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Congress recently passed the Retire through Ownership Act (ROA) to clarify the valuation of closely held stock by employee stock ownership plan (ESOP) fiduciaries, which President Donald Trump is expected to sign into law.
The new legislation amends the definition of “adequate consideration” under the Employee Retirement Income Security Act of 1974 (ERISA) to provide that ESOP fiduciaries 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 Rev. Rul. 59-60 (as amplified and modified by the IRS from time to time) in determining the fair market value of closely held stock.
Rev. Rul. 59-60 prescribes the general approach, methods and factors that should be considered in valuing closely held stock for estate and gift tax purposes, which recognizes, among other general principles, that there is not just one valuation or formula that applies in each case, but rather the fair market value of closely held stock is generally a range of values determined based on all of the relevant factors.
The purchase and sale of employer stock by an ESOP would generally be considered a prohibited transaction under ERISA and the Code (Section 4975). However, there are exceptions for transactions involving qualifying employer securities if certain conditions are satisfied, including, among others, that such purchases and sales are for adequate consideration. Before the changes made by ROA, the definition of adequate consideration for closely held stock was not clear ꟷ essentially the fair market value of the stock as determined in good faith.
The changes made by ROA would only apply to valuation determinations made on or after the effective date of the new law.
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