House Committee Unanimously Approves Bill to Create Safe Harbor for ESOP Valuations

On September 17, the House Committee on Education and the Workforce unanimously approved H.R. 5169, the Retire through Ownership Act, sponsored by Rep. Rick Allen (R-Ga.), who is chair of the House Subcommittee on Health, Employment, Labor and Pensions (HELP). The bill was amended in committee to more closely parallel the version of the same bill that passed the Senate Committee on Health, Education, Labor and Pensions earlier this year.

The bill aims to address the risks of ESOP valuation by creating a "safe harbor" for ESOP trustees. It would allow ESOP trustees to rely on independent appraisals by qualified ESOP appraisal firms using guidance under IRS Revenue Ruling 59-60. First issued in 1959 for valuing small business stock for gift and estate tax purposes, it outlines the basic valuation principles that ESOP valuations typically use, such as weighting earnings, assets, and comparable company approaches; using discounted or capitalized earnings to project enterprise value; and calculating discount rates based on the weighted average cost of capital. ERISA was not enacted until 1974, so this ruling did not apply specifically to ESOPs. In late 2024, the DOL issued its own proposed valuation guidelines, which would have been much stricter, but the new administration recalled them. ESOP advocates have long complained that the lack of clear and practical valuation rules has hampered the growth of ESOPs. The Senate bill (and now the House bill) includes language that, while the Secretary of Labor could not expand the regulatory authority of the DOL to define the term "adequate consideration" beyond the authority the DOL had before the bill's enactment, the Secretary can issue regulatory guidance for interpreting the valuation provisions in the bill.