A practice sale while the cash balance plan is still open

March 29 is early enough to put an open cash balance plan into a sale, and late enough that a signed letter of intent may already be wrong. The plan is a qualified defined benefit plan of the employer. The hypothetical account on the statement is a way of expressing the accrued benefit. It is not a brokerage account you can assign in a purchase agreement, and it does not vanish because a buyer would rather not buy a pension. If counsel is already trading drafts and the plan has not been named, that is the gap to close this week. Decide whether the plan will continue, freeze, or terminate before the purchase agreement is final.

Sterling Pension Group LLC, in West Hartford, is the third-party administrator. We can assemble the census, the trust statements, the document, and the valuation so the lawyers are not inventing the liability from a participant statement. We are not an actuarial firm. An independent Enrolled Actuary certifies the valuation. We are not the sale counsel, and this briefing is not tax, legal, or actuarial advice.

The plan belongs to the employer, and the form of the sale decides which employer

Start with the entity, not with the handshake. In an equity sale the buyer purchases the corporation or the partnership interest. The plan sponsor is that entity. Unless the agreement says otherwise, and unless you actually terminate or spin the plan off before closing, the plan stays with the sponsor and goes with the equity. The buyer inherits a funding obligation, a document, a trust, and a filing history. Sophisticated buyers price that. Unsophisticated ones discover it in diligence and reopen the price.

In an asset sale the buyer purchases equipment, charts, goodwill, and often the right to hire the people. The seller's entity remains the plan sponsor unless someone moves the plan. Employees who resign and join the buyer have a severance from the seller. That severance can be a distribution event under the document. It is not, by itself, a plan termination. The seller may be left with a plan, a shrinking payroll, and a benefit promise that still has to be funded. The operating account that received the purchase price is not the plan's trust. Wiring sale proceeds into the pension because "that is the retirement piece of the deal" is how prohibited transactions start.

Related employers matter on both sides of the signature. If you keep a billing company, a real-estate LLC, or a second practice, those entities may still be in a controlled group or an affiliated service group with the sponsor. Selling one letterhead does not always sell the group. The same is true of the buyer. A buyer who already sponsors a plan may have to test the incoming employees, or the incoming plan, with the plans it already has. None of that is visible on a one-page term sheet that says "assets, free and clear."

The plan lifecycle page is the calm version of what happens after a plan exists. A sale is one of the events that page is for. The cash balance overview is the other page to hand a buyer who has never seen a hypothetical account and is treating it as a profit-sharing balance.

Continue, freeze, or terminate are different promises

Those three words get used as if they were synonyms. They are not.

Continuing means the formula keeps accruing for employees who still meet the document's rules. If you are the sponsor after closing, you are still the sponsor. If the buyer is the sponsor, the buyer has to decide whether it will live with your formula. A formula written for a 58-year-old owner and a small staff is rarely the formula a buyer wants for a growing practice.

Freezing means future accruals stop. Benefits already earned do not disappear. Anti-cutback rules protect the accrued benefit. A freeze also requires advance notice when the rate of future accrual is being significantly reduced. That notice is measured in days before the freeze is effective, and a closing scheduled for next Thursday is a poor way to discover the clock. After a freeze, the minimum funding obligation for what people have already earned continues. Investment losses can still increase the contribution. A freeze is a stop on new promises, not a release from old ones.

Terminating means the plan ends, benefits are made fully vested, and assets are distributed under the document and the law. The amount a participant receives is not automatically the number on last year's statement. The interest crediting rate, the plan's definition of the accrued benefit, and the rates that apply to lump sums can produce a different check. In a low-rate environment the cost of paying everyone out can exceed the hypothetical accounts. In a high-rate environment the relationship can run the other way. The only figure that belongs in a purchase-price adjustment is the figure an independent Enrolled Actuary will certify for the termination, and that figure is not available on the afternoon someone decides to "just wrap the plan into the deal."

Do not sign a clause that says the seller will terminate the plan and deliver benefits equal to the most recent statements. That sentence is how owners promise a number the statute may not allow them to pay, or a number that is smaller than the plan's real liability. Ask the actuary for a termination estimate before the clause is agreed. Label it an estimate until the final valuation is done.

There is a fourth path that is really a version of the first three: a spinoff of the owner's benefit into a separate plan that then terminates, leaving the staff plan behind, or the reverse. It is lawful only when the spinoff rules, the nondiscrimination rules, and the funding rules are all satisfied. It is not a stationery trick. If someone describes it as "we just move your account to a new plan and pay it out," send that sentence back.

Staff, vesting, and the partial-termination risk

A sale that moves a large share of the employees off the seller's payroll can be a partial termination. The consequence of a partial termination is full vesting for the affected group. Plans are often already generous on vesting, and many cash balance documents use a short schedule or immediate vesting. If yours does not, the sale can accelerate vesting you thought would be forfeited when people left. Forfeitures are not a silent source of funds for the owner's payoff.

The IRS looks at facts and circumstances, including the percentage of participants who leave in connection with the event. There is no owner-friendly rule that an asset sale is exempt. There is also no rule that a friendly transition, in which you introduce the staff to the buyer, avoids the question. Tell the administrator the expected termination dates before you announce them. A census built on "everyone is still here" is not the census the closing will produce.

Participants who keep working for a successor employer sometimes have distribution rights and sometimes do not. The document's definition of severance, and whether the buyer is a successor, decides it. Paying lump sums to people who have not had a distributable event is a qualification problem, not a courtesy. Holding balances for people who have had one, and who are entitled to an election, is an administration problem. Neither one is solved by a payroll cutoff.

Owners who are staying on as employees of the buyer for a year or two, a common earnout structure, need a separate answer. You may still be a participant. Your compensation may now be a W-2 from a company you do not control. The compensation briefing for S corporation wages is the right reread if the buyer is paying you a salary and the rest of the price is coming through as sale proceeds. Sale proceeds are not plan compensation. A consulting agreement after closing might be. Those are different documents, and only the one that is actually wages or earned income can enter a formula.

The 2026 limits do not bend for a closing

The limits in force this year were published in IRS news release IR-2025-111 on November 13, 2025, with the technical detail in Notice 2025-67. The elective deferral limit is $24,500. Catch-up contributions are $8,000, and $11,250 for a participant who is age 60, 61, 62, or 63. The defined contribution annual-additions limit is $72,000. Compensation that the plan may count is capped at $360,000. The defined benefit limit is an annual benefit of $290,000, not a deposit. The IRS explains that benefit ceiling on its defined benefit limits page. A sale does not create a special contribution cap, and it does not erase the one that already exists. There is no flat IRS cash-balance contribution limit to prorate across a closing date.

If the plan stays alive for 2026, accruals depend on who is employed, what they are paid, and what the formula says. A mid-year closing can cut the owner's considered compensation if the wages stop. An illustration prepared in January on a full year of $360,000 is not the illustration for a March sale. Ask for a revised illustrative range. Do not fund the January picture because the wire instructions were already drafted.

Two clocks from 2025 are still running, and a sale does not merge them. For a calendar-year plan, the minimum funding contribution for the 2025 plan year is generally due September 15, 2026. The deduction for that contribution often follows the due date of the employer's 2025 return, including extensions. Those are different rules. A buyer who wants the seller to "clean up the pension before closing" may be talking about minimum funding, about the deduction, about a termination shortfall, or about all three without knowing it. Publication 560 is the IRS booklet that separates plan types. It will not price your deal. Your CPA has to say which tax year can take which deposit, and the enrolled actuary has to say what the minimum is.

The 2025 Form 5500, for a calendar-year plan, is due July 31, 2026, or October 15, 2026 if the extension on Form 5558 is filed. A sale that closes in April does not cancel that filing. The plan administrator who signs it is whoever the document says, which may be you personally. The deadline calendar is the place to put these dates next to the closing timeline so they are not treated as the buyer's problem by default.

PBGC coverage can change because the employer changed

Pension Benefit Guaranty Corporation coverage is plan-specific. Many small professional-service plans are exempt. Not all. The exemption that practices rely on generally requires a professional-service employer and a plan that has not had more than 25 active participants. A dental or medical practice with a small staff is a common exempt case. A business that is not a professional-service employer is not exempt merely because it feels small. The PBGC explains the categories on its coverage page.

A sale can change the answer. The buyer may not be a professional-service employer. The combined staff may cross the headcount. A plan that was exempt can become covered, and premiums are a separate check from the contribution. The reverse can also happen, and you should not assume it. Do not represent in the purchase agreement that the plan is PBGC-exempt unless someone has actually looked. If the plan is covered, termination has a PBGC process. It is not a resolution and a distribution.

What the buyer will ask, and what you should already have

Expect a request list: the plan document and all amendments, the adoption agreement, the most recent valuation, the last Form 5500 with schedules, the trust statement, the investment policy if there is one, the fidelity bond, any determination or opinion letter, and a census. If you cannot produce those without a search through a closed email account, start that search now. The administrator should have them. The administration relationship exists so a sale is not the moment the records are assembled for the first time.

Buyers also ask whether contributions are current, whether any minimum was missed, and whether benefits can be paid as lump sums. Missed minimums carry an excise tax, generally 10 percent under section 4971 until corrected, and they become a diligence item with a dollar sign. Benefit restrictions can apply when the plan's funded percentage is too low. That is an actuarial certification, not a feeling about the portfolio. If lump sums are restricted, a termination or a layoff in connection with the sale gets harder, not easier.

The owner's personal tax on the sale of the practice is a different conversation from the plan. Goodwill, installment notes, earnouts, and entity-sale versus asset-sale character sit with the CPA and sale counsel. The plan's trust is not a vehicle for receiving the purchase price, and a contribution deduction does not shelter the sale itself just because both numbers are large. If the goal of a last-minute contribution is to soften the tax on the sale, say that out loud to the CPA. The plan can only deduct what the funding and deduction rules allow, for the employer that actually maintains the plan, in the year those rules specify.

What to do in the next two weeks

Write one paragraph that states the form of the deal as you understand it today: equity or assets, expected closing month, whether you will remain employed, and whether the buyer already has a retirement plan. Attach the latest valuation and the latest trust statement. Send that package to sale counsel, to your CPA, and to the administrator at the same time.

Ask the enrolled actuary, through the administrator, for two illustrative figures and label them as illustrations. One is the estimated cost of terminating and paying benefits in connection with the closing. The other is the estimated minimum if the plan instead freezes and stays open through the end of the year. Neither figure is a purchase price. Both are better than the statement balance.

Confirm who will sign the 2025 Form 5500 and whether Form 5558 should be filed so the deadline moves from July 31, 2026 to October 15, 2026. Put September 15, 2026 on the same page as the closing date, because that is the usual minimum-funding date for the 2025 plan year. Then tell us where the sale actually stands. The useful call is short: entity, deal structure, closing month, and whether the plan is supposed to survive it.