For owners of closely held businesses, an employee stock ownership plan, or ESOP, can be an attractive way to transition ownership while allowing employees to participate in future growth. But one issue has long made ESOP transactions more difficult and expensive: uncertainty over how the Department of Labor, or DOL, and courts will evaluate the price paid for privately held employer stock.
Congress has acted to reduce that uncertainty. The Retire through Ownership Act (S. 2403) (the “Act”) expressly allows an ESOP fiduciary to rely in good faith on an independent valuation using the principles and methodologies of IRS Revenue Ruling 59-60. The Act passed both chambers of Congress and was signed into law by the President on October 15, 2026.
The Act should make ESOP transactions more predictable. But it does not give fiduciaries a free pass on valuation.
Why ESOP Valuation Has Been So Difficult
ERISA permits an ESOP to purchase employer stock, including stock of a privately held company, but generally requires the ESOP to pay no more than “adequate consideration.” For stock without a recognized public market, that requires determining fair market value in good faith.
In practice, that determination is not straightforward.
Valuing privately held stock necessarily depends on financial projections, assumptions about future performance, capitalization or discount rates, comparable companies, control considerations and other matters requiring professional judgment.
That uncertainty has contributed to substantial ESOP litigation, often centered on whether the ESOP paid more than fair market value for employer stock.
The DOL has worked for years on regulations addressing “adequate consideration,” but no comprehensive final regulatory framework has emerged. The Act is intended to provide greater statutory certainty.
What the Act Changes
The Act permits an ESOP fiduciary to rely in good faith on a valuation by an independent valuation expert or business appraiser applying the principles and methodologies of Revenue Ruling 59-60, as the IRS may amplify or modify that guidance over time.
Revenue Ruling 59-60 has long been a principal framework for valuing closely held stock. It requires consideration of factors including financial condition, earnings capacity, dividend-paying capacity, goodwill, industry conditions and comparable market information.
By placing that framework directly into ERISA’s adequate-consideration rules, the Act gives fiduciaries, business owners and advisers a clearer starting point for valuing privately held employer stock.
A Safe Harbor — But Not a Free Pass
The Act is sometimes described as an ESOP “valuation safe harbor,” but that shorthand can be misleading.
It does not make any appraisal automatically establish adequate consideration.
Three limitations are important.
- The fiduciary’s reliance must be in good faith;
- the valuation must be performed by an independent appraiser; and,
- most importantly, the Act does not modify a fiduciary’s obligations under ERISA Section 404, including the duties of prudence and loyalty.
An ESOP trustee therefore could not simply obtain an appraisal and consider the fiduciary inquiry complete. The trustee would still need a sound process for evaluating the transaction and the supporting valuation, including projections, assumptions, financing terms and other relevant information.
The Act protects good-faith reliance on an independent valuation—not blind reliance on one.
The Litigation May Shift, Not Disappear
The Act could significantly affect ESOP litigation because valuation and adequate-consideration disputes have been a recurring source of claims. Industry professionals expect greater certainty to reduce some of that litigation risk.
Future disputes may focus less on identifying the “right” valuation methodology and more on whether:
- the appraiser was independent and properly applied Revenue Ruling 59-60;
- the projections and significant assumptions underlying the valuation were reasonable; and
- the fiduciary’s reliance was in good faith and otherwise consistent with ERISA’s duties of prudence and loyalty.
The Act may therefore narrow one area of uncertainty while increasing the importance of documenting the fiduciary’s decision-making process.
Why This Matters to Business Owners
For a business owner considering a sale to an ESOP, valuation risk is more than a technical ERISA issue.
It can affect transaction costs, trustee and adviser participation, fiduciary insurance, financing and ultimately whether an ESOP is a practical succession alternative.
Greater certainty regarding the valuation standard could therefore remove one obstacle from the ESOP succession-planning process.
An ESOP will not be right for every company. Company value, cash flow, management succession, transaction financing, employee demographics and the owner’s objectives all remain important.
But owners evaluating a third-party sale, management transition or other succession strategy may have another reason to include an ESOP in the discussion.
Existing ESOPs Should Take Notice
Existing ESOP companies and fiduciaries should review how they select independent appraisers, evaluate projections and assumptions, and document their consideration of valuations—both for annual administration and for transactions involving employer stock.
The Story Is Not Over
The Act preserves the DOL’s authority to issue regulations interpreting the new provision without expanding DOL’s underlying regulatory authority.
Future DOL guidance and developing case law therefore will remain important.
The Act gives ESOP fiduciaries an express statutory basis for good-faith reliance on an independent professional valuation using a long-established framework. It could make valuation risk more predictable. For closely held business owners considering succession alternatives, that may be reason enough to take another look at an ESOP.
If you are weighing an ESOP as a succession strategy, or you administer an existing ESOP and want to review your valuation and documentation practices in light of the Act, please contact Robert T. Mashburn, Jr. or Leon H. Rittenberg III.