I recently sold my business, and all of my employees went to work for the buyer. My goal is to continue working for a period of time, but I do not expect to hire any more employees.
Can I keep my 401(k) plan open even though I no longer have any employees? Also, can I set up a defined benefit plan using the proceeds from the sale of my business?
Any time the sale of a business is involved, the first question that arises is whether it was a stock sale or an asset sale. If you sold the stock of your company, then the buyer most likely inherited your 401(k) plan along with the purchase. That can be the case even if that wasn’t specifically intended and even if the buyer already had their own plan in place. As a result, you typically would not be able to maintain the existing plan.
On the other hand, it you sold certain assets of your business, then your company still exists as a separate entity and continues to be the sponsor of the 401(k) plan. Although all your former employees are terminated from service with your company and are entitled to take distributions from the plan, you continue to be a participant in the plan and can maintain it for as long as you would like.
That brings us to the topic of the proceeds of the sale and your question about a defined benefit plan. Regardless of the type of plan (401(k) or defined benefit), contributions are primarily a function of your annual compensation. For these purposes, compensation is either the amount reported on a W2 for a corporate entity or earned income for partnership or sole proprietorship. Since proceeds from the sale of a company do not fall into any of these categories, they cannot be used as the basis for retirement plan contributions.
There is an important “but” here. There is nothing that prohibits you from using that cash to actually fund retirement plan contributions that are based on compensation/earned income that you receive from your continued work. You would simply use that compensation/earned income to determine the tax-deductible contribution you are allowed to make to your 401(k) plan and/or defined benefit plan and use whatever cash you have available to actually fund that contribution.
For more information on M&A and eligible plan compensation, please visit our Knowledge Center here, here and here.