Frequently Asked Questions

Employee Ownership FAQs

Common questions about employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and other forms of employee ownership, from the basics to technical topics.

This FAQ is written primarily for business owners, managers, and advisors involved in setting up or running an employee ownership plan. If you're an employee at an ESOP company looking to understand your own benefits and rights, see our articles on Working at an ESOP Company and The Rights of ESOP Participants.

NCEO employee ownership FAQ hero (keyboard)

If a valuation is not completed for some months after the end of the plan year, how should the company handle distributions in terms of the price it pays for shares to make sure the price reflects fair market value? The law says the distribution must be at the current fair market value, but this seems impossible given the usual lag in valuations.

First, plan language should be clear that distributions will occur as soon as practicable after the required time from termination, retirement, death, or disability. That recognizes that it is not possible to pay out as of the actual date of the current valuation. Plans typically provide that the distribution will be as of the last valuation. There are some options, however.

Say the valuation is completed six months after the end of the plan year. If your policy says that an employee can choose a distribution prior to that date, the plan would normally say the price of the shares would be the most recent valuation (the one completed in the prior June). But employees could also wait until the new valuation is completed and then be paid within a short (30 days, for instance) window. If employees leave after the valuation date, but before the end of the plan year, they would get the June 30 price.

If a company wanted to provide for potential hardship issues, or for death or retirement, it could allow employees to take a percentage of the distribution (such as 75%) and then be "trued-up" at the June 30th date. That way, the company is protected if the stock value drops sharply from the prior valuation.

In some cases, however, companies and/or trustees may want to do an interim valuation because they believe there has been a substantial change in the company’s value as happened to some companies during COVID. With approval from the trustee, the company could ask for an updated valuation to use for distributions.

For more details, see The ESOP Repurchase Obligation Handbook.

Link to this FAQ Topic: Distributions & Repurchase