Compliance

ESOP Valuations in 2026: The “Adequate Consideration” Standard Behind Every Annual Appraisal

The DOL nearly finalized the 'adequate consideration' rule for ESOP valuations in 2025, then withdrew it. Here's what governs your ESOP appraisal in 2026.

By 409.AI Team - 2026-07-23

# ESOP Valuations in 2026: The "Adequate Consideration" Standard Behind Every Annual Appraisal

Once a year, an employee-owned company gets a phone call from its trustee: the annual appraisal is done, and the shares are worth some number per unit. That number is not a formality. It sets the price the plan pays retiring employees when they cash out, it feeds every participant's account balance, and it is the first thing a Department of Labor investigator asks to see if the transaction ever gets questioned. For the roughly 6,600 employee stock ownership plans in the United States, covering more than 15 million participants and over $2 trillion in assets, that annual number is the whole ballgame ([National Center for Employee Ownership](https://www.nceo.org/research/employee-ownership-by-the-numbers)).

Here's the strange part. The legal standard that governs how that number gets set has been unfinished for nearly 50 years. In January 2025 the government came within days of finally writing it down, then pulled it back. If you run, advise, or sit on the board of an ESOP company, it's worth understanding what "adequate consideration" means, why the rulebook is still half-written, and what a defensible appraisal looks like while everyone waits.

What "adequate consideration" actually requires

An ESOP is a retirement plan governed by ERISA, and the trustee who runs it is a fiduciary. When that plan buys, holds, or later repurchases stock in a private company, there is no stock exchange quoting a price. So ERISA sets a rule for what the plan is allowed to pay.

Section 3(18) of ERISA defines "adequate consideration" for an asset with no generally recognized market as the fair market value of that asset, determined in good faith by the trustee or named fiduciary. Two words in that sentence carry all the weight. "Fair market value" is the price a willing buyer and willing seller would agree on, neither under compulsion, both reasonably informed. "Good faith" is the fiduciary's obligation to actually do the work, which in practice means hiring an independent, qualified appraiser and engaging with the analysis rather than rubber-stamping it.

If any of that sounds familiar, it should. Fair market value is the same concept that anchors a startup's [409A valuation](https://409.ai/articles/what-is-a-409a-valuation-a-comprehensive-guide), and the appraiser reaches for the same toolkit. The difference is who's watching and why, which we'll get to.

Why the number is not a formality

Two mechanics make the ESOP appraisal high-stakes.

First, the purchase. When an ESOP is created, it borrows money and buys shares from the company or a selling owner. Pay too much, and the plan has overpaid with employees' retirement money. That's the exact fact pattern behind most DOL enforcement actions and the private lawsuits that follow: the allegation is that the fiduciary approved a price above fair market value and breached its duty.

Second, the repurchase obligation. Participants in a private ESOP have a put option, which means the company must buy their shares back at fair market value when they leave or retire. So the annual appraisal isn't a one-time event. It's a recurring liability that determines real cash payments, year after year.

A quick worked example. Say an ESOP-owned manufacturer has an equity value of $60 million and one million allocated shares, so the appraised value lands near $60 per share before adjustments. An appraiser applying a discount for lack of marketability of, say, 15 percent to reflect that these shares can't be freely sold would bring that closer to $51. If a long-tenured employee retiring with 4,000 shares gets valued at $51 instead of $60, that's a $36,000 swing in what the company owes one person. Multiply across a workforce and you see why the methodology, not just the headline number, gets scrutinized. The mechanics of a discount like that mirror the [asset-based approach](https://409.ai/articles/asset-based-approach-409a-valuation) and marketability adjustments appraisers use in private-company work generally.

A standard that's been unfinished since 1988

Congress first told the Department of Labor to write regulations defining adequate consideration back when ERISA was young. The DOL issued a proposed regulation in 1988 and then, remarkably, never finalized it and never formally withdrew it. For decades it sat in limbo, cited as "proposed" and treated by many practitioners as informal best practice without the force of a final rule ([Holland & Knight](https://www.hklaw.com/en/insights/publications/2025/02/the-rise-and-fall-of-the-dols-long-anticipated-proposed-regulation)).

That gap had consequences. With no binding regulation on the books, the working standard for ESOP valuations was shaped largely by enforcement actions and court decisions rather than clear rules written in advance. Practitioners sometimes called it regulation by litigation: you learned what the DOL expected by watching who got sued and why. Appraisers and trustees wanted a rulebook. They just didn't have one.

SECURE 2.0 tried to force the issue

The 2022 SECURE 2.0 Act took another run at it. Section 346 of that law incorporated the Worker Ownership, Readiness, and Knowledge (WORK) Act, which directed the Department of Labor to establish an Employee Ownership Initiative and, importantly, to issue formal guidance on the acceptable standards and procedures for establishing good-faith fair market value for shares of a business acquired by an ESOP ([Morgan Lewis](https://www.morganlewis.com/blogs/mlbenebits/2023/02/secure-act-20-impact-on-esops)).

This was the mandate the industry had wanted for a generation. Congress wasn't asking the DOL whether to write the rule. It was telling the agency to do it.

The rule that appeared, then vanished

On January 16, 2025, in the final days of the outgoing administration, the DOL's Employee Benefits Security Administration delivered. It released two proposals at once: the long-awaited adequate consideration regulation, and a proposed prohibited-transaction class exemption laying out conditions under which an ESOP could buy or sell company stock. Both carried a 75-day comment period ([U.S. Department of Labor](https://www.dol.gov/newsroom/releases/ebsa/ebsa20250116)).

Then, almost as quickly, they were gone. Within days the incoming administration froze pending rulemakings across the government and pulled both ESOP proposals back before they took effect. One law firm's summary put it plainly in the headline: the proposals were "issued and then quickly withdrawn" ([Morgan Lewis](https://www.morganlewis.com/blogs/mlbenebits/2025/03/long-awaited-esop-proposals-issued-and-then-quickly-withdrawn)).

So as of 2026, here's where things actually stand. There is still no final, binding "adequate consideration" regulation. The withdrawn proposals are a useful window into how the DOL was thinking, and the Congressional mandate under SECURE 2.0 hasn't disappeared, so many observers expect guidance to resurface in some form ([NCEO](https://www.nceo.org/employee-ownership-blog/new-esop-valuation-rules-could-come-as-early-as-january-2026)). But nobody should treat the 2025 proposals as law. They aren't.

What a defensible ESOP appraisal looks like right now

With no finalized rule, the safeguard is process. The elements that have held up under DOL scrutiny for years are the same ones a careful trustee relies on today.

Start with independence. The appraiser should be genuinely independent and qualified, engaged by the fiduciary rather than handed a number by the seller. The valuation itself typically works through the standard three lenses: the [income approach](https://409.ai/articles/income-approach-409a-valuation), which discounts the company's projected cash flows; the [market approach](https://409.ai/articles/market-approach-409a-valuation), which looks to comparable public companies and transactions; and, where relevant, the asset approach. Weighting them is a judgment call the appraiser has to defend, not a plug-and-play formula, which is exactly why the reasoning behind a valuation matters as much as [the arithmetic](https://409.ai/articles/how-are-409a-valuations-calculated).

Then there's the fiduciary's own diligence. Good faith under ERISA isn't satisfied by receiving a report. It means questioning the assumptions, documenting the review, and being able to show later that the price reflected fair market value on the transaction date. And because a participant's account and any repurchase happen on a recurring basis, ESOP shares get appraised annually, a cadence that will feel familiar to anyone who has managed a [409A refresh schedule](https://409.ai/articles/409a-valuation-frequency-how-often-should-you-get-one).

How an ESOP valuation differs from a 409A

Founders who've been through a 409A sometimes assume an ESOP appraisal is the same exercise. The toolkit overlaps, but the context doesn't.

A 409A values a startup's common stock so the company can set option strike prices under an IRS safe harbor. The regulator is the IRS, the purpose is equity compensation, and the thing being valued is almost always a minority, non-controlling slice of common stock, which is why it sits below the preferred price and below the post-money headline. An ESOP appraisal, by contrast, answers to the Department of Labor under ERISA, exists to protect participants' retirement assets, and often values a controlling interest, since ESOPs frequently acquire a majority or all of a company. Control can support a different value than a small minority block would, and the fiduciary standard sitting on top changes what "good enough" documentation looks like.

Put simply: same appraisal discipline, different regulator, different stakes. Knowing which set of rules you're under is the difference between a report that holds up and one that invites a challenge. It's the same reason [fair market value and a 409A number aren't interchangeable](https://409.ai/articles/409a-valuation-vs-fair-market-value) even when they're built from similar parts.

The takeaway

The unusual thing about ESOP valuation heading into 2026 isn't that the rules are strict. It's that the central rule still isn't written. Congress ordered it, the DOL drafted it, and then it was pulled back before the ink dried. That could change quickly if the mandate resurfaces, so anyone running an ESOP should watch for the next proposal rather than assume the status quo is permanent.

Until then, the standard is what it has effectively been for years: an independent, qualified appraisal, a documented good-faith determination of fair market value, and a fiduciary who can explain the number. If your plan's annual valuation can't survive that basic test, the absence of a final regulation won't help you. If you want that appraisal done by people who do this for a living, that's exactly what an [ESOP valuation engagement](https://409.ai/products/esop-valuation) is built to deliver.