Employee Benefits Due Diligence: The Health Insurance, 401(k), and PTO Obligations You Inherit When You Buy an HVAC Company

You found a 15-person HVAC company with solid revenue, good techs, and a retiring owner ready to deal. You’ve modeled the SDE, stress-tested the seasonality, and your SBA lender is moving forward. Then you close, and within 60 days your lead installer quits because “the new benefits suck.” Two more follow him out the door.

Nobody told you the seller was paying 80% of health premiums. Nobody told you there was $38,000 in accrued PTO sitting on the balance sheet. Nobody told you the company’s SIMPLE IRA hadn’t had a compliant deposit in nine months.

For a 10–20 person HVAC company, benefits obligations typically run $80,000 to $200,000 per year. That’s real money — and it’s money that doesn’t show up in a standard broker CIM. Here’s how to find it, model it, and avoid inheriting someone else’s compliance mess.

What You’re Actually Inheriting (or Not)

The benefits picture changes completely depending on whether you’re doing an asset purchase or a stock purchase. This is not a technicality. It’s the difference between a clean start and inheriting a ticking clock.

Asset Purchase

• You’re buying equipment, customer lists, vehicles, and goodwill — not the legal entity
• The seller’s benefit plans do not transfer to you
• Employees technically get terminated by the seller and rehired by you
• You need benefits in place on day one or you’ll lose people (more on employee retention below)
• COBRA obligations stay with the seller’s entity, not with you

Stock Purchase

• You’re buying the company itself — the legal entity, warts and all
• Every benefit plan comes with you: health insurance, retirement accounts, PTO policies, all of it
• Compliance history is now your compliance history
• Pending claims, underfunded matches, late filings — yours
• Any DOL or IRS audit exposure transfers to you

Most SBA-financed HVAC deals are asset purchases. That’s good news for benefits exposure, but it creates an urgent problem: you need to stand up new benefits fast, or your best techs walk. I’ve seen it happen in under two weeks.

Health Insurance — The Biggest Line Item Nobody Models

Group health insurance for a 15-person HVAC company runs $120,000 to $200,000 per year. That’s not a rounding error. That’s a full-time tech’s salary, and it’s a line item that most buyers either miss entirely or dramatically underestimate.

Fully Insured vs. Self-Insured

Most small HVAC companies carry fully insured plans through a carrier like Blue Cross, UnitedHealthcare, or a state exchange option. The risk sits with the carrier. Your premium is your premium.

But some shops — especially those with 15+ employees — have self-insured or level-funded plans. These are different animals:

• Self-insured: The company pays claims directly, usually with stop-loss insurance for catastrophic events. If the seller’s plan has pending or unreported claims, those liabilities may not be obvious.
• Level-funded: A hybrid. Fixed monthly payments, but you’re still on the hook for claims up to a corridor. These plans look like traditional insurance until they don’t.

What to ask for:

• Current plan documents and summary of benefits
• Last 24 months of claims data (this tells you the real cost)
• Renewal quotes or rate lock dates
• Stop-loss policy details for self-insured plans
• Any pending large claims or ongoing treatments

COBRA Obligations

In an asset purchase, COBRA responsibility generally stays with the seller. But here’s the catch: if the seller dissolves the entity post-sale (common with retiring owners), there may be nobody left to administer COBRA. This creates a gray area that can generate complaints to the DOL.

In a stock purchase, COBRA is fully your problem. Every qualifying event that happened in the 18 months before closing could still generate a COBRA election.

ACA Compliance

If the company has 50+ full-time equivalent employees (rare for the 10–20 person shops we’re discussing, but possible with seasonal crews), Affordable Care Act reporting requirements apply. Check whether the seller has been filing Forms 1094-C and 1095-C. If they haven’t, that’s your exposure now.

Even for smaller companies, the Healthcare.gov small business portal is the starting point for understanding your SHOP marketplace options.

Retirement Plans — The 401(k) or SIMPLE IRA Nobody Audits

Here’s a pattern I’ve seen repeatedly: HVAC owner sets up a retirement plan years ago when his accountant told him to. Makes deposits for a while. Gets busy. Starts cutting corners. By the time you’re doing due diligence, the plan is technically active but operationally neglected.

This is a compliance time bomb.

What to Look For

Vesting schedules. If the company offers employer matching, some or all of that match may vest over 3–6 years. You need to know:

• How much unvested employer match is sitting in employee accounts
• What happens to vesting schedules if employees are technically terminated in an asset purchase
• Whether accelerated vesting is triggered by a change of control

Late deposits. The DOL considers it a fiduciary breach when employee salary deferrals aren’t deposited “as soon as administratively feasible” — generally within a few business days. Late deposits are one of the most common retirement plan violations, and they’re easy to find. Just compare payroll dates to deposit dates.

Check the IRS 401(k) qualification requirements for the full picture.

Discrimination testing. 401(k) plans must pass annual nondiscrimination tests (ADP/ACP tests). SIMPLE IRAs don’t have this requirement, which is one reason they’re popular with small HVAC shops. If the company has a 401(k), ask for the last three years of testing results. Failed tests mean corrective distributions or additional employer contributions.

Plan audits. Plans with 100+ participants require annual audits. Not relevant for most HVAC shops, but worth confirming.

SIMPLE IRA vs. 401(k) — Know What You’re Getting

• SIMPLE IRA: Lower administrative burden, mandatory employer match (dollar-for-dollar up to 3% or flat 2% contribution), no discrimination testing. Common in small HVAC companies.
• 401(k): More flexibility, higher contribution limits, but more compliance overhead. Requires a third-party administrator (TPA).

A quick note: this article is about the company’s retirement plan. If you’re thinking about how the acquisition fits your overall financial picture, make sure your personal financial planning accounts for both.

PTO, Sick Leave, and Accrued Obligations

This is the sleeper liability. Nobody thinks about PTO until they see the number.

The Math

A 15-person HVAC company where techs earn $25–$35/hour and carry 2–3 weeks of accrued PTO is sitting on $15,000 to $50,000 in accrued PTO liability. Here’s a simple calculation:

• 15 employees × average $30/hour × 80 hours accrued PTO = $36,000

That’s money somebody owes those employees. The question is who.

Who Pays?

Asset purchase: The seller’s entity is technically responsible for paying out accrued PTO when employees are “terminated.” But sellers often resist this, especially if the purchase price is already negotiated. This needs to be addressed explicitly in the purchase agreement.

Three common approaches:

1. Seller pays out all accrued PTO before closing. Cleanest for you. Seller hates it.
2. Purchase price is reduced by the accrued PTO amount. You inherit the obligation but pay less for the business.
3. Buyer assumes accrued PTO as part of the deal. Common, but make sure you’ve modeled the cash impact.

Stock purchase: The accrued PTO stays on the company’s books. It’s a liability you inherit automatically.

State Law Matters — A Lot

PTO payout requirements vary dramatically by state:

• California, Colorado, Montana, Nebraska: Accrued PTO must be paid out upon termination. Period. No exceptions.
• Illinois, Louisiana, Massachusetts, North Dakota: Paid out if employer policy or practice establishes it.
• Many other states: PTO payout depends on company policy. If the employee handbook says “use it or lose it,” that may be enforceable.

Check state requirements through the SBA compliance guide. Don’t assume your state works like the last state you worked in.

Sick Leave

Mandatory paid sick leave laws have expanded rapidly. Depending on where the company operates, you may be required to provide paid sick leave regardless of company size. This is separate from PTO and may have its own accrual and carryover rules.

The Benefits Due Diligence Checklist

Here’s exactly what to request and review before you close. Hand this to your attorney and your CPA. No excuses.

Health Insurance

1. Current plan documents, SPDs (Summary Plan Descriptions), and certificates of coverage
2. Premium costs — employer vs. employee split — for the last 24 months
3. Claims history (last 24 months) for self-insured or level-funded plans
4. Renewal dates and any pending rate changes
5. COBRA administration records and any active COBRA participants
6. ACA filings (Forms 1094-C, 1095-C) if applicable
7. Any pending claims, disputes, or compliance complaints

Retirement Plans

8. Plan documents and most recent amendments
9. Last three years of Form 5500 filings
10. Discrimination testing results (401(k) only)
11. Deposit timing records — compare payroll dates to actual contribution dates
12. Vesting schedules and current vesting status for all participants
13. TPA contact information and last audit results
14. Any IRS or DOL correspondence regarding the plan

PTO and Leave

15. Written PTO policy from employee handbook
16. Current accrued PTO balances for every employee
17. State-specific payout requirements for the company’s operating locations
18. Sick leave policy and any state/local mandatory sick leave compliance
19. Any pending leave requests (FMLA, disability, military leave)

General

20. Complete employee census: name, hire date, salary, position, benefits enrolled
21. Any pending EEOC complaints, wage claims, or benefits disputes
22. Workers’ comp claims history and current workers’ comp MOD rates
23. Employment agreements that reference benefits guarantees
24. Union or collective bargaining agreements (if applicable)

If the seller pushes back on providing any of these items, that’s a red flag. Legitimate sellers with clean operations don’t hide benefits records.

What to Do in the First 30 Days Post-Close

You’ve closed the deal. The closing process is behind you. Now you have 30 days to get benefits right or start losing people.

Week 1: Communicate and Bridge

• Day 1: Tell every employee their benefits will continue or be replaced with equivalent coverage. Be specific about timelines. Vague reassurances don’t cut it — techs talk, and uncertainty drives them to competitors.
• Days 1–3: If asset purchase, confirm COBRA coverage is being offered by the seller’s entity for the gap period.
• Days 1–5: Contact health insurance brokers. You should have started this pre-close, but if you didn’t, move fast.

Week 2: Establish Plans

• Enroll in a group health plan. For a 15-person HVAC company, you’ll likely work with a broker who specializes in small group coverage. Expect the process to take 2–4 weeks from application to effective date.
• Set up a retirement plan if the seller’s plan didn’t transfer. A SIMPLE IRA is the fastest option — you can establish one with a financial institution in about a week.
• Document your PTO policy in writing and distribute it. Even if you’re honoring the seller’s policy, put it in your own employee handbook.

Weeks 3–4: Optimize

• Consider a PEO. Professional Employer Organizations like Justworks, TriNet, or Insperity can handle benefits administration, payroll, and HR compliance for small companies. For a 10–20 person HVAC shop, a PEO often gets you better health insurance rates than you’d get on your own because they pool employees across all their client companies.
• Review costs against your model. Now that you have real quotes, compare actual benefits costs to what you projected during due diligence. If there’s a significant gap, adjust your cash flow projections immediately.
• Set up payroll deductions. Make sure employee premium contributions and retirement deferrals are being withheld and deposited correctly from day one. Starting sloppy on deposit timing is how the last owner got into trouble.

The PEO Question

A PEO deserves its own consideration. For HVAC companies with 10–20 employees, a PEO can:

• Reduce health insurance costs by 10–20% through pooled purchasing
• Handle all benefits administration and compliance
• Manage workers’ comp, payroll taxes, and HR paperwork
• Cost roughly $150–$250 per employee per month

The tradeoff is you give up some control. But for a first-time owner who’s also learning to run a business, manage techs, and handle sales? Outsourcing HR and benefits to a PEO is often the smart play for year one.

The Bottom Line

Benefits due diligence isn’t the exciting part of buying an HVAC company. Nobody gets into this business because they love reading Summary Plan Descriptions. But $80,000 to $200,000 in annual obligations — plus potential accrued liabilities, compliance exposure, and the retention risk of getting it wrong — makes this one of the highest-stakes areas of your deal.

Do the work upfront. Build benefits costs into your financial model. Address accrued PTO in the purchase agreement. And have a benefits plan ready before you hand over the check.

Your techs don’t care about your SDE multiple or your debt service coverage ratio. They care about whether their kids can go to the dentist and whether they’re getting their PTO paid out. Get those answers right and you’ll keep the team that makes the business worth buying in the first place.