Do Your Retirement Plan Contributions Lower What a Buyer Will Pay for Your Business?

Partly, and the split is negotiated. A buyer may price the business on adjusted earnings, so contributions made for you (up to $72,000 or 100% of the participant’s compensation, whichever is less, in a 2026 defined contribution plan, per IRS Notice 2025-67) can be argued back in. Staff contributions are harder to add back.

How a buyer actually reads a plan contribution

In my experience this usually comes as a surprise. Most owners do not know how add-backs work or what a buyer actually looks at.

Every dollar the company puts into a retirement plan shows up as an expense on the P&L. That lowers reported profit. Depending on how the deal is structured, a buyer may price the business on adjusted earnings rather than reported profit, and the adjusting is where your plan contributions get sorted.

The IRS describes the same step in its own valuation guidance: historical financial statements should be “adjusted to reflect the appropriate asset value, income, cash flows and/or benefit stream” (IRS, Internal Revenue Manual 4.48.4.2.3, Business Valuation Guidelines, effective September 22, 2020). A buyer’s quality-of-earnings team runs the private-market version of that. They go line by line and ask one question of each expense: is this a cost of running the business, or a cost of being this particular owner?

Owner salary is the familiar example. A seller may argue that an above-market salary should be added back, and a buyer may push to subtract what it would cost to hire someone to do the owner’s actual job. That logic, covered in what actually determines what your business is worth, can be applied to your retirement plan too. Your contributions are part of your pay package. A buyer may ask what a replacement’s pay package would look like.

Two separate questions hiding in one contribution line

Most P&Ls show one number for retirement plan expense. That number is really two decisions stacked together, and a buyer will pull them apart whether you do or not.

First, the money that went to you. Profit-sharing allocations, cash balance credits, and the owner’s share of any safe harbor contribution all go away when you do. That is the seller’s argument for normalizing them. A buyer may push back that a general manager replacing you would also get some retirement benefit, and argue that only the excess over a market-rate replacement’s benefit belongs in the add-back. A seller tends to do better on this point when the plan records show clearly which dollars went to the owner.

Second, the money that went to your employees. Those people are staying. If the buyer cuts the benefit, some of them may leave, and the employees are a large part of what the buyer is paying for. So a buyer may treat staff contributions as an ongoing cost it will carry or have to replace with something comparable, and it tends to push hardest on this when those contributions have been made every year.

Then there is the gray zone. Some staff contributions exist only because of the owner’s plan design. A cash balance plan or an aggressive profit-sharing formula still has to meet IRC section 401(a)(4), which bars contributions or benefits that discriminate in favor of highly compensated employees, and depending on the design, passing that test may require a meaningful benefit for staff. A seller can argue that piece is owner-driven and goes away with the owner’s plan. A buyer can argue the employees now expect it. This piece is negotiated. A buyer tends to push back when the staff contributions have run every year, and a seller tends to do better when the plan was built around the owner and the plan design and allocation reports document why the staff piece exists.

The 2026 limits that set the size of the argument

How much is at stake depends on how heavily the plan is funded. The IRS limits below cap the owner side for 2026.

Source: IRS Notice 2025-67, 2026 cost-of-living adjustments (415(c), 415(b), 401(a)(17), 402(g) and catch-up limits). The 100% of compensation limits are in IRC 415(c)(1)(B) and 415(b)(1)(B). The buyer-treatment column is general and educational. Actual treatment is negotiated and varies by deal.

Notice what the table does not show: a number for how much value an add-back is worth. That depends on the multiple a buyer applies, which depends on the business. Anyone quoting you a fixed result without seeing your financials is guessing.

The word “discretionary” cuts both ways

When I bring up a cash balance plan with a business owner, the pushback I hear most is the annual funding commitment. My answer is usually that they have already been funding profit sharing every year. It has just been discretionary.

That same observation shows up again at the sale. Take a hypothetical owner of a San Diego professional practice who has made a profit-sharing contribution every single year for the last six. To the owner it is discretionary. A buyer reading six years of statements may argue that a contribution made every single year is a recurring cost. The seller has a stronger case for the owner’s share, because it ends when the owner leaves. The staff share is harder to defend, because a buyer can point to the pattern as a sign the employees count on it.

A seller tends to do best when the contributions really are owner-only and documented that way. A business with no eligible employees, or one where the plan design and allocation reports show almost everything going to the owner, has a cleaner argument for a larger add-back than one where staff receive a meaningful share, though the final number is still negotiated.

What to evaluate for 2026 and 2027 if you plan to sell in one to five years

First, size the owner contributions with both ends in mind. They are generally deductible now, within the annual limits in IRC section 404, and they are arguable later. Heavier owner funding before a sale is not automatically a valuation problem, provided the paperwork shows clearly which dollars were yours. The price of admission is a plan allocation report, every year, split by participant.

Second, evaluate any new cash balance plan against the sale timeline. A cash balance plan carries required annual funding, and a buyer will want to know whether that obligation, and any shortfall in it, comes with the business or ends before closing. Confirm the funding status and the termination path with your actuary and ERISA attorney before it becomes a negotiating point.

Third, be careful with cutting staff contributions right before a sale to lift earnings. A buyer’s team can see the change in the trend and may argue the old level is the true run rate, and the employees will notice too. For what a safe harbor design actually costs a small San Diego business, see safe harbor 401(k) cost for a 14-person business.

The documents that make the owner-versus-staff split defensible:

• Annual allocation reports from your plan administrator, showing each participant’s employer contribution by type
• The plan document and every amendment, including the profit-sharing allocation formula
• Safe harbor notices, which show which contributions were required versus discretionary
• Form 5500 filings for each year
• For a cash balance plan, the annual actuarial valuation and funding certification
• A CPA tie-out of retirement plan expense on the P&L to those plan reports

Confirm with your CPA and the buyer’s or your own quality-of-earnings provider how each category will be presented. This is general education, not legal or tax advice. Deal structure and plan decisions belong with your CPA and ERISA attorney. If you are weighing a cash balance plan or a bigger profit-sharing formula before a sale, the San Diego Business Owner Blueprint is where that plan design choice and the valuation side get looked at together.

FAQ

Are my profit-sharing contributions an add-back when I sell?

The share that went to you can be, at least in part, when the plan records separate it clearly. A buyer may push to net it against what a replacement manager would receive in retirement benefits. The share that went to employees is harder to add back, because a buyer can argue those employees stay and expect a comparable benefit. Treatment is negotiated, so confirm how your contributions will be presented with your CPA and M&A advisor.

Does a cash balance plan hurt my sale price?

Not necessarily. A seller may argue the owner's credits should be normalized like other owner-specific pay. A buyer is likely to look hard at the obligation: required annual funding and whether the plan is fully funded. For 2026, the annual benefit a defined benefit plan can pay is capped at $290,000 or 100% of the participant's high-3 average compensation, whichever is less (IRS Notice 2025-67 and IRC 415(b)(1)(B)). Evaluate the funding status with your actuary well before a sale.

Should I stop staff contributions the year before I sell?

Evaluate it carefully with your advisors first. A sudden drop in staff contributions is easy for a buyer to spot in the trend, and they may treat the old level as the real run rate anyway. It can also change how employees feel about staying through a transition, which is part of what the buyer is buying.

What will a buyer's quality-of-earnings team ask for?

Typically the plan document and amendments, annual allocation reports by participant, Form 5500 filings, safe harbor notices, and for a cash balance plan the actuarial valuations. Having those organized by year, with owner and staff amounts separated, makes the add-back conversation shorter and the numbers easier to defend.

Does the buyer have to keep my retirement plan?

Not necessarily. [What happens to the plan](/blog/what-happens-to-401k-when-company-is-sold) depends largely on how the deal is structured and what the buyer already offers. That decision is separate from valuation, but it often gets made in the same negotiation, so raise it with your ERISA attorney early.

Do you know how much of last year’s plan contribution went to you and how much went to everyone else? If not, that is the first number to pull. Book a complimentary review and we can go through the allocation reports together.

Hope that helps.