Williams | Robinson | Wiggins

How employer stock must be valued when an ESOP buys it, and where the rules stand today.

An employee stock ownership plan, or ESOP, lets the owner of a closely held business sell some or all of the company to its employees through a retirement trust — often with meaningful tax advantages for the seller, the company, and the employees alike. But because an ESOP buys stock from the very people who run and control the company, federal law polices one issue above all others: the price. ERISA permits an ESOP to acquire employer stock only for no more than "adequate consideration," and valuation — alleged overpayment — is at the center of many of the Department of Labor's significant ESOP enforcement actions. Here is what the requirement means, and where the rules stand after an eventful stretch of regulatory activity.

Why the price is the whole ballgame. ERISA generally prohibits a retirement plan from buying property from "parties in interest" — a group that includes the sponsoring company, its officers and directors, and significant shareholders (ERISA § 406, 29 U.S.C. § 1106). Congress then carved out the exemption that makes ESOPs possible: a plan may acquire qualifying employer securities from an insider if it pays no more than adequate consideration and no commission is charged (ERISA § 408(e), 29 U.S.C. § 1108(e)). If the price is right, the purchase is exempt. If the plan overpays — even unintentionally — the exemption falls away, the purchase becomes a prohibited transaction, and the trustee who approved it can be personally liable for the overpayment. The selling shareholder is not automatically liable merely because the plan overpaid, but even a seller who was not a fiduciary can face equitable relief — such as rescission or disgorgement — if the seller knew or should have known of the circumstances that made the transaction unlawful, and a seller who also wore a fiduciary hat faces greater exposure still. See Harris Trust & Sav. Bank v. Salomon Smith Barney Inc., 530 U.S. 238, 251–53 (2000).

What the statute says — and what it leaves out. For an asset "other than a security for which there is a generally recognized market" — closely held company stock being the classic example — ERISA defines adequate consideration as "the fair market value of the asset as determined in good faith by the trustee or named fiduciary" — and, critically, "in accordance with regulations promulgated by the Secretary" of Labor (ERISA § 3(18)(B), 29 U.S.C. § 1002(18)(B)). The definition has two working parts: the number itself must reflect fair market value, and the process used to reach it must be conducted in good faith. The catch is in the final clause — the statute contemplates regulations that, more than fifty years after ERISA's enactment, have never been finalized.

The regulations the statute promised never arrived. The Department of Labor proposed a regulation in 1988 that would have given both parts real content — defining fair market value, describing the good-faith standard, and requiring the valuation to be reflected in written documentation (Prop. Reg. § 2510.3-18(b), 53 Fed. Reg. 17,632 (May 17, 1988)). Notably, the 1988 proposal did not demand that every valuation be performed by an outside appraiser; it asked instead whether the fiduciary making the determination was independent of the parties or, if not, whether the fiduciary relied in good faith on the report of an appraiser who was. The categorical independent-appraisal requirement actually comes from the tax side: for ESOP stock that is not readily tradable on an established securities market, the Internal Revenue Code requires valuations to be performed by an independent appraiser (I.R.C. § 401(a)(28)(C)). The 1988 proposal was never finalized. For nearly four decades, ESOP fiduciaries have priced transactions under a statute that points to regulations that do not exist, guided instead by the proposal's framework, court decisions, and the Department's enforcement positions.

How courts and the Department filled the gap. Courts have long measured good faith by conduct: a fiduciary must make an honest, prudent investigation of value, and cannot simply hand the question to an appraiser and look away. See Donovan v. Cunningham, 716 F.2d 1455, 1467–69 (5th Cir. 1983). The Department, for its part, has effectively written its expectations into a series of settlement agreements with prominent ESOP trustees — most notably the 2014 GreatBanc Trust agreement, whose valuation process requirements the Department has published as guidance for ESOP appraisals — addressing appraiser independence, scrutiny of the financial projections underlying the valuation, and documentation of the fiduciary's deliberations. Those agreements bind only the trustees who signed them, but they have become a widely influential benchmark for the industry.

Congress ordered real guidance. In the SECURE 2.0 Act of 2022, Congress directed the Department to issue formal guidance on acceptable standards and procedures for establishing good-faith fair market value for shares of a business that an ESOP proposes to acquire (Pub. L. No. 117-328, div. T, § 346(c)(4)(B), codified at 29 U.S.C. § 3228(c)(4)(B)). After decades of regulatory silence, Congress had imposed an express statutory mandate — although it specified no deadline for the Department to act.

The January 2025 proposals. In response to that mandate, on January 16, 2025, the Department's Employee Benefits Security Administration released — in prepublication form — a draft proposed regulation defining adequate consideration under § 3(18)(B), together with a draft proposed class exemption covering an ESOP's initial acquisition of privately held employer stock from a selling shareholder. In broad strokes, the package would have codified the modern consensus: fair market value determined as of the transaction date, a written report from a qualified independent appraiser, active fiduciary oversight of the valuation — including the reasonableness of management's projections — and documentation sufficient to show the work. The class exemption would have offered a clearer, condition-based path through the prohibited transaction rules for first-time ESOP purchases.

And their withdrawal. The drafts were released in the closing days of the outgoing administration and were withdrawn before publication in the Federal Register, consistent with the incoming administration's January 20, 2025 regulatory freeze — so they never took legal effect of any kind. The withdrawal changed no existing law, but it returned the adequate consideration question to where it has stood since 1988: a statutory definition, a never-finalized proposed regulation, case law, and enforcement practice. A next chapter is already penciled in: as of August 2026, the Department's regulatory agenda lists a replacement adequate-consideration proposal (RIN 1210-AC20) targeted for November 2026. Agenda dates are aspirational rather than binding, the content of any new proposal may differ, and the fate of the separate class exemption remains uncertain — but the statutory mandate of § 346(c)(4)(B) remains on the books.

What this means if you are considering an ESOP. The absence of final regulations is not a relaxation of the rules. The Department continues to investigate ESOP valuations, and overpayment claims remain a recurring focus of ESOP litigation and Department enforcement. A well-run transaction today looks much like what the withdrawn proposal would have required: an experienced independent trustee; a qualified independent appraiser engaged by the trustee, not the seller; hard scrutiny of the projections behind the valuation; genuine arm's-length negotiation of price and terms; and a written record of all of it. Sellers benefit from the same discipline, because a defensible process is what protects the transaction — and the seller's proceeds — from being unwound years later.

Did you know? The above information is presented by Williams | Robinson | Wiggins as a public service and to generally outline the law in a particular area. It is not provided and is not intended as legal advice tailored to you or to your unique situation. Every legal matter depends upon specific facts which an attorney hired by you must consider in forming legal opinions and advice.

Need more information? If you are weighing a sale of your business to an ESOP, or serve as a fiduciary for a plan considering one, you may contact us at(573) 341-2266 to obtain more detailed assistance.