DOL to Begin Notice & Comment Rulemaking on ESOP Adequate Consideration Exemption
The Consolidated Appropriations Act of 2023 was an omnibus spending bill that was signed into law on December 29, 2022. This spending bill contained a number of provisions expected to have a positive impact on employee stock ownership plans (ESOPs). Contained within this bill was the Worker Ownership, Readiness, and Knowledge (WORK) Act.
The WORK Act requires the U.S. Department of Labor (DOL) to issue “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.” The lack of regulation in ESOP valuation and the increased number of ESOP audits and litigation have long been a concern of the ESOP community.
In a letter to The ESOP Association (TEA) dated April 12, 2023 from Assistant Secretary of Labor Lisa Gomez, the DOL has committed to move forward with a public notice-and-comment rulemaking on a key regulation the community has sought since ESOPs were first created in 1974. The regulation will clearly define “adequate consideration” under Section 408(e) of the Employee Retirement Income Security Act of 1974 (ERISA). This letter was issued in response to a formal Administrative Procedures Act (APA) petition initiated by TEA last September.
This development is considered a major victory for ESOPs. TEA has been aggressively seeking the formal rulemaking throughout its history but has been particularly focused on these efforts over the last four years. In addition to exercising its rights under the APA, TEA also championed legislative language within the SECURE 2.0 Act directing the DOL to accomplish the rulemaking. “This has been a long time coming … unnecessarily long. While we are far from a proposed regulation, let alone a final regulation, I am hopeful the Department will live up to their commitment in a timely way,” said James Bonham, TEA president and CEO. “We look forward to working with the Department to ensure ESOP Trustees have the regulatory clarity they have desperately needed, and the employee owners of ESOPs can be confident they have not overpaid for the companies their ESOP is buying on their behalf.”
The APA petition, which was brought under ERISA, was formally declined by the DOL. Gomez indicated the requirements contained in the SECURE 2.0 Act were the reason it was moving forward at this time. “To be clear, however, the Department has decided to move forward with notice and comment rulemaking on the “adequate consideration” requirement in connection with ESOP acquisitions of qualifying employer securities and looks forward to hearing from you and a wide range of stakeholders on the relevant issues.” Gomez continued, “The Department expects to move forward and engage with interested stakeholders, including TEA, relatively soon as the first step of the rulemaking process. The specific timing of next steps in the process will depend on the breadth and depth of public input from those public engagement sessions with interested stakeholders. We look forward to additional input from TEA as we move forward with this process.”
Bonham further indicated that TEA expects the DOL to move forward without delay and observed that the formal denial of TEA’s petition created a legal cause of action under the APA. “The reason we had to file the petition was because the Department has refused to issue the regulatory guidance as required by ERISA for almost 50 years,” Bonham said. “It is not lost on us that the DOL has said many times before that they will do what they are promising to do now. There is not much trust between ESOPs and the DOL, so we hope this isn’t a case of fool me twice. This rulemaking should begin with all haste. Our membership will measure that in weeks and months, not years.”
TEA’s original petition to the DOL via the APA is available online,1 along with a fact sheet on the petition and related issues.2
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