ESOPs Are Now More Attractive as New Law Limits Valuation Risks
Employee stock ownership plans, or ESOPs, can provide valuable retirement benefits to employees—in addition to allowing business owners to transition ownership of the business gradually while providing employees with an attractive ownership stake. Unfortunately, ESOPs have always been risky due to fiduciary concerns over how the value of privately held company stock will be evaluated by the Department of Labor. One past DOL proposal offered guidance on how to determine whether an ESOP was acquiring employer stock for "adequate consideration"—but fell victim to the Trump administration's regulatory freeze in 2025. Now, Congress itself has finally acted. The Rise Through Ownership Act was officially signed into law on October 15, 2026 and it offers valuable guidance for ESOP transactions. ESOP sponsors should carefully evaluate the parameters of the new law to avoid the risk of litigation going forward.
ESOP Valuation: Understanding the Importance
ESOPs are a type of retirement plan that invests primarily in the company that sponsors the plan on behalf of its employees. While ESOPs can be valuable, they also pose risks—generally, because the bulk of the ESOP is invested in one company and its affiliates. If the company fails, participants risk losing a large portion of their retirement assets. ESOPs are therefore subject to detailed requirements.
One key condition that must be satisfied under the exemption is that the employer stock must be acquired for fair market value—known as the "adequate consideration" component of the exemption.
For privately held companies, determining what constitutes adequate consideration can be difficult. No built-in market for the stock exists. The valuation process requires making assumptions about future performance, evaluating financial projections, considering control premiums, evaluating similar companies and more.
Without guidance, ESOPs have been left to navigate their obligations on their own—and the risk of litigation over the adequate consideration issue has always been significant.
The Rise Through Ownership Act (the Act)
The new law bases ESOP valuation on existing principles contained in Revenue Ruling 59-60. Revenue Ruling 59-60 the primary IRS guidance used by closely held businesses to calculate the fair market value of their stock for corporate transactions, business disputes and estate and gift tax purposes. The guidance mandates a facts-and-circumstances analysis, listing relevant factors that must be considered in assessing the value of closely held stock.
Pursuant to the Act, in determining share value, ESOPs can rely in good faith upon independent appraisals prepared by valuation experts or business appraisers who apply the concepts laid forth in Revenue Procedure 59-60. The law therefore seems to codify the existing "willing buyer"/"willing seller" standard that has long been the basis for establishing fair market value.
That said, it's important for ESOP sponsors to remember that obtaining an appraisal does not automatically relieve them of their duties. The appraiser must be genuinely independent. The ESOP sponsor must act in good faith when relying on the appraisal. It's also important for the ESOP sponsor to remember that the new law does not eliminate their fiduciary duties of loyalty and prudence.
As such, it remains important for the ESOP trustee to obtain all relevant information and evaluate that information in good faith—and not blindly rely on an appraisal. While the standard has been referred to as a "safe harbor", whether it truly operates as a safe harbor is debatable. The ESOP sponsor must select a qualified and independent appraiser and evaluate the final results themselves. Challenges may still arise over whether the ESOP fiduciary has fulfilled their duties.
The law builds on the DOL's 2025 Notice of Proposed Rulemaking (NPRM), which itself can help ESOP sponsors understand the scope of their duties. Pursuant to the NPRM, the ESOP fiduciary's process should include (1) selection of a qualified independent appraiser to prepare a written valuation report, (2) overseeing production of that report based on current, complete and accurate information, (3) reviewing the final report to determine whether it can reasonably be relied upon.
Conclusion
The new law provides ESOP sponsors with an important baseline when assessing the value of underlying private company stock.
Still, it's important to remember that the DOL has authority to release additional regulations interpreting the new law—and the IRS has authority to modify or clarify Revenue Ruling 59-60 itself. Understanding how the courts and the DOL interpret the core concepts contained in the new law will be critical going forward.