Proposed ESOP Rules Scrapped Following Trump’s Regulatory Freeze

A presidential executive order issued Monday led to the withdrawal of rules that had not yet been published in the Federal Register.

President Donald Trump signed 40 executive orders on Monday, his first day back in office, including an executive order withdrawing any proposed federal rules that had not been published in the Federal Register prior to January 20, causing proposed rules regarding employer stock ownership plans to be withdrawn.

The ESOP proposal, issued earlier this month by the Department of Labor under then-President Joe Biden, aimed to clarify the issue of “adequate consideration” and strengthen protections for plan participants while providing fiduciaries with clear guidance on determining the fair market value of employer stock in these transactions.

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The proposed ESOP rule was scheduled to be published in the Federal Register on January 22. The unpublished document has been removed from the Federal Register website.

Other recently proposed rules, including regulations for Roth catch-up contributions and requirements regarding automatic enrollment in retirement plans and the Voluntary Fiduciary Correction Program, which had been published in the Federal Register prior to January 20, remain online.

The withdrawn ESOP proposal had been meant to carry out a directive from the SECURE 2.0 Act of 2022 to provide principles-based guidance, facilitate the creation of ESOPs and protect ESOP benefits provided to workers. The provision, Section 123 of SECURE 2.0, is effective for plan years beginning after December 21, 2027.

Questions and disputes about the fair market value of company stock in ESOPs have often been the subject of litigation under the Employee Retirement Income Security Act, with fiduciary breaches alleged when the equity is believed to be mispriced.

The ESOP proposal also came with accompanying exemption to “provide a safe harbor for newly created ESOPs that are making their initial purchase of non-publicly traded common stock from selling shareholders in compliance with ERISA’s fiduciary provisions.”

Jim Bonham, CEO of the ESOP Association, says he is pleased that the safe harbor proposal was withdrawn.

“The proposal, as it was written, showed a lack of real world understanding of how the market works, and it created standards and requirements that simply would never have been attained,” Bonham says. “No ESOP would have used it.”

He adds that the proposal, as written, would have created a “negative environment for ESOPs,” because it would have most likely been used by plaintiffs’ law firms that were seeking to file “nuisance lawsuits” and get past a motion to dismiss to try to force trustees into a settlement agreement.

“We’re grateful that that one has been withdrawn, and we would actively encourage the Trump administration to not even revisit it,” Bonham says.

On the issue of adequate consideration, Bonham says it is important that more clear regulatory guidance be issued on good faith standards for establishing adequate consideration, but he argues that EBSA’s proposal was not an attempt to help ESOPs grow or to reduce their cost of formation, but rather an effort to turn trustees into appraisers themselves.

The ESOP Association is in the process of analyzing the proposal and plans to publish a thorough review.

Bonham adds that he looks forward to working with Trump’s nominee for secretary of labor, former Representative Lori Chavez-DeRemer, R-Oregon, on this regulation. Chavez De-Remer previously wrote a letter to Acting Secretary of Labor Julie Su encouraging the DOL to issue a “fair regulation.”

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