Executive Summary
The Retire Through Ownership Act (S. 2403), signed into law on October 15, 2026, represents an important development for Employee Stock Ownership Plan (“ESOP”) transactions. The law expressly permits ESOP fiduciaries to rely in good faith on independent valuations prepared using the principles and methodologies of Internal Revenue Service (“IRS”) Revenue Ruling 59-60. For Trustees, this provides a more defined framework for determining adequate consideration for privately-held company shares.
The Act does not remove a Trustee’s fiduciary responsibilities or provide an unconditional safe harbor. Trustees must continue to exercise prudent judgment throughout an ESOP transaction, including when reviewing financial projections and other terms that can meaningfully affect the economics of the deal.
Independent valuations remain an important part of the ESOP transaction process. Determining the fair market value of company shares remains distinct from assessing whether the overall transaction is financially fair or prudent for ESOP participants.
Background
On September 16, 2026, the U.S. House of Representatives passed the Retire Through Ownership Act (S. 2403) by a bipartisan vote of 401–14. President Donald Trump signed the bill into law on October 15, 2026, becoming Public Law 119-124. The Act amends Section 3(18) of the Employee Retirement Income Security Act of 1974 (“ERISA”), which defines adequate consideration for assets acquired by employee benefit plans.1
Under ERISA, an ESOP generally cannot pay more than adequate consideration when acquiring privately-held employer securities. When those securities do not have a generally recognized market, the Trustee or another named fiduciary must determine fair market value in good faith and in accordance with applicable regulations. While the Department of Labor (“DOL”) proposed regulations on this requirement, no final or comprehensive regulations establishing detailed valuation standards have been adopted.
The Act addresses part of this uncertainty by expressly permitting an ESOP fiduciary to rely in good faith on a valuation prepared by an independent valuation expert or business appraiser. That work must use the principles and methodologies of IRS Revenue Ruling 59-60, as subsequently amplified or modified. Revenue Ruling 59-60 has long provided guidance for valuing closely-held businesses and allows the analysis to reflect the facts and circumstances of the business rather than prescribing a single method.2 Relevant considerations include the company’s financial condition and earning capacity as well as the industry outlook and market information.
The Act does not, however, replace a Trustee’s broader fiduciary responsibilities. It explicitly preserves these obligations under ERISA Section 404 and allows the DOL to issue future interpretive regulations within its existing authority. The amendment applies to qualifying determinations made on or after October 15, 2026.3
Analysis
1.What the Act Means for ESOP Trustees
For ESOP Trustees, the Retire Through Ownership Act provides greater clarity regarding the use of an independent valuation advisor when determining adequate consideration. This more defined framework may help address questions Trustees have historically faced regarding their obligations under ERISA.
Relying on an independent valuation does not provide automatic protection. A valuation prepared under Revenue Ruling 59-60 does not necessarily demonstrate adequate consideration. Trustees must still consider material information, understand the assumptions that significantly affect value and exercise prudent judgment on behalf of ESOP participants. An independent valuation can support the price paid for company shares but cannot alone establish that the transaction as a whole is prudent.
2. Determining an Appropriate Purchase Price
A Recognized Basis for Independent Valuation
The Retire Through Ownership Act creates a clearer framework for Trustees determining the fair market value of privately-held employer securities. By incorporating Revenue Ruling 59-60 into ERISA’s adequate consideration provisions, the Act provides statutory recognition for established business valuation principles in ESOP transactions. The appropriate approach may vary based on the characteristics of the company and the circumstances of a transaction. A valuation advisor may therefore use an income approach, a market approach or a combination of accepted methods. Trustees may rely in good faith on the valuation advisor’s professional judgment when selecting and applying those methods.
Reliance Does Not Mean Automatic Acceptance
An independent appraisal still requires the Trustee to assess the reasonableness of the valuation process and address significant issues identified during due diligence. This includes considering the key assumptions and how they affect the valuation conclusion. Selecting a qualified, independent valuation advisor remains an important part of the Trustee’s review.
Fair market value also should not be viewed as an automatic negotiating objective. The appraisal provides support for the purchase price, which should be considered in the context of other relevant transaction terms.
Litigation Risk Remains
The Retire Through Ownership Act may reduce some litigation uncertainty by providing an explicit statutory basis for good-faith reliance on independent valuations. This recognition can offer additional support when a Trustee’s purchase-price determination is challenged. ESOP litigation has often focused on the valuation process, including the reasonableness of financial projections and whether Trustees adequately reviewed information provided by management and other transaction participants.
The Act does not provide immunity from legal challenges. Disputes may still involve the appraiser’s qualifications or independence, the information and assumptions supporting the appraisal or the overall prudence of the transaction. The Act also does not define every circumstance that constitutes good-faith reliance, and the scope of that protection may continue to develop through future court decisions and regulatory guidance.
3. Evaluating Financial Projections
Financial projections remain among the most consequential considerations in ESOP transaction valuations, particularly when the income approach represents a significant component of the concluded fair market value. Revenue Ruling 59-60 recognizes the importance of the company’s earning capacity and future economic prospects. It does not, however, prescribe a detailed procedure for reviewing management’s financial projections in an ESOP transaction. This creates an important distinction between using an accepted valuation methodology and determining whether the underlying financial assumptions are reasonable.
The DOL has historically emphasized projection review in ESOP enforcement agreements with certain trustees. These agreements have considered historical performance, management’s forecasting record and relevant industry benchmarks. Although they are not universally applicable regulations, they illustrate the DOL’s expectations regarding prudent valuation processes.4
In practice, Trustees and their advisors should continue to consider the principal assumptions supporting management’s projections. Revenue growth, customer concentration and backlog conversion can be important, along with labor availability and operating margins. Capital expenditures and working capital requirements can also affect forecasted results. Where appropriate, Trustees and advisors should consider management’s historical forecasting accuracy and the basis for projected changes. Industry performance and the potential impact of downside scenarios can provide additional context.
Reliance on an independent appraiser’s professional assessment of financial projections does not eliminate the need for a reasonable investigation of assumptions that materially influence the valuation.
4. Other Considerations in ESOP Transactions
The Retire Through Ownership Act provides additional clarity regarding independent valuations but does not specifically address several financial and structural considerations commonly encountered in leveraged ESOP transactions. These factors can affect the economic benefits received by ESOP participants and the overall financial fairness of a transaction.
Seller Warrants and Warrant Packages
Seller warrants are frequently used in leveraged ESOP transactions as part of the compensation provided to selling shareholders who finance a portion of the purchase price.
When evaluating a transaction involving warrants, the Trustee should consider the value of the warrants within the economics of the entire seller-financing arrangement. This includes understanding the potential dilution of the ESOP’s ownership and the resulting effect on participants’ economic interests. Because the Retire Through Ownership Act establishes no specific standards for determining the reasonableness of warrant packages, independent financial analysis of these arrangements remains important.
Stock Appreciation Rights
Stock appreciation rights (“SARs”) are another consideration in ESOP transactions, particularly when companies implement management incentive programs following a transaction. SARs generally provide participants with compensation based on appreciation in the company’s equity value above an established threshold. Unlike traditional stock options, SARs are typically settled in cash and do not require the issuance of additional shares.
Although SARs can help align management incentives with future company performance, they may also represent significant economic obligations for the company. The valuation advisor should determine whether existing or proposed SAR arrangements have been appropriately reflected in projected cash flows and the company’s capitalization structure, including its equity value. SAR arrangements fall outside the specific matters addressed by the Act.
Evaluating Control Rights
Control rights also merit attention in ESOP transactions, particularly when an ESOP pays a control-level price. An ESOP may acquire a controlling or 100% ownership interest in the sponsoring company, but the percentage of shares acquired does not necessarily determine the level of control received. A control-level valuation may be appropriate when the ownership interest provides the economic and governance rights associated with control. Transaction agreements, governance arrangements, lender restrictions or contractual rights retained by sellers or management may limit those rights.
In the context of control rights, the DOL has emphasized whether an ESOP paying a control-level price receives corresponding control rights. DOL process agreements with Trustees have specifically addressed restrictions on control and their potential effect on value.5 Revenue Ruling 59-60 recognizes that the size and characteristics of the ownership interest are relevant to determining fair market value. Consideration of control rights is therefore consistent with the principles incorporated into the Act.
Acquiring a majority or 100% ownership interest does not automatically entitle an ESOP to a control premium. Trustees and valuation advisors should consider the actual rights acquired. This includes the extent of the ESOP’s voting rights and board representation, its ability to replace directors and any restrictions on significant corporate decisions.
Certain contractual restrictions may be commercially reasonable and may not necessarily eliminate effective control. The relevant question is whether those restrictions materially affect the economic value of the ownership interest. Reliance on a properly developed control-level valuation still requires determining whether the ESOP receives the rights and economic benefits reflected in the analysis.
Implications for Valuation and Trustee Engagements
The Retire Through Ownership Act reinforces the importance of independent valuation advisors in ESOP transactions and may influence how their engagements are structured, documented and presented to Trustees.
Valuation advisors should clearly demonstrate how their analyses incorporate the principles and methodologies of Revenue Ruling 59-60. Reports should explain the basis for the selected approaches and significant assumptions, as well as the resulting conclusions. The use of financial projections should also be documented. Because projections can have a substantial effect on the outcome, advisors should explain the basis for projected growth and profitability, and address capital expenditures or other material assumptions as appropriate.
The distinction between a valuation opinion and an assessment of overall financial fairness also remains important. The former generally addresses the fair market value of the securities being acquired. A broader transaction analysis considers the structure and financial consequences for the ESOP Trust. This can include the effects of seller financing and leverage, as well as warrants or management incentive arrangements. Debt service requirements may also factor into this assessment.
The Act highlights the importance of the Trustee and valuation advisor clearly defining their respective responsibilities in engagement letters and transaction documentation. The advisor provides a conclusion regarding fair market value and fairness, while the Trustee retains responsibility for determining whether the transaction satisfies its fiduciary obligations. Documenting this process can demonstrate how the Trustee reviewed the independent appraisal and reached its purchase-price determination.
Conclusion
The Retire Through Ownership Act clarifies the legal framework governing ESOP transactions by expressly recognizing good-faith reliance on independent valuations prepared using the principles and methodologies of Revenue Ruling 59-60. For Trustees, the Act provides a clearer statutory foundation for determining the fair market value of privately-held employer securities and may reduce some of the uncertainty associated with defending those determinations. For advisors, the Act reinforces the importance of a well-supported and clearly documented appraisal process. The Act does not, however, eliminate the Trustee’s independent fiduciary responsibilities or provide automatic protection in every circumstance.
[1] U.S. Congress. Retire Through Ownership Act, S. 2403, 119th Congress, Public Law 119-124, enacted October 15, 2026. Enrolled legislative text; U.S. House of Representatives. Congressional Record, September 16, 2026, House proceedings concerning S. 2403; Employee Retirement Income Security Act of 1974, Section 3(18) and 404, as amended.
[2] Internal Revenue Service. Revenue Ruling 59-60, 1959-1 C.B. 237, Valuation of Closely Held Corporate Stock.
[3] U.S. Congress. Retire Through Ownership Act, S. 2403, 119th Congress, Public Law 119-124, enacted October 15, 2026. Enrolled legislative text.
[4] U.S. Department of Labor, Employee Benefits Security Administration. ESOP Agreement and Appraisal Guidelines—Horizon. DOL process agreement.
[5] U.S. Department of Labor, Employee Benefits Security Administration. ESOP Agreement and Appraisal Guidelines—First Bankers Trust Services. DOL process agreement.
Henry Ventura is a Director at Prairie Capital Advisors, Inc. He can be contacted at 404.809.2444 or by email, hventura@prairiecap.com.
