Tax Facts
Post-SECURE 2.0 New DOL ESOP Valuation Guidelines
by Prof. Robert Bloink and Prof. William H. Byrnes
Employee stock ownership plans, or ESOPs, can provide valuable retirement benefits to employees—in addition to an ownership stake in their employer. Still, ESOPs have always been risky due to fiduciary concerns over how the employer stock should be valued when acquired by the ESOP. The SECURE Act 2.0 directed the Department of Labor (DOL) to provide updated guidance on how responsible parties should determine whether an ESOP was acquiring employer stock for “adequate consideration”—and the DOL answered with a notice of proposed rulemaking (NPRM) in 2025. Ultimately, the DOL proposal fell victim to President Trump’s regulatory freeze. Still, because key aspects of the NPRM reflect the results of court decisions on ESOP valuation over the years, the 2025 DOL guidance may remain the most valuable tool currently available to help ESOPs avoid court intervention when acquiring employer stock.
ESOPs: Background
ESOPs are a type of retirement plan that invests primarily in the company that sponsors the plan on behalf of its employees. While ESOPs can be valuable, they also pose risks—generally, because the bulk of the ESOP is invested in one company and its affiliates. If the company fails, participants risk losing a large portion of their retirement assets. ESOPs are therefore subject to detailed requirements.
Acquiring the sponsoring employer’s stock can always create a risk of violating the prohibited transaction rules, which prohibit or restrict certain transactions that create a risk of self-dealing in the retirement plan context. An important prohibited transaction exemption exists to protect ESOPs when acquiring employer stock. One key condition that must be satisfied under the exemption is that the employer stock must be acquired for fair market value—known as the “adequate consideration” component of the exemption.
Prior to the 2025 NPRM, guidance on how ESOPs should comply with the standard was minimal. Many ESOPs turn to a DOL proposal released in 1988. As evidenced by the number of lawsuits regarding ESOP stock valuation over the years, the 1988 guidance has not been particularly effective (it’s estimated that ESOP violations have cost defendants over $385.5 million over the past decade) and ESOP sponsors have long requested clarifications.
The DOL’s Post-SECURE Act 2.0 Proposal
The DOL’s NPRM would have withdrawn the 1988 regulation entirely and provided important clarification pursuant to the SECURE Act 2.0 directive.
The NPRM proposed two key elements that should be satisfied to qualify under the existing prohibited transaction exemption: (1) a fair market value test and (2) a “good faith” determination of the fair market value.
Fair market value, as expected, means the price at which the employer’s stock would have changed hands in an arm’s length transaction between a willing buyer and a willing seller, assuming neither party was under any compulsion to buy or sell and each had knowledge of all relevant facts. This is the general test for determining fair market value in any number of contests.
The good faith requirement deals with the independent trustee or fiduciary’s process. The good faith element required the responsible party to use a prudent process in determining value in accordance with their general duties of prudence and loyalty. More specifically, the fiduciary’s process should include (1) selection of a qualified independent appraiser to prepare a written valuation report, (2) overseeing production of that report based on current, complete and accurate information, (3) reviewing the final report to determine whether it can reasonably be relied upon.
The independent appraiser, of course, should have no relationship with the sponsoring employer—and no financial interest in whether the stock price is acceptable from the seller’s perspective. The reliability issue is also important. The independent appraiser would be tasked with determining whether any forecasts provided by the sponsoring employer were reliable—and the trustee would be tasked with reviewing the appraiser’s process.
The DOL’s proposal also contains a new safe harbor under the prohibited transaction exemption. While would not be necessary to rely on the safe harbor to remain ERISA-compliant, the safe harbor was meant to provide detailed guidance on how responsible parties can comply when acquiring stock to form a new ESOP.
Under the safe harbor, an independent trustee would be solely responsible for determining the purchase price. That trustee would be permitted to rely on expert advice received from independent appraisers if the trustee determines that the advice is sound, loyal and prudent with respect to ESOP participants.
Conclusion: Best Practices Going Forward
ESOP sponsors should pay particular attention to choosing an independent fiduciary with a strong track record when it comes to evaluating the value of private company stock. That fiduciary should have both industry experience and experience with ESOP valuation.
While ESOP sponsors cannot formally rely upon the 2025 NPRM’s new safe harbor, the guidance provides valuable insight into the DOL’s stance when it comes to enforcement efforts. The NPRM also incorporates many key elements that courts have evaluated when resolving ESOP valuation disputes over the years.
ESOP sponsors aren’t now required to comply with the NPRM, yet adhering to its principles-based approach on stock valuation can potentially help prevent costly litigation going forward.
Employee stock ownership plans, or ESOPs, can provide valuable retirement benefits to employees—in addition to an ownership stake in their employer. Still, ESOPs have always been risky due to fiduciary concerns over how the employer stock should be valued when acquired by the ESOP. The SECURE Act 2.0 directed the Department of Labor (DOL) to provide updated guidance on how responsible parties should determine whether an ESOP was acquiring employer stock for “adequate consideration”—and the DOL answered with a notice of proposed rulemaking (NPRM) in 2025. Ultimately, the DOL proposal fell victim to President Trump’s regulatory freeze. Still, because key aspects of the NPRM reflect the results of court decisions on ESOP valuation over the years, the 2025 DOL guidance may remain the most valuable tool currently available to help ESOPs avoid court intervention when acquiring employer stock.
ESOPs: Background
ESOPs are a type of retirement plan that invests primarily in the company that sponsors the plan on behalf of its employees. While ESOPs can be valuable, they also pose risks—generally, because the bulk of the ESOP is invested in one company and its affiliates. If the company fails, participants risk losing a large portion of their retirement assets. ESOPs are therefore subject to detailed requirements.
Acquiring the sponsoring employer’s stock can always create a risk of violating the prohibited transaction rules, which prohibit or restrict certain transactions that create a risk of self-dealing in the retirement plan context. An important prohibited transaction exemption exists to protect ESOPs when acquiring employer stock. One key condition that must be satisfied under the exemption is that the employer stock must be acquired for fair market value—known as the “adequate consideration” component of the exemption.
Prior to the 2025 NPRM, guidance on how ESOPs should comply with the standard was minimal. Many ESOPs turn to a DOL proposal released in 1988. As evidenced by the number of lawsuits regarding ESOP stock valuation over the years, the 1988 guidance has not been particularly effective (it’s estimated that ESOP violations have cost defendants over $385.5 million over the past decade) and ESOP sponsors have long requested clarifications.
The DOL’s Post-SECURE Act 2.0 Proposal
The DOL’s NPRM would have withdrawn the 1988 regulation entirely and provided important clarification pursuant to the SECURE Act 2.0 directive.
The NPRM proposed two key elements that should be satisfied to qualify under the existing prohibited transaction exemption: (1) a fair market value test and (2) a “good faith” determination of the fair market value.
Fair market value, as expected, means the price at which the employer’s stock would have changed hands in an arm’s length transaction between a willing buyer and a willing seller, assuming neither party was under any compulsion to buy or sell and each had knowledge of all relevant facts. This is the general test for determining fair market value in any number of contests.
The good faith requirement deals with the independent trustee or fiduciary’s process. The good faith element required the responsible party to use a prudent process in determining value in accordance with their general duties of prudence and loyalty. More specifically, the fiduciary’s process should include (1) selection of a qualified independent appraiser to prepare a written valuation report, (2) overseeing production of that report based on current, complete and accurate information, (3) reviewing the final report to determine whether it can reasonably be relied upon.
The independent appraiser, of course, should have no relationship with the sponsoring employer—and no financial interest in whether the stock price is acceptable from the seller’s perspective. The reliability issue is also important. The independent appraiser would be tasked with determining whether any forecasts provided by the sponsoring employer were reliable—and the trustee would be tasked with reviewing the appraiser’s process.
The DOL’s proposal also contains a new safe harbor under the prohibited transaction exemption. While would not be necessary to rely on the safe harbor to remain ERISA-compliant, the safe harbor was meant to provide detailed guidance on how responsible parties can comply when acquiring stock to form a new ESOP.
Under the safe harbor, an independent trustee would be solely responsible for determining the purchase price. That trustee would be permitted to rely on expert advice received from independent appraisers if the trustee determines that the advice is sound, loyal and prudent with respect to ESOP participants.
Conclusion: Best Practices Going Forward
ESOP sponsors should pay particular attention to choosing an independent fiduciary with a strong track record when it comes to evaluating the value of private company stock. That fiduciary should have both industry experience and experience with ESOP valuation.
While ESOP sponsors cannot formally rely upon the 2025 NPRM’s new safe harbor, the guidance provides valuable insight into the DOL’s stance when it comes to enforcement efforts. The NPRM also incorporates many key elements that courts have evaluated when resolving ESOP valuation disputes over the years.
ESOP sponsors aren’t now required to comply with the NPRM, yet adhering to its principles-based approach on stock valuation can potentially help prevent costly litigation going forward.
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