The fair market value of employer stock is determined by an independent valuation firm; however, the fiduciary is ultimately responsible for making sure the stock has been properly valued. Over or under valued stock can lead to deduction issues, a prohibited transaction, or other violations. Fiduciaries must act prudently and in good faith with the fair market value calculated with adequate consideration to prevent such issues.
The IRS indicates “Adequate consideration is defined as the fair market value of the security as determined in good faith by the plan trustee or named fiduciary. See ERISA Act section 3(18).” While this has been a general statement, due to the WORK Act, which is included within the SECURE 2.0 Act, the DOL has finally committed to set formal guidelines to define Adequate Consideration in connection with valuing stock for ESOP acquisition purposes. Formal guidance and regulation should provide clarity on what constitutes adequate consideration and provide tools to properly value ESOP companies.
Here is the news article release from the IRS - https://www.irs.gov/newsroom/irs-cautions-plan-sponsors-to-be-alert-to-compliance-issues-associated-with-esops
Contact your Blue Ridge ESOP team for further information.
