OMB Completes Review of DOL ESOP Valuation Regulation

Valuation is a crucial topic for ESOPs because in closely held companies, the price paid for company stock in transactions must be based on an independent outside appraisal, and likewise ESOP-held stock must be appraised at least annually. Much ESOP litigation over the years has revolved around valuation.

The Department of Labor issued proposed ESOP valuation regulations in 1988 but never finalized them. ESOP professionals have urged the DOL to issue formal guidance instead of leaving it to the courts, and the SECURE 2.0 Act of 2022 (as part of the WORK Act) directed the DOL to develop formal guidance on valuation. In October 2024, the DOL sent a new proposed ESOP valuation regulation to the Office of Management and Budget (OMB) for inter-agency review of costs and benefits. The OMB has now completed its review of the regulation.

Under "Anticipated Costs and Benefits," the OMB states: "The proposed regulation will provide clarity and certainty to ESOP plan fiduciaries who acquire or sell a security for which there is not a generally recognized market.  Estimates of the cost are still under development and will be reflected in the notice of proposed rulemaking."

Under "Risks," the OMD states the DOL believes "a regulation is necessary to protect and safeguard the interests of participants and beneficiaries of ESOPs that invest in employer stock without a generally recognized market....for stock without a generally recognized market, [b]ecause the price of such stock is not set by reference to a public market price, there is greater risk that the ESOP may pay more than fair market value.  Overpayment effectively diverts value to the sellers of stock, depriving the ESOP’s participants and beneficiaries of important retirement benefits and full compensation for their labor.  Additionally, if an ESOP transaction is financed by its sponsoring employer, overpayment can result in the employer taking on excessive debt, which can impact both the ESOP’s investment in employer stock as well as participants’ jobs."

The next step will be for the DOL to make the regulation available for comment. The ESOP community will examine the proposed regulations with great interest, and we at the NCEO will analyze them, gather input from the community, and report on the implications of the proposed regulations and what our research finds on the topic.