On January 16, 2025, in connection with the SECURE 2.0 Act, the U.S. Department of Labor released a draft of long-awaited proposed rules regarding employee stock ownership plans (ESOPs) and the valuation of company stock.
ESOPs are retirement plans, governed by ERISA and managed by plan fiduciaries, created to invest primarily in the stock of the sponsoring employer.
By permitting employees to purchase equity in their employers and receive a direct stake in ownership, ESOPs can be a powerful tool to promote substantial personal investment in the financial prosperity and growth of companies that maintain them.
With respect to valuation, the proposed rules would clarify how plan fiduciaries can establish the fair market value of company stock for purposes of investment through the “adequate consideration test”. Because private company stock is not traded publicly, there is no readily available market price.
To mitigate this uncertainty, the proposed rules would establish a framework for fiduciaries to value stock and develop appraisals without mandating specific methods or factors for doing so. To value company stock, plan fiduciaries can leverage valuation advisers independent from the seller or ESOP sponsor. By valuing company stock accurately, plan fiduciaries can take comfort that participants invest at the proper valuation and avoid overpayment.
In addition to the foregoing proposal on valuation, the Department of Labor announced a potential safe harbor exemption in the context of an ESOP’s initial acquisition of non-publicly traded employer common stock from a selling shareholder.
The proposed rules are to be issued with a 75-day period to solicit public comments and are subject to change before becoming final. It is worth noting that, in addition to the proposed rules, the Trump Administration has, thus far, appeared highly motivated to encourage the implementation of ESOPs for private sector employers.