Key Takeaways
- In most asset-sale purchases, start a new 401(k) rather than inherit the seller's. The convenience of assuming the existing plan rarely outweighs what the buyer takes on.
- This applies when the deal is structured as an asset sale. You form a new entity with a new EIN and buy only specified assets, so the seller's plan does not follow by default.
- An asset sale generally leaves you with no obligation to assume the plan. Because you are typically not a successor employer, winding down the old 401(k) stays the seller's job.
- A new plan gives you a clean start, with the seller handling the old one. You avoid inherited defects and design the plan around your practice, while the seller terminates and files a final return.
Virtus Financial Partners is an SEC-registered investment advisor that works exclusively with dental practices, and this article looks at what happens to your 401(k) when you buy one.
This issue has come up a lot with our clients that are buying a practice. You want to make sure the employees have a retirement plan, and the easiest move looks like taking over the seller's existing 401(k). Plus, there are a million things to handle before closing, and the 401(k) is not high on the list.
In most cases, the buyer is better off starting a new plan under their own entity. Below, we walk through the legal, fiduciary, practical, and strategic reasons why.
What is an asset sale, and why does it change the 401(k) question?
How the deal is structured decides what happens to the 401(k), so start there. There are two basic shapes, and they are treated very differently.
In a stock or entity sale, you acquire the seller's legal entity itself. Its tax identification number (EIN), contracts, liabilities, and plans all continue.
The buyer effectively "steps into the shoes" of the prior owner, and the seller's retirement plan carries over automatically under the new ownership. In a stock sale, the plan comes with the entity.
In an asset sale, the dynamic is different. You form a new entity (or use an existing one), obtain a new EIN, and purchase only the specified assets. The seller's entity stays intact.
Because of that, the buyer is generally not treated as a successor employer to the seller's plan unless the buyer chooses to adopt or assume it. The facts of your specific deal can change this, so confirm it with your counsel.
The upshot in an asset sale is you are generally not obligated to take over the seller's 401(k), and many buyers choose not to.
Why shouldn't I take over the seller's 401(k)?
There are seven common reasons buyers walk away from the existing plan.
Inherited fiduciary liability
The plan sponsor is personally responsible for running the plan prudently. When you assume an existing plan, you take that on going forward, and you may have to correct past compliance failures once they surface.
That matters because if the prior owner:
- Failed to deposit employee deferrals on time (a common small-plan violation)
- Selected imprudent or excessively expensive investment options
- Did not follow the plan document's eligibility or vesting provisions
- Failed to provide required notices (such as safe harbor or default-investment notices)
...then as the new sponsor you may have to correct those failures, and you could face enforcement actions, penalties, or participant claims in the process.
Here is the nuance that matters, though. You are not personally liable for breaches the prior owner committed before you became a fiduciary; the prior owner remains responsible for those. What you inherit is the work of fixing the plan's uncorrected defects, at the plan's cost and your administrative burden. And once you know about a problem, failing to address it can itself become a breach.
Compliance correction exposure
The IRS maintains a correction system for operational failures in qualified retirement plans. The corrections exist, but they can be costly and administratively burdensome.
Common operational failures found in small dental practice 401(k) plans include:
- Eligibility errors - Employees who should have been offered enrollment were excluded, or employees who did not meet eligibility requirements were improperly enrolled.
- Missed deferral opportunities - Failure to give eligible employees the chance to make elective deferrals.
- Incorrect matching contributions - Employer match calculated on the wrong compensation definition or percentage.
- Late deposit of deferrals - Employee salary deferrals not remitted to the trust in time. Small plans (under 100 participants) can use a 7-business-day safe harbor; otherwise, deferrals are due as soon as they can reasonably be segregated from the employer's general assets.
- Failed nondiscrimination testing - Annual testing not performed or performed incorrectly, requiring corrective distributions or additional employer contributions.
If you assume the seller's plan and later discover these issues, through an IRS audit or your own due diligence, you have to work through the IRS correction process, which ranges from self-correction to a formal filing.
Anti-cutback constraints
Federal law generally bars you from removing "protected benefits" or "optional forms of benefit" that participants had under the prior plan, even features that no longer fit your practice. This matters most if the seller maintained a cash balance or other defined benefit plan.
These protected benefits include:
- In-service withdrawal options
- Specific distribution forms (installment payments, lump-sum options)
- Early retirement benefits or subsidized benefit formulas
One point that trips people up is the availability of participant loans is generally not a protected benefit. You can usually drop the loan feature going forward, even for existing participants, though a loan already outstanding continues under its own terms.
Even so, the seller's plan can lock you into features that do not fit your practice's needs, your budget, or your plan design strategy.
Discrimination testing complications
Qualified 401(k) plans must satisfy annual nondiscrimination testing, unless the plan uses a safe harbor design. These tests compare the contribution rates of highly compensated employees (HCEs) and non-highly compensated employees (NHCEs) to make sure the plan does not disproportionately benefit owners and top earners.
When you assume the seller's plan, you inherit its testing history and its current participant demographics. If the seller's workforce had a different mix of HCEs and NHCEs than your post-acquisition workforce, the testing dynamics can shift, and the plan can fail testing in the transition year.
There is real relief here worth knowing about. Federal law gives an acquiring employer a transition period that generally treats the plan's coverage as satisfied from the transaction date through the end of the following plan year, as long as coverage is not significantly changed apart from the acquisition. That gives you runway to design or transition the plan before any testing consequences hit.
It is time-limited, though, which is why many Virtus Financial Partners clients use a Safe Harbor plan to mitigate the nondiscrimination testing issue from the outset.
Plan document misalignment
Every 401(k) plan is governed by a written plan document, and that document reflects the choices of the prior owner, choices that may not match your goals. Common misalignments include:
- Vesting schedule - The seller may have used immediate vesting for employer contributions, while you may prefer a graded or cliff schedule to improve retention.
- Eligibility requirements - The seller's plan may have allowed entry after 30 days; you may prefer a one-year eligibility period with a 1,000-hour requirement.
- Compensation definitions - The plan may define compensation in a way that does not match your payroll structure.
- Matching formula - The seller's match may be more generous than your practice economics support.
- Profit-sharing allocation method - The seller may have used a pro-rata method, while you may benefit from a new comparability (cross-tested) allocation to maximize owner contributions.
Plan amendments can address some of these, but the anti-cutback rules limit what you can change for existing participants, and certain significant reductions in future benefit accruals require advance participant notice.
The seller's 401(k) may sit on an outdated recordkeeping platform, be locked into a provider contract with early termination fees, or hold high-cost retail share class funds when lower-cost institutional alternatives are available.
The plan sponsor has an ongoing duty to monitor plan fees and ensure they are reasonable. Take over a plan with a poor investment lineup or fee arrangement and you must overhaul it right away, and potentially defend the gap between when you assumed the plan and when you fixed it.
Administrative complexity and record gaps
Small practice 401(k) plans often have incomplete or disorganized recordkeeping. Common gaps include:
- Missing or unsigned plan documents and amendments
- Incomplete annual tax filing history
- Lack of required fidelity bond coverage
- Missing summary plan descriptions or failure to distribute required participant notices
- Inadequate documentation of fiduciary process (investment reviews, fee benchmarking)
Inheriting a plan with gaps in its records creates ongoing compliance risk and makes any future audit significantly harder.
None of this is automatic. Whether assuming or replacing the plan is right turns on your specific deal and workforce, so weigh these points with your legal, tax, and retirement plan advisors.
At a Glance: Taking Over vs. Starting New
| Fiduciary liability | Inherit the plan's uncorrected defects | Clean slate |
| Compliance record | Unknown; may have defects | No prior issues |
| Anti-cutback constraints | Cannot remove protected benefits | Full design flexibility |
| Discrimination testing | Transition-year complications | Calibrated to your workforce |
| Plan document provisions | May not fit your goals | Custom-designed for your practice |
| Investment platform | May be locked into poor options | Select optimal lineup from day one |
| Administrative records | May have gaps | Complete from inception |
| Cash balance / defined benefit pairing | May require complex amendment | Designed to pair from the start |
Buying a practice and unsure what to do with the existing 401(k)?
Virtus Financial Partners can walk through your specific deal and show what starting fresh versus taking over the plan looks like for your numbers. Complimentary, and no pitch, just the analysis.
Download the Guide Request a Plan Review
Why start a new 401(k) after buying a practice?
A new plan under your purchasing entity lets you:
- Design the plan around your goals - As a new owner, you can set the matching formula, profit-sharing allocation method, and contribution levels to fit your income, tax situation, and wealth-building timeline.
- Pair the 401(k) with a combined 401(k)/defined benefit plan design - Many dental owners add a cash balance/defined benefit plan for significantly higher total contributions than a 401(k) alone, often well over $100,000 a year for older, higher-income owners. That capacity comes with a commitment: a cash balance plan requires funding each year, including contributions for staff, so it fits practices with strong, steady cash flow. Designing both plans together from the start avoids the complexity of bolting a cash balance plan onto an assumed 401(k) later.
- Set a vesting schedule that supports retention - Turnover is a real concern in dental practices. A vesting schedule (for example, a six-year graded schedule for employer contributions) helps retain staff while managing your contribution cost.
- Choose a TPA (third-party administrator), recordkeeper, and investment advisor who specialize in dental practice retirement plans and understand your industry.
- Start with a clean compliance record - Your plan begins on day one with proper documentation, timely deposits, correct eligibility administration, and complete records, which protects you in any future audit.
What happens to the seller's 401(k) after the sale?
In an asset sale, the seller's entity continues to exist, and the seller's 401(k) remains the seller's responsibility. The seller's typical options are:
- Terminate the plan - This is the most common outcome. The seller terminates the plan, distributes all assets to participants (who may roll over into IRAs or the buyer's new plan once established), and files a final Form 5500.
- Freeze the plan - The seller could freeze the plan (stop contributions) and maintain it, though this is less common for selling dentists who are retiring or moving on.
- Merge the plan into another plan - If the seller has another business with a retirement plan, the plan could be merged, subject to applicable merger and transfer rules.
The seller being responsible for winding down their own plan is a real advantage of the asset sale structure. It keeps the buyer's responsibilities clean and forward-looking.
How does the 401(k) transition actually work in an asset sale?
Here is a simplified timeline of how the 401(k) transition typically works in an asset sale of a dental practice.
Pre-Closing - Buyer forms a new entity (LLC, S-Corp, etc.) and obtains a new EIN. The purchase agreement specifies that the buyer is not assuming the seller's retirement plan.
At Closing - The asset sale closes. Employees transition to the buyer's payroll. The seller's plan stops covering these employees, since they are no longer employees of the seller's entity.
Post-Closing (Buyer) - Buyer works with their financial advisor, TPA, and attorney to adopt a new 401(k) plan (and potentially a cash balance/defined benefit plan) designed for the new practice. Eligibility and entry dates are set to begin covering employees promptly.
Post-Closing (Seller) - Seller terminates their 401(k), completes all final distributions, and files a final Form 5500.
Rollovers - Once the buyer's new plan is established and accepts rollovers, transitioning employees can roll their balances from the seller's terminated plan (or their IRAs) into the buyer's new plan if they choose.
What 401(k) steps should I take when buying a dental practice?
If you are buying a dental practice through an asset sale, here are the key steps:
- Confirm the deal is structured as an asset sale - Make sure your purchase agreement explicitly states you are not assuming the seller's retirement plan or any liabilities associated with it.
- Expect to start your own plan rather than assume the seller's - Many buyers ultimately decide not to take over the seller's 401(k). The risks of inherited defects, compliance correction exposure, anti-cutback constraints, and plan document misalignment tend to outweigh the perceived convenience.
- Establish your own 401(k) promptly after closing - Work with a qualified financial advisor, TPA, and your CPA to design a plan that fits your practice, your workforce, and your long-term wealth strategy.
- Consider pairing your 401(k) with a cash balance/defined benefit plan - For many owners with consistent, high income, this combination can be a powerful wealth-building tool, though actual benefits depend on your income, age, tax situation, and plan design.
- Let the seller handle their own plan termination - This is the seller's responsibility in an asset sale, and your purchase agreement should make it explicit.
As always, whether you should assume a seller's plan or start a new one depends on your specific transaction, workforce, and existing plan terms. These decisions should be evaluated with your legal, tax, and retirement plan advisors based on your individual circumstances.
