On October 15, 2026, the President signed the Retire Through Ownership Act, which amends ERISA section 3(18), the definition of “adequate consideration,” for stock that is not publicly traded and is bought by an employee stock ownership plan (ESOP).
Under the new provision, an ESOP fiduciary may rely in good faith on a valuation from an independent valuation expert or business appraiser who relied on the principles and methodologies in IRS Revenue Ruling 59-60, as amplified and modified by the IRS from time to time. Revenue Ruling 59-60 has long governed the valuation of closely held stock for estate and gift tax purposes. It identifies eight fundamental, but not exclusive, factors: (1) the nature and history of the business; (2) the economic outlook for the economy and the industry; (3) book value and financial condition; (4) earning capacity; (5) dividend-paying capacity; (6) goodwill and other intangible value; (7) prior sales of the stock and the size of the block being valued; and (8) market prices of comparable publicly traded companies. The ruling rejects any fixed formula or simple averaging of factors. How much weight each factor gets depends on the company. Later IRS rulings add guidance for restricted securities and for preferred and common stock issued in recapitalizations.
The Act has important limits that ESOP fiduciaries should consider. It does not change a fiduciary’s duties of prudence and loyalty under ERISA section 404. It does not prevent the Department of Labor from issuing regulations interpreting the new provision, although it does not expand the Department’s authority over “adequate consideration” beyond what it had before enactment. The new rule applies only to valuation determinations made on or after October 15, 2026. This Act does not alter an individual participant’s ability to sue, claiming that the ESOP trustee paid too much for the stock, but such a plaintiff will need to overcome the statute’s permission of the ESOP trustee to rely in good faith on an independent valuation that meets the requirements under the Service’s Revenue Ruling 59-60 and the subsequent guidance on such Revenue Ruling.
What This Means for ESOP Fiduciaries
The Act does not expressly state it is a safe harbor. Participants can still challenge ESOP transactions under ERISA’s fiduciary rules and prohibited transaction rules as not being transactions for “adequate consideration.” The Act does give fiduciaries a clearer statutory basis for relying on a sound valuation (assuming the fiduciary has determined the valuation is independent and meets the requirements), which may add a hurdle for plaintiffs to surmount in litigation. To get that benefit, fiduciaries should confirm that the appraiser is independent and actually applied the analysis of the factors in Revenue Ruling 59-60 and its later rulings. The ESOP fiduciary should also critically review the factors the appraiser considered, how it weighed them, and how it treated any restrictive agreements, and document that review for each transaction. ESOP fiduciaries purchase the plan sponsor’s non-publicly traded securities, not only in the initial transaction forming the ESOP, but also in subsequent purchases, and repurchases of shares when participants receive distributions and exercise their options to utilize the put right, as well as in re-leveraging transactions.
The valuation requirements for “adequate consideration” follow the guidance used to value businesses for estate and gift tax purposes, and reasonable minds may differ on how the principles in the guidance should be applied. The good faith reliance on an independent valuation meeting the requirements of the guidance may provide some further assurance to ESOP fiduciaries engaging in transactions purchasing the non-publicly traded securities. This does not stop the U.S. Department of Labor from auditing ESOP transactions, although the current administration has not indicated a desire to investigate such transactions. These changes were effective as of October 15, 2026, the date the law was signed by the President.
The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice. For additional assistance please contact Greta E. Cowart or a member of the Employee Benefits & Executive Compensation (EBEC) practice.
Meet Greta
Meet GretaGreta E. Cowart has counseled employers for more than 30 years on best practices in human resources and employee relations related to benefits and executive compensation. In her practice, Greta routinely develops strategies for effective administration of claims and other disputes, including defense of grievances, and in ERISA claim litigation, while also considering applicable labor and employment laws. Greta also provides fiduciary training and review of fiduciary operations to improve the documentation of the fiduciary process.
