Insights
Published August 24, 2026 by Harbor Point Advisors
Two weeks before closing, he asked his attorney what was going to happen to the 401(k).
The attorney said it was being handled. Which was true. The plan was going to be terminated on schedule, the paperwork was already drafted, and every participant would receive a notice explaining their options. Nothing was wrong.
What nobody said, because it was not their job to say it, was that his own balance was the second largest number in the transaction and that the decision he was about to make about it on a form, in a week where he was making forty other decisions, would set his tax bill for the year and determine whether he could touch that money before he turned fifty-nine and a half.
He was fifty-seven.
Go looking for guidance on this and see what you find. Articles about stock sales versus asset sales, written for HR directors. Law firm summaries about plan sponsor obligations. Recordkeeper explainers about participant notice requirements. Forum threads where employees ask what happens to their match.
All of it is competent and none of it is written for you, the person who owns the company and also happens to be the participant with the biggest balance.
Those are two different roles and they want opposite things. As the sponsor, you want a clean termination that closes without a compliance problem. As a participant, you want to know what this does to your taxes and your access to your own money. Your attorney is handling the first one. Nobody is assigned to the second one.
So here is the second one.
Yes, and this is the fork everything else runs through, so it is worth getting straight even though it sounds like paperwork.
In an asset sale, the buyer purchases the assets of the business. Your entity generally survives the transaction and continues to sponsor the plan. Typically the plan is then terminated, and a plan termination is a distributable event. Balances can come out.
In a stock sale, the buyer acquires the entity itself, and the plan usually goes with it. The buyer then chooses: keep the plan running, merge it into their own, or terminate it. If the plan continues or merges, there is often no distributable event at all, which means you cannot move your balance even though you no longer work there in any meaningful sense.
That surprises sellers. People assume that selling the company frees the money. Depending on the structure, it may do the opposite and leave your balance inside a plan controlled by someone you just sold to.
If the deal structure is still being negotiated, this is worth raising, because it is easier to address in the purchase agreement than after closing.
Usually, if the plan terminates. But there is a trap here that catches owners who are not fully retiring, and it is the kind of thing that is invisible until it is expensive.
It is called the successor plan rule. If you terminate a 401(k) and then establish or maintain another defined contribution plan during the period running from termination through twelve months after all assets are distributed, the new plan can be treated as a successor. When that happens, the distributions from the terminated plan were not valid distributions, and plans that violate the rule risk disqualification, taxation of assets, and penalties.
Why does this matter to a seller? Because plenty of owners do not stop working. They sell the operating company and start something new the following spring. If that new venture sets up a 401(k) inside the window, the tidy termination you did at closing can be retroactively compromised.
There are exceptions, including a narrow one where fewer than two percent of the eligible employees end up in the new plan, and certain plan types such as SEPs and SIMPLEs are never treated as successors. Which is exactly the sort of detail you want confirmed by your TPA or ERISA counsel before you sign anything, rather than discovered afterward.
Now the part I most want you to read, because it is the one I see most often and it is entirely preventable.
When the plan terminates, you get a form. The form asks where to send your balance. The overwhelmingly common answer, the one the recordkeeper's paperwork gently steers you toward and the one every reasonable person picks, is: roll it all into an IRA.
For most people that is right. If you are under fifty-five or over fifty-nine and a half, roll it and stop reading this section.
But if you are somewhere between fifty-five and fifty-nine and a half, you are about to give something up without being told.
There is a provision commonly called the rule of 55. If you separate from service with an employer in the year you turn fifty-five or later, you can take distributions from that employer's plan without the ten percent early withdrawal penalty. Ordinary income tax still applies. The penalty does not.
Here is the part nobody mentions on the form. It applies only to the employer plan. Rollover IRAs from 401(k)s are not included in this rule, and withdrawals could incur a penalty.
10%
So picture the fifty-seven year old who just sold. He does not want another job. He has a few years before Social Security and before he can touch an IRA without penalty, and he needs income in the meantime. The one tool built precisely for that situation is the rule of 55, and he erases it by checking the box everyone checks.
I am not saying take the cash. Taking a large distribution has its own consequences, and I will get to the timing in a moment. I am saying that the moment the termination paperwork arrives is a decision point, not an administrative formality, and it deserves a conversation before the form goes back.
Whether it applies to you depends on your age, your actual separation from service, and what your plan document permits, which for an owner-employee is not always as simple as it sounds. Confirm it with your CPA and your plan administrator rather than with a blog.
The other expensive decision is timing, and it is expensive in a way that is easy to see coming and easy to miss anyway.
The year you sell is usually the highest income year of your life. Gain from the transaction, any final compensation, whatever the business threw off before closing. Everything stacks into one return.
Now drop a taxable distribution from a terminated 401(k) on top of that stack. It lands at the highest rate you will pay, in the year you can least afford it.
A rollover, by contrast, is not a taxable event. The money moves and nothing hits the return. So for most sellers, the answer is that the balance should move but the tax should not, and the decisions about converting, distributing, or repositioning belong to a later year when your income has normalized.
The exception runs the other direction and is worth knowing about. Some sellers have an unusually low income year immediately after closing, once the operating income stops and before other income begins. That trough can be a comparatively inexpensive window for a Roth conversion. Whether that is true for you is arithmetic your CPA can do in an afternoon with your actual numbers, and it is worth asking rather than assuming.
Either way, the principle is the same one that governs everything else in this period: move deliberately, and do not let a form's due date decide your tax year for you. That is the same reason I keep saying the first ninety days after you sell should mostly be about not making irreversible decisions.
None of this requires expertise. It requires asking four questions before the paperwork comes back.
Ask whether the deal is an asset sale or a stock sale, and what happens to the plan under each. Your attorney knows. Most sellers never ask, because it sounds like a plan sponsor question rather than a personal one.
Ask whether you intend to start anything new within the next year. If there is any chance of a new venture with a retirement plan, raise the successor plan rule with your TPA before termination, not after.
Ask how old you will be at separation. If the answer is between fifty-five and fifty-nine and a half, stop and get advice specifically about the rule of 55 before you elect a full rollover.
Ask what year the tax should land in. Usually not this one. Sometimes next one. Never by accident.
And once the balance is somewhere sensible and the year has turned, the real question arrives, which is what all of it should actually produce for you. I wrote separately about how much monthly income a lump sum genuinely generates, three different ways, because that is the decision this one is really setting up.
Your 401(k) is not a loose end from the transaction. For a lot of owners it is the second largest asset in their life, and the only time anyone treats it as a footnote is the exact week when the decisions about it are being made permanently.
The transaction has a team. The lawyer, the banker, the CPA, the buyer's counsel. Every one of them is working on the company. Your own balance is the piece nobody was hired to think about.
If you want someone to look at that piece specifically before you sign the election form, that is a conversation and not a commitment. There is more on the whole picture on our what to do with proceeds from selling a business page whenever you are ready.
No pressure, no obligation, just clarity.
This article is provided for educational purposes only and does not constitute tax, legal, investment, or ERISA advice. Retirement plan rules are complex and outcomes depend on your specific plan document, the structure of your transaction, and your individual circumstances. Plan termination, distribution eligibility, successor plan treatment, and separation from service determinations should be confirmed with your third party administrator, ERISA counsel, and tax professional before you act. The rule of 55 and early withdrawal penalty exceptions are subject to eligibility requirements and plan terms and may not apply to you. Tax rules reflect current federal law and are subject to change; consult your own tax professional regarding your specific situation. Product guarantees are subject to the claims-paying ability of the issuing insurance company. Adam Stevens is a licensed insurance professional. Harbor Point Advisors.
Harbor Point Advisors. Bozeman, Montana. (406) 539-3423. Serving clients nationwide.
Harbor Point Advisors is an insurance agency. Adam Stevens is a licensed insurance professional, license number 3004330767, NPN 22297129. Not a registered investment adviser or broker-dealer.
This article is educational and is not individualized investment, tax, or legal advice.