The spread of COVID-19 and the resulting economic downturn has caused employee stock ownership plan (ESOP) companies to question their annual stock valuations for purposes of ESOP participant distributions and diversifications.

Company stock in an ESOP must be valued at least annually, typically as of the last day of the plan year. This annual stock value is determined by the ESOP trustee based on the report and advice of an independent appraiser. Once the annual stock value is determined, it is generally used for all participant distributions and diversifications until the next annual valuation. However, under certain circumstances, the ESOP plan administrator may declare an interim valuation date that is then used by the ESOP trustee to re-determine the stock value.

ESOP companies interested in declaring an interim valuation date now because of the COVID-19 economic downturn should consider the following items:

  • In-Process Valuations. Many ESOPs are calendar year plans and therefore have annual valuations as of December 31. Most of these year-end valuations are currently in-process, but cannot take into consideration the current economic downturn because it was not reasonably foreseeable as of December 31, 2019.
  • Plan Language. Most ESOPs, including the Ballard Spahr form ESOP document, gives plan administrators the ability to set a special interim valuation date for extraordinary situations to protect the interests of participants in the ESOP. Such extraordinary situations often include a significant change in economic conditions or market value of the company stock. Where the ESOP allows for the use of an interim valuation in appropriate cases, courts have held that plan fiduciaries may use this valuation date for purposes of determining ESOP participant distributions and diversifications.
  • Plan Amendment. If the ESOP does not give plan administrators the ability to set a special interim valuation date, the ESOP potentially could be amended to provide such ability on a prospective basis. However, even though valuation dates are not protected benefits under the ERISA anti-cutback rules, courts have generally not allowed ESOPs to be subsequently amended to allow the use of an interim valuation date for participants who terminated employment or become eligible for a diversification prior to such amendment.
  • Fiduciary Obligations. The decision to declare an interim valuation date is a fiduciary decision that must be made in the best interest of plan participants and beneficiaries, including participants who have terminated employment. The fiduciary should also consider the prior practices of the company if it previously faced significant changes in economic conditions. All the facts, circumstances, and competing best interests should be weighed by the fiduciary when deciding whether or not to declare an interim valuation date.
  • Additional Cost. Choosing to declare an interim valuation date will come with additional costs from the ESOP trustee’s independent appraiser. These costs are somewhat dependent on how close the interim valuation is to the completion of the annual valuation and whether or not the ESOP trustee will require a full report from the appraiser.
  • Timing. ESOP companies considering declaring an interim valuation should discuss the timing of the interim valuation with the ESOP trustee and independent appraiser. Asking an independent appraiser to perform an interim valuation currently in the midst of this economic downturn will likely be difficult because of the economic uncertainty. Therefore, it may be prudent to defer an interim valuation until more economic clarity becomes available.

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.