The U.S. Department of Labor has introduced a proposed regulation concerning the valuation of employer stock bought or sold by employee stock ownership plans (ESOPs). This initiative, announced by the department's Employee Benefits Security Administration, aligns with directives from the SECURE 2.0 Act of 2022 and addresses requests from ESOP stakeholders for clearer guidance.
ESOPs are retirement plans regulated at the federal level that invest primarily in stock issued by the sponsoring employer. These plans offer workers valuable retirement benefits and an ownership stake in their company. Managed under the Employee Retirement Income Security Act (ERISA), plan fiduciaries are tasked with overseeing investments while prioritizing the interests of participants and beneficiaries.
A significant challenge arises when employer stock is not publicly traded, making it difficult to establish a market price. The proposed regulation aims to ensure that ESOPs neither overpay nor undersell stocks relative to their fair market value. Accurate valuation protects employees' compensation used for stock purchases and secures their retirement benefits and employment.
The proposal provides principles-based guidance for fiduciaries on valuing employer stock in accordance with ERISA obligations. Additionally, it offers a detailed roadmap for sellers and fiduciaries interested in establishing new ESOPs purchasing employer stock as required by ERISA.
"Employee Stock Ownership Plans are a form of worker ownership that can enable workers to share in the financial successes and profits that their labor helps make possible," stated Assistant Secretary for Employee Benefits Security Lisa M. Gomez. "Workers’ retirement security, and often their livelihood, depend on ESOP fiduciaries getting the price right."
Gomez emphasized that these proposals reflect stakeholder input and departmental experience with ESOP transactions, providing essential guidance to safeguard against overpayment by ESOPs.
The Notice of Proposed Rulemaking and Notice of Proposed Class Exemption will be published in the Federal Register, initiating a 75-day public comment period with instructions on submitting feedback.
