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.

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For allocations, deductions, distributions, and ESOP purchases, when must stock be valued in an ESOP?

The law says that ESOPs must pay no more than fair market value. By definition, a valuation that is stale is not proof that the ESOP is paying fair market value. Using a current value is usually easy to do in an ESOP purchase. The purchase is simply timed to occur very soon after the valuation.

For distribution purposes in ongoing ESOPs, valuations are typically done annually. The valuation typically will be provided three to six months after the company closes its financials. Plans typically state that an employee will receive a distribution based on the most recent valuation. In the case of distributions, that could mean relying on a valuation that is as much as one year old. This can become an issue if there is reason to believe that there has been a substantial change in the company's value in the interim. If that is the case, it may be prudent to have an interim valuation done. The trustee needs to be involved in this decision. For instance, during COVID some companies had reason to believe that their stock value would drop significantly or even dramatically. If they had to pay out at the valuation based on a pre-COVID price, and there were significant diversifications or distributions, that could put the company in significant financial jeopardy and be detrimental to the remaining ESOP participants. As a result, some companies did interim valuations. The reverse could also be true if there has been a dramatic increase in the company's stock price. These interim valuations, however, do need approval by the trustee and are relatively uncommon.

The annual diversification election period usually starts at the end of the plan year and ends 30 days after the updated share value and eligible diversification amounts have been communicated to participants who are eligible to diversify. Then there is a 90-day period for processing your diversification election that begins the day after the close of the election period.

Some companies use a different approach to this, such as giving people 90 days as soon as they are eligible based on a prior valuation, but then letting them revoke their choice when the new valuation is updated.

Link to this FAQ Topic: ESOP Valuation