U.S. House Sends ESOP Valuation Bill to President

The Retire Through Ownership Act passed the House on Wednesday by a vote of 401-14. The bill would allow fiduciaries of employee stock ownership plans (ESOP) to rely on IRS valuation guidelines when appraising the value of the shares in the ESOP.

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The bill passed the Senate unanimously in October and now heads to the President’s desk.

The issue of “adequate consideration,” or a fair appraisal of ESOP shares, has exposed the ESOP industry to increased litigation risk and slowed their usage, according to ESOP industry advocates.

If enacted, the legislation would permit ESOP fiduciaries to “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” to determine the fair market value (FMV) of the stock.

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Revenue Ruling 59-60 is designed to provide a methodology for “valuing shares of the capital stock of closely held corporations for estate tax and gift tax purposes.” Closely held corporations often have low trading volume, making it difficult to use market quotes to price the stock.

The guidance lists several factors for appraisers to consider: nature of the business and its history; the general outlook for the economy, and the industry; stock book value and the condition of the business; earning capacity; dividend paying capacity; intangible value; volume of outstanding shares; and the stock value of comparators, among other factors.

Rep. Rick Allen (R-Ga.) said in a statement that “If an independent appraiser follows the Internal Revenue Service’s longstanding guidelines to determine what a company is worth, the ESOP trustee can rely on that appraisal to decide if the price is fair.”

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The ESOP Association said in a statement that “IRS Revenue Ruling 59-60 provides a longstanding and broadly accepted framework for valuing closely held businesses.”

The ESOP Association continued, “Aligning ERISA with these established valuation principles would create a more consistent process for fiduciaries, appraisers, regulators, and courts while preserving the fiduciary protections afforded to employee owners under federal law.”

 As seen in Plan Sponsor Council of America.