year keeps that status for the short year if the termination is tied to a qualifying acquisition or substantial business hardship. Otherwise ADP and ACP testing, and top-heavy, return for the whole year.
• Reconcile deposits yourself. Withholding date against deposit date, every payroll, three years back. Any gap goes into the correction program before diligence opens.
• Close out qualification defects. Missed restatements, eligibility errors, the wrong compensation definition. Correct them rather than disclose them raw.
• Calendar the wind-up. Distribution as soon as administratively feasible, then the final annual report. Do not let the selling entity dissolve before both are done.

Law: 26 C.F.R. 1.401(k)-3(e)(4).

The rules here are stated as of October 2026. Thresholds and procedures change, so confirm the operative revenue procedure before you act.

One date on one resolution decides whether this is a clean wind-up or an indefinite lockout. Fix the date first; the rest is administration.