By Barry Salkin, Andrew Oringer and Dannae Delano
Last week, on October 15, 2026, President Trump signed the Retire Through Ownership Act (the “Act”) which amends the definition of “adequate consideration” in Section 3(18) of the Employee Retirement Income Security Act of 1974 (“ERISA”). The definition applies, among other things, to employee stock ownership plans (“ESOPs”). The Act provides a measure of certainty regarding valuation issues that had not previously been available.
Background
ESOPs have been expressly contemplated by ERISA as both a tax-qualified retirement tool and a tool of corporate finance, ever since ERISA’s enactment. In some ways, ESOPs are unlike other tax-qualified plans because investment of plan assets can be concentrated in a single asset that can be quite speculative, especially where the employer is privately held and its stock is not available on a public exchange. Further, both the risks and the rewards can be heightened in the case of an ESOP depending on whether or not the interests of shareholders and employees align. (While much of the discussion herein could also apply to non-ESOP eligible individual account plans that allow investment in “employer securities,” this discussion is limited to ESOPs.)
The U.S. Department of Labor (DOL) has long been concerned with ESOPs as both a regulatory and an enforcement matter. Until recently, the DOL had since 2005 designated ESOPs as a national enforcement project on its website.
Back in 1988, the DOL proposed a regulation under the ERISA rules that govern whether an ESOP pays more than, or receives less than, adequate consideration for employer securities. Courts have relied on the proposed regulation to varying extents and, during the long period during which the proposal has been outstanding, there has been substantial uncertainty in the market about how much or how little the parties should comply with the specifics of the proposed regulation. Some have wondered whether the proposed regulation has relevance to the more recently added definition of “adequate consideration” that applies for purposes of the so-called “service provider” exemption added to ERISA (as Section 408(b)(17)) by Section 611(d)(1) of the Pension Protection Act of 2006.
One approach taken by the DOL in past years has been to pursue fiduciary issues, including valuation issues, through litigation and other enforcement efforts, rather than through further regulatory efforts. One notable settlement, involving GreatBanc Trust Company, garnered significant attention in the market and became (sometimes, at the behest of ESOP sponsors) a basis under which various ESOP fiduciaries proceeded when valuing employer securities.
In 2022, the DOL was directed by Congress (in Section 346 (c)(4)(B) of the SECURE 2.0 Act) to issue guidance on the standards and procedures that should be followed when establishing good faith market value for employer securities to be acquired by an ESOP. On January 16, 2025, the DOL under the Biden administration proposed a regulation defining “adequate consideration,” together with a proposed safe harbor. That proposal would have established a number of arguably high bars for ESOP-related valuations. Four days later, President Trump took office and issued an Executive Order (Regulatory Freeze Pending Review), which, among other things, froze all rules sent to, but not yet officially published in, the Federal Register, including the Biden administration proposed regulation.
As further context leading to the enactment of the Act, the DOL has arguably indicated that its historical hostility towards ESOPs may be waning. In Field Assistance Bulletin 2026-01, the DOL stated:
A key principle guiding EBSA enforcement is fairness . . .. Whenever possible and consistent with our mission, EBSA must not regulate through enforcement activities, or use enforcement to drive policy. Instead, we should use notice-and-comment rulemaking and sub-regulatory guidance.
Although circumstances may arise requiring EBSA to act to fulfil its mission to protect the security of the employee benefit plan system, novel legal theories or interpretations of ERISA should not be first articulated during enforcement actions. . .. For example, until EBSA complies with the Congressional directive to provide “acceptable standards and procedures to establish good faith fair market value for shares of a business to be acquired by an employee stock ownership plan,” all pending and proposed ESOP valuation investigations must be reviewed against this guiding principle of fairness.
The Act
Against this backdrop, in a Congress where bipartisan action is not always the norm, the Act was passed with overwhelming bipartisan support. Under the Act, which took effect immediately upon enactment, the relevant plan fiduciary “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 Revenue Ruling 59-60 (as amplified and modified by IRS) in determining fair market value.” The Act also provides the DOL with authority to issue regulations interpreting the Act; states that the Act does not expand the regulatory authority of the DOL; and does not modify a fiduciary’s obligations under Section 404 of ERISA. If and when the DOL decides to issue proposed regulations under the Act, it will not necessarily be starting cold, because the valuation factors it included in the 1988 proposed but never finalized regulations were based on Revenue Ruling 59-60. Aside from providing specific rules for determining methodology, the Act also varies from the original text by requiring only one standard that needs to be satisfied, i.e., a good faith standard. The pre-amendment language could be read, and was read by the DOL and some courts, as requiring a second test, namely that the good faith valuation be accurate as well, not accurate to the extent of a specific price but accurate within a reasonable range.
What does Revenue Ruling 59-60 provide? It requires that fair market value be determined on the date of the transaction in question. Fair market value is the price that a willing buyer would pay to a willing seller, neither being under any compulsion to buy or sell and both being fully informed. The willing buyer and the willing seller are hypothetical people, rather than specific individuals or entities, and their characteristics may differ from the characteristics of the purchaser or seller. Thus, the hypothetical buyer may have more knowledge than the actual purchaser, and the hypothetical buyer may have undertaken greater due diligence efforts than the actual purchaser. Further, the hypothetical buyer and the hypothetical seller are presumed to be dedicated to achieving the maximum economic advantage.
Application of the principles and methodologies of Revenue Ruling 59-60 will not preclude divergent and sometimes vastly different valuations between parties in litigation. Revenue Ruling 59-60 specifically provides that, “No general formula may be given that is applicable to the many different valuation situations arising in the valuation of such [closely held] stock.” It is a firmly established principle of tax law that valuation of stock is a question of fact depending upon the circumstances of the individual case and that same principle should apply in ERISA cases challenging the adequacy of consideration received by or paid by a plan. Consistent with the absence of a general formula for valuation, Revenue Ruling 59-60 required consideration of the following eight non-exclusive factors:
- The nature of the business and the history of the enterprise from its inception
- The economic outlook in general and the outlook of the specific industry in particular
- The book value of the stock and the financial condition of the business
- The earning capacity of the company
- The dividend paying capacity of the company
- Whether or not the company has good will or other intangible value
- Sales of the stock and the size of the block to be valued
- The market price of stocks of corporations engaged in the same or similar lines of business having their stock actively traded on the free and open market, either on an exchange or over the counter.
In recognition that a determination of fair market value is a question of fact and will depend upon the circumstances of each case, the ruling instructs appraisers to apply common sense, an informed judgment, and reasonableness in weighing the specific facts of a case and determining their aggregate significance. Revenue Ruling 59-60 further advised appraisers that because valuations cannot be made on the basis of a prescribed formula, there is no means by which the eight factors cited above can be assigned mathematical weight in determining fair market value. For this reason, no useful purpose would be served by taking an average of several factors and basing a fair market value on that result. Revenue Ruling 59-60 did state that earnings may be the most important criterion in some cases while asset value will receive primary considerations in others. An appraiser will give primary consideration to earnings when valuing companies which sell products and services to the public. In contrast, in the investment or holding type of company an appraiser may accord the greatest weight to the assets underlying the security.
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The Act may provide significant comfort to ESOP fiduciaries dealing with valuation and other fiduciary issues, and to plan sponsors and transaction counterparties involved in an ESOP transaction. At a minimum, the landscape has changed from a time in which much of the significant authority was contained in a decades-old, proposed regulation and a certain settlement agreement of no precedential value. Now, we have significant statutory guidance that follows an apparent change to the DOL’s enforcement priorities.
If you have any questions regarding the Act, or about ESOPs more generally, please do not hesitate to contact us.