On April 12, 2023, the U.S. Department of Labor (the “DOL” or “Department”) submitted a letter to The ESOP Association (the “TEA”) in which the Department committed to provide guidance regarding “Adequate Consideration” under Section 408(e) of the Employee Retirement Income Security Act of 1974 (“ERISA”). The guidance should establish long-awaited clarity for employee stock ownership plan (“ESOP”) valuations.

The letter was prompted by the December 29, 2022 “Setting Every Community Up for Retirement Enhancement” (“SECURE”) 2.0 Act legislation, which requires the DOL to establish ESOP valuation guidelines. The DOL’s Assistant Secretary of Labor, Lisa Gomez, stated, “[T]he Department has decided to move forward with the notice and comment rulemaking on the “adequate consideration”  requirement in connection with ESOP acquisitions of qualifying employer securities and looks forward to hearing from [the TEA] and a wide range of stakeholders on the relevant issues.”

The requirement within the SECURE Act language compels the DOL to develop, “acceptable standards and procedures to establish good faith fair market value for shares of a business to be acquired by an employee stock ownership plan.” ESOP plan sponsors, participants, and service providers hope the development of these standards and procedures will bring transparency and consistency to the valuation process and benefit the ESOP community by:

  • Delivering a valuation roadmap to ESOP trustees and fiduciaries, who are responsible for ensuring that the ESOP pays no more than adequate consideration for the stock of the sponsoring company. The lack of clear guidance on this issue has led to several decades of uncertainty and potential liability for trustees and fiduciaries.
  • Reducing the risk of noncompliance with ERISA’s prohibited transaction rules, as well as incurrence of potentially costly penalties.
  • Increasing the confidence of employees who participate in ESOPs, knowing that the valuations are being conducted in a consistent and reliable manner, and perhaps leading to increased adoption of ESOPs and greater support for their use.

The DOL did not goes as far as to state when the regulations will be issued; it may be months or more likely years. It will be crucial for the ESOP community to actively participate in the regulatory process to ensure that the regulations meet the needs of ESOPs and their participants and do not inhibit successful employee ownership opportunities.