Department of Labor Sends Proposed ESOP Valuation Rules to OMB

We will post an update when the OMB completes its review of the proposed regulations, which should happen before the end of 2024.

The Department of Labor (DOL) sent proposed ESOP valuation regulations to the Office of Management and Budget (OMB), which will have 60 days to conduct an inter-agency review of the proposal for expected costs and benefits. The DOL said that it had “established a pre-rule outreach plan to broaden public participation and community engagement in the regulatory process. This includes meeting with a range of stakeholders (including ESOP sponsors, appraisers, labor organizations and academics) to hear about issues they believe should be addressed in the Department’s guidance." After OMB completes the review, the proposal is expected to be made available for public comment.

Jeff Turner, acting deputy director of the Office of Regulations and Interpretations at the DOL's Employee Benefits Security Administration, told the American Society of Pension Plan Advisors, “We have seen a number of circumstances where the stock value has been inflated, primarily to benefit the selling shareholder.”

The value of stock held by an ESOP in a closely held company must be appraised at least annually by an outside independent appraisal firm hired by the ESOP’s trustee. The appraisal is based on the price a willing financial buyer would be willing to pay. That assessment considers a company’s projected earnings, assets and liabilities, and market conditions. Because the appraisal is necessarily subjective, disputes have occasionally arisen over an appraisal's fairness to plan participants. Between 5 and 10 of these disputes end up in court each year out of the more than 6,000 ESOPs in closely held companies. ESOP professionals have long urged the DOL to issue formal guidance on valuation rather than leave the matter to the varying standards of different courts.

ESOP participants very rarely pay for the stock in their plans; instead, the company provides the plan as an employee benefit. Data from the NCEO shows that plan participants have about twice the asset value in their ESOPs as comparable employees in comparable companies have in their 401(k) plans. Most ESOP companies have a 401(k) plan as well.

The NCEO has a book on ESOP valuation, The Fiduciary’s Guide to ESOP Valuation.