Using 401k to Buy a Business – Permanency Requirements

After using my 401k to buy a business, can my company terminate the new 401k after I have completed the business funding transaction?

For entrepreneurs using 401k funds to buy a business via a 401k business funding strategy, the franchise or other small business will need to adopt a 401k profit sharing plan. The Treasury regulations require that the plan be permanent (as opposed to a temporary) arrangement. These rules also generally provide that if a plan is discontinued within a few years after its adoption there is a presumption that it was not intended as a permanent program from its inception, unless business necessity required the discontinuance, termination or partial termination. In order to invoke this “business necessity” exception, the necessity must have been unforeseeable when the plan was adopted, and cannot be within the control of the employer. See section of IRS Revenue Manual regarding plan terminations here. Thus, if you are using 401k money to buy a business, you should not plan to terminate the company’s new 401k plan and any unplanned termination of the plan within a few years after adoption of the plan should generally only be completed if a business necessity required the termination.

To learn more about a using your 401k to buy a business generally, please visit our 401k small business financing page.