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One of the most important fiduciary responsibilities with administration of an ESOP is determining the fair market value (“FMV”) of the stock held in an ESOP on an annual basis and as of the specific date when stock is purchased or sold by an ESOP.

When a business is sold to a third party, the buyer generally prefers to purchase a company’s assets rather than its stock for liability and tax reasons.  Selling to an ESOP is always a stock sale which is more favorable from a tax standpoint than a traditional asset sale.  When analyzing the purchase price, it is essential to consider the after-tax proceeds when comparing an ESOP transaction sale to a third party sale.

Last week we defined the ESOP Repurchase Liability and how the ESOP Repurchase Obligation is Reported on the Company's Financial Statements.  In order to accurately forecast the company’s ESOP future repuchase obligation, it is essential to understand and properly account for the interrelationship between the ESOP stock valuation and the ESOP repurchase obligation.

The ESOP Association shared a Message from Senator Mitch McConnell at The ESOP Association’s 35th Annual Conference last week and on their blog. In his remarks, Sen. Mitch McConnell [R-KY] reiterated his support of ESOPs and employee ownership, noted the 100+ ESOP companies in Kentucky, cited the Findings of 2010 General Social Survey (GSS), shared his concerns with the DOL ESOP Fiduciary Regulation, and expressed his support of S.1232 A bill to modify the ERISA definition of fiduciary to exclude appraisers of ESOPs.

What is the ESOP repurchase liability?

The May 1, 2012 Employee Ownership Update is online and discusses the following:  

As mentioned in my previous post, ESOP plan documents will typically indicate the share release formula can be either of the two acceptable formulas, as defined in the Treasury Regulations Sec. 54.4975-7(b)(8):

We have recently discussed the importance of Identifying your Long-Term ESOP Objectives and Developing Accurate ESOP Repurchase Obligation Forecast Assumptions as part of the ESOP Repurchase Obligation process.  Today we will look at the significance of the ESOP Distribution Policy. Here is a quick summary of the various Timing of ESOP Distribution rules: 

An employee stock ownership plan (ESOP) is a type of qualified retirement plan that buys, holds, and sells company stock for the benefit of the employees, providing them with an ownership stake in the company.  The ability of the ESOP to purchase company stock Creates an Internal Market and Built-In Buyer.

As part of the AICPA Employee Benefits Conference the DOL reiterated their desire to impose a potential legal liability on financial advisors (i.e. ESOP appraisers) and specifically mentioned ESOPs as an audit priority.  They also provided an update on the timing of the DOL Re-Proposal of the DOL ESOP Fiduciary Regulation that would be consistent with the July 2012 timeframe we have been discussing.