The regulatory uncertainty around valuations for employee stock ownership plans (ESOPs) is a significant burden that creates undue risk and can “hamper employee-owned businesses,” says Alex Brill, a senior research fellow at the American Enterprise Institute, in a new paper. He’s referring to long-awaited rules on the fair market value of company shares to be bought by an ESOP—a key to the setup and ongoing operations of these vehicles. Without final rules, the DOL has resorted to regulating through litigation, winning many cases alleging that the ESOPs overvalued (and thus overpaid for) the stock of the sponsoring companies. Valuation experts say the DOL uses rules that are not consistent with accepted valuation standards.

New-law mandate: The paper points out that, while Congress recently directed the DOL to establish guidance on ESOP fair market valuation, the new legislation (contained in the SECURE 2.0 Act of 2022) does not provide a deadline for issuing the guidance. “It is critical that DOL issue guidance for ESOP valuation promptly through a formal notice-and-comment rulemaking that permits stakeholders to offer feedback on a proposed regulation,” Brill concludes.

You can read Brill’s paper if you click here.

We point out that, although there is no official deadline, a DOL official stated that regs will be issued by year-end, according to a blog post from the National Center for Employee Ownership (NCEO). Once the proposed regulations are issued, there will be a two-to-three-month public comment period before they are finalized.