Hunter Benefits Consulting Group



Selling Your Business With a 401(k): 7 Costly Mistakes to Avoid

by Webmaster

Are you contemplating selling your business? If so, and if your business includes a 401(k) plan, you’ll want to pay close attention. In this guide, we’re unraveling the potential pitfalls associated with selling a business and managing its retirement plan. Let’s dive into the seven mistakes you absolutely want to steer clear of:

1. Neglecting Fiduciary Responsibilities:

  • The sale of your business doesn’t absolve you of fiduciary duties.
  • Continue treating plan participants fairly and avoid misusing plan assets during the transaction.
  • Failing in this area can lead to legal complications, penalties, and damage to your business reputation.

2. Communication is Key:

  • Clearly communicate changes to participants promptly.
  • Inform them about post-sale scenarios, plan asset management, and provisions for a successor company.
  • Transparent communication builds trust, reduces anxiety among employees, and facilitates a smoother transition.

3. Improper Handling of Participants’ Accounts:

  • In an asset sale, terminated participants trigger 100% vesting.
  • Continue making required deposits, especially if your plan has safe harbor or top-heavy provisions.
  • Failure to manage accounts properly can lead to compliance issues, disgruntled employees, and potential legal challenges.

4. Neglecting Compliance Issues:

  • Plans are separate legal entities; they need active termination, not passive termination.
  • Be aware of close-out fees and ensure fair distribution among participants.
  • Ignoring compliance can result in regulatory scrutiny, fines, and disruptions to the sale process.

5. Not Seeking Professional Guidance:

  • Consult your pension advisor before the transaction.
  • Whether it’s a stock or asset sale, professional guidance is vital to achieving your goals.
  • A seasoned consultant can provide insights, navigate complex regulations, and help you make informed decisions.

6. Overlooking Plan Termination Procedures:

  • Address notification requirements, Sarbanes-Oxley notices, participant loans, and required minimum distributions (RMDs) during termination.
  • Overlooking these procedures can lead to confusion, financial penalties, and delayed closure of the retirement plan.

7. Assuming the Sale Ends Your Responsibility:

  • Your responsibilities endure post-sale.
  • Maintain records for at least seven years and be prepared for potential audits.
  • Assuming your responsibilities have ended can result in legal consequences and financial repercussions.

In conclusion, involving your consultants early in the process is crucial. We understand the need for confidentiality but also recognize your fiduciary obligations. Seeking professional advice can lead to cost savings and a smoother transition for everyone involved.

Watch our video on a cautionary tale where a business owner’s mistakes cost him $14,000, emphasizing the importance of avoiding these pitfalls. 

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