Selling to an ESOP: the price has to be right.

How employer stock must be valued when an ESOP buys it, and what the Retire through Ownership Act changed.

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 now that Congress has, for the first time, written a valuation benchmark into the statute itself.

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)(A)(ii), 29 U.S.C. § 1002(18)(A)(ii), as redesignated in October 2026; until then the provision was § 3(18)(B), the citation most published decisions use). 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 had stood since 1988: a statutory definition, a never-finalized proposed regulation, case law, and enforcement practice. The Department's regulatory agenda still lists a replacement adequate-consideration proposal (RIN 1210-AC20) targeted for November 2026, the fate of the separate class exemption remains uncertain, and the statutory mandate of § 346(c)(4)(B) remains on the books. Congress, however, did not wait for the Department.

Congress acts: the Retire through Ownership Act. On October 15, 2026, the Retire through Ownership Act was signed into law (S. 2403, Pub. L. No. 119-124). The bill had passed the Senate by unanimous consent in October 2025 and the House by a vote of 401 to 14 in September 2026. It is short — a single operative section — and it amends the adequate consideration definition directly. New ERISA § 3(18)(B) provides that a fiduciary of an ESOP "may make a good faith reliance on a valuation provided by an independent valuation expert or business appraiser that has relied upon the principles and methodologies set forth in Internal Revenue Service Revenue Ruling 59-60 (as amplified and modified by the Internal Revenue Service from time to time)" in determining the fair market value of closely held employer stock. The amendment applies to adequate consideration determinations made on or after October 15, 2026; transactions priced before that date remain under prior law.

What Revenue Ruling 59-60 is — and why Congress chose it. Revenue Ruling 59-60 (1959-1 C.B. 237) is the Internal Revenue Service's 1959 guidance on valuing the stock of closely held corporations for estate and gift tax purposes. It defines fair market value by the familiar willing-buyer, willing-seller standard — the same formulation the Department borrowed for its 1988 proposal — and lists the factors an appraiser must weigh: the nature and history of the business, the economic outlook for the industry, the company's book value and financial condition, its earning capacity, its dividend-paying capacity, the value of goodwill and other intangibles, prior sales of the stock and the size of the block being valued, and the market prices of comparable publicly traded companies. It cautions against mechanical formulas and simple averaging of methods, and it has been the common vocabulary of business appraisers for more than sixty years. In choosing it, Congress did not invent a new standard; it gave statutory standing to the one ESOP appraisers already use.

What the Act does — and does not — do. The Act is a process protection, not a price guarantee. It tells a fiduciary that reliance on an independent appraiser who followed Revenue Ruling 59-60 can satisfy the good-faith element of the definition, and it gives trustees, appraisers, lenders, and sellers a statutory reference point where before there was only a withdrawn proposal and a line of settlement agreements. But the statute says the fiduciary "may make a good faith reliance" — the reliance must itself be in good faith, and good faith has always been measured by conduct. The Act expressly provides that it does not modify a fiduciary's obligations under ERISA § 404, so the trustee must still select an appraiser who is genuinely independent and qualified, understand the valuation, test the projections and other material assumptions behind it, evaluate the terms of the transaction, and document its deliberations. A fiduciary who accepts a report it does not understand is not relying in good faith. The Act is also silent on the questions that have driven much of the litigation — control premiums, below-market seller financing, warrants and other synthetic equity, and the reasonableness of management's projections — and those remain matters of fiduciary judgment. Finally, the Act neither forbids nor requires further regulation: it preserves the Department's existing authority to issue interpretive regulations through notice-and-comment rulemaking while providing that the authority is not expanded. The proposal on the Department's agenda may still come, but it must now be built around the statutory reliance rule rather than in place of it.

What this means if you are considering an ESOP. The Act does not relax the rules; it organizes them. The Department continues to investigate ESOP valuations, overpayment claims remain a recurring focus of ESOP litigation and Department enforcement, and the Act's protection is available only to a fiduciary whose reliance is in good faith. A well-run transaction today looks much like what the withdrawn proposal would have required, with one new element: an experienced independent trustee; a qualified independent appraiser engaged by the trustee, not the seller, under an engagement letter that requires the valuation to follow Revenue Ruling 59-60 and a report that says it did; 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.