Unfunded Pension Liability When Selling a Business: What Buyers Ask

It depends on the deal structure, and then on the plan's funding. Practitioner commentary draws the usual line. In a stock sale the buyer takes over the seller's legal entity and typically becomes the new plan sponsor, inheriting the plan's past and future obligations (BDO, May 8, 2019). In an asset sale the seller keeps its entity and its plans, and the buyer acquires only the assets and liabilities the agreement lists. Morgan Lewis (June 9, 2022) adds that if the plan is underfunded on a termination basis, the parties must decide how to handle the shortfall, for example by having the buyer assume the plan and reduce the purchase price. That is commentary on market practice, not law.

The law sets the backdrop. If a single-employer plan ends in a distress termination or one the PBGC starts, ERISA section 4062 makes every person who was a contributing sponsor on the termination date, and every member of that sponsor's controlled group, jointly and severally liable for the unfunded benefit liabilities, with interest from the termination date. Section 4069 reaches transactions with a principal purpose of evading that liability when they become effective within five years before the termination date.

So selling a company does not make a plan problem go away. It changes who sits in the controlled group. A seller who keeps a plan behind and a buyer who takes it on both need the same thing: a current, signed measure of what the plan owes. That measure comes from the plan's enrolled actuary, and Finbryn prepares the schedules that support it.

A buyer's actuary and counsel work from a request list. The table below combines the documents that law and accounting firm articles tell sellers to gather with the actuarial items a buyer's actuary needs to size the plan. Morgan Lewis lists the plan document, amendments, summary plan description, IRS determination or opinion letter, annual testing reports and Forms 5500 as the documents to gather for each retirement plan, and BDO adds service provider contracts and records of IRS or DOL audits from the last three years.

The fastest way to lose a week in diligence is to have the Schedule SB in one folder and the accounting valuation in another with different dates. Put them side by side before the buyer does.

A single plan has at least three liabilities, each answering a different question, and a buyer's actuary will ask for all of them.

On the funding basis, IRS Notice 2026-57 gives September 2026 adjusted segment rates of 4.75, 5.25 and 5.89 percent for plan years beginning in 2027. The 24-month averages are adjusted within a corridor of 95% to 105% of the 25-year averages. Those rates and the mortality table are set outside the company, so two actuaries working from the same data should land close together. The accounting and termination bases use judgment and market pricing, so they can sit well apart from the funding figure.

In a business combination, the acquirer recognizes and measures a liability related to the acquiree's employee benefit arrangements in accordance with other GAAP, including the pension standards (FASB Statement 141(R), paragraph 28, now in ASC 805). The buyer's opening balance sheet therefore carries the accounting funded status, while Morgan Lewis frames the price discussion around the termination-basis shortfall. Do not average the numbers. Show each one with its date and its basis.

Three options, each with a clock.

Keep it. The plan stays with the entity or moves with it. This is the stock sale default, and the funded status becomes a price negotiation.

Freeze it. A freeze stops new accruals. It needs a section 204(h) notice and counsel's review of the amendment, and it can run into the section 436 limits if the funding percentage is low. Below 80%, an amendment that raises liabilities generally cannot take effect, and below 60% benefit accruals stop and prohibited payments such as lump sums are barred. Between 60% and 80%, one limited lump-sum payment per participant is allowed (IRC 436). Our plan freeze and DB to DC conversion page covers the notice rules.

Terminate it. A well-funded plan can end in a standard termination. Morgan Lewis says the process generally takes 18 to 24 months and requires notices to participants and to the PBGC. PBGC's page (updated July 8, 2026) starts it with a notice of intent to terminate at least 60 and not more than 90 days before the proposed termination date, followed by the Form 500 filing, the Schedule EA-S sufficiency certification and the distribution notices. A plan that is short on a termination basis cannot complete a standard termination unless the sponsor first contributes enough to cover every benefit, which is why the shortfall number matters before the decision. See plan termination support.

A buyer that does not want the plan can ask the seller to terminate it immediately before closing in a stock sale (BDO, 2019). Whether that works depends on how long the process takes and on the funding.

It can. ERISA section 4043 requires the plan administrator or contributing sponsor to report a reportable event within 30 days after they know or have reason to know of it. One listed event is a person ceasing to be a member of the plan's controlled group. Under 29 CFR 4043.29 a transaction includes a binding agreement to transfer ownership, even an unwritten one, and the regulation's first example makes the report due 30 days after the parties enter into the sale agreement.

Waivers exist, and several fit a small seller. The regulation waives the report where the departing members are a de minimis 10-percent segment of the plan's old controlled group, where the plan had 100 or fewer participants for whom flat-rate premiums were payable in the preceding plan year, where the plan is in the well-funded plan safe harbor for the event year, where each post-event sponsor and its highest-level US parent are low-default-risk, and where a public sponsor timely files an SEC Form 8-K disclosing the event.

Section 4043(b) adds an advance notice. A sponsor whose controlled group has more than $50,000,000 of aggregate unfunded vested benefits and a funded vested benefit percentage below 90 percent must report certain upcoming events at least 30 days before they take effect, unless an exemption such as SEC reporting applies.

The filing belongs to the sponsor, the plan administrator and counsel. Ask your ERISA counsel on day one whether a waiver applies. Finbryn supports the funding numbers behind the well-funded plan safe harbor and the participant count behind the small-plan waiver.

In a self-funded health plan the employer pays claims out of its own money and usually buys stop-loss coverage above a limit. KFF's 2025 Employer Health Benefits Survey (released October 22, 2025) found 67% of covered workers in self-funded plans, 27% at firms with 10 to 199 workers and 80% at larger firms. KFF's methodology describes a level-funded plan as a set monthly payment to an insurer or third party administrator that funds a reserve for claims, administrative costs and stop-loss premiums.

IBNR means incurred but not reported. The Actuarial Standards Board's ASOP No. 5, effective for work issued on or after September 1, 2017, defines the unpaid claims liability as the unpaid portion of incurred claims, including unreported claims and reported but unpaid claims. On any given date the sponsor owes money for care that has already been delivered but has not yet been billed, adjudicated or paid.

Illustrative, made-up numbers: a plan pays $400,000 of claims a month, and claims take an average of two months from the date of service to payment. On a closing date, about $800,000 of claims incurred before that date are still unpaid. A completion-factor method, built from a claims lag triangle, refines the estimate by month of service.

Whether that liability is a debt-like item, part of working capital or covered by an indemnity is a purchase agreement term, and your counsel and the buyer's advisers will negotiate it. The actuary's estimate gives them a number to negotiate from. Finbryn builds the lag triangle and the estimate for review by a credentialed signing actuary; see self-funded health IBNR support.

1. Get a current valuation on all three bases: funding, accounting and termination. Date each one.
2. Check the adjusted funding target attainment percentage on the latest Schedule SB (Part III, line 15) and the section 436 limits that apply at that level.
3. Assemble the last three Forms 5500, the plan document with amendments, the IRS letter and the premium filings.
4. Map the controlled group, with counsel, to see which other entities and plans share the exposure.
5. Ask counsel whether a PBGC reportable event waiver applies to the transaction, and calendar the 30-day clock from signing.
6. For a self-funded health plan, collect 24 months of paid claims by month of service, the stop-loss contract and the TPA's run-out terms.
7. Decide with counsel whether to keep, freeze or terminate, and whether a termination can finish on the deal timeline.
8. Line the pension footnote up with the valuation your auditor will accept.

Who signs what: the plan's enrolled actuary signs Schedule SB and any funding certification, and a credentialed signing actuary signs the accounting and reserve reports. Finbryn prepares the schedules and workpapers behind both, and does not give legal advice or act as the plan's actuary. For the broader deal work, see M&A due diligence support, and for the plan-side basics, whether your retirement plan needs an actuary.