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Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Oregon is representative of a common question on Qualified Small Business Stock and qualified plans
Here’s the background. The business owner is selling his tech company. The sale qualifies under the Qualified Small Business Stock (QSBS) rules of IRC §1202 that permit shareholders to exclude up to 100% of the capital gains on the sale. In addition, the corporation maintains a 401(k) and a cash balance plan, and the owner wants to know how the QSBS sale impacts the retirement plans.
Let’s review the QSBS rules and examine their interplay with qualified plan rules.
It is important to note that various QSBS provisions were enhanced by the One Big Beautiful Bill Act (the Act). The QSBS rules allow individuals to sell qualifying securities and avoid up to 100% of the capital gains on the transaction. The conditions for this exclusion include:
The organization is a C corporation with a net value of no more than $50,000,000 (and for stock issued after July 5, 2025, the Act increased this amount to $75,000,000).
The individual acquired the stock directly from the organization and has held the stock for at least five years (and under the Act, shorter holding periods are permitted with pro rata reductions in available exclusions).
The business must not be focused on the fields of health, law, accounting, brokerage services, financial services, engineering, architecture, actuarial science, athletics, performing arts, or consulting.
The maximum capital gain exclusion is the greater of $10,000,000 (and under the Act for stock issued after July 5, 2025, this amount is increased to $15,000,000) or 10 times the shareholders' adjusted basis in the company.
The organization's qualified plans are not affected by this transaction. Recall that the organization, not the shareholders, controls the retirement plans. Thus, unless the corporation takes steps to amend or terminate the plan or plans, they remain intact. The shareholder is entitled to a distribution from one or both plans if they have a triggering event, such as separation from service or attainment of age 59 ½, as specified by the terms of the plan documents.
The potential of no capital gains on a qualifying sale of QSBS is a great option for shareholders, and the transaction has no impact on the organization's qualified plans. If the shareholder leaves service, distributions from the plans often become available.