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DOL/EBSA | RIN: 1210-AC20 | Publication ID: Fall 2024 |
Title: Worker Ownership, Readiness, and Knowledge–Proposed Regulation Relating to the Definition of Adequate Consideration | |
Abstract:
The term "adequate consideration," as defined in section 3(18) of the Employee Retirement Income Security Act of 1974 (ERISA), represents a central condition of a statutory prohibited transaction exemption, at section 408(e) of ERISA, that permits an employee stock ownership plan (as defined in section 407(d)(6) of ERISA) to engage in certain transactions involving securities issued by the plan’s sponsor. In relevant part, section 3(18)(B) of ERISA provides that in the case of an asset other than a security for which there is a generally recognized market, the term adequate consideration means the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan and in accordance with regulations promulgated by the Secretary of Labor. Section 346 of the SECURE 2.0 Act of 2022 directs the Secretary of Labor to establish within the Department of Labor an Employee Ownership Initiative to promote employee ownership. Section 346(c)(4)(B), in turn, provides that the Secretary of Labor, in consultation with the Secretary of the Treasury, shall issue formal guidance for acceptable standards and procedures to establish good faith fair market value for shares of a business to be acquired by an employee stock ownership plan (as defined in section 407(d)(6) of ERISA). This regulatory action relates to the Secretary of Labor’s obligations under section 346 of the SECURE 2.0 Act of 2022. To inform this action, the Department established a pre-rule outreach plan to broaden public participation and community engagement in the regulatory process. This includes meeting with a range of stakeholders (including ESOP sponsors, appraisers, labor organizations and academics) to hear about issues they believe should be addressed in the Department’s guidance. The goal of the outreach plan is to inform this regulatory action through meaningful and equitable opportunities for public input by a range of interested or affected parties, including underserved communities.
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Agency: Department of Labor(DOL) | Priority: Other Significant |
RIN Status: Previously published in the Unified Agenda | Agenda Stage of Rulemaking: Proposed Rule Stage |
Major: Undetermined | Unfunded Mandates: Undetermined |
CFR Citation: Not Yet Determined (To search for a specific CFR, visit the Code of Federal Regulations.) | |
Legal Authority: SECURE 2.0 Act of 2022, sec. 346 ERISA sec. 3(18), 408(e) ERISA sec. 505 |
Legal Deadline:
None |
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Statement of Need: ERISA is a comprehensive statute designed to protect the interests of employees and their beneficiaries in employee benefit plans. It does this primarily by imposing, in section 404, a number of stringent duties on plan fiduciaries, including a duty of loyalty, a duty to act for the exclusive purpose of providing plan benefits and defraying reasonable expenses, and a duty of prudence. 29 U.S.C. 1104(a)(1)(A), (B). In addition, the statute, in section 406, supplements these general fiduciary duties by prohibiting fiduciaries from engaging in certain transactions that are likely to harm the plans they serve. 29 U.S.C. 1106. As relevant here, ERISA section 406 prohibits any sale of property between a plan and a related party, known under ERISA as "party in interest, although section 408(e) exempts the sale of employer stock in some situations, including where it is for "adequate consideration." 29 U.S.C. 1108(e). Section 3(18)(B) of ERISA provides that in the case of an asset other than a security for which there is a generally recognized market, the term adequate consideration means the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan and in accordance with regulations promulgated by the Secretary of Labor. In 1988, the Secretary of Labor proposed regulations under section 3(18)(B) of ERISA. However, the proposed regulations were never finalized. Section 346(c)(4)(B) of the SECURE 2.0 Act directed that the Secretary of Labor, in consultation with the Secretary of the Treasury, shall issue formal guidance for acceptable standards and procedures to establish good faith fair market value for shares of a business to be acquired by an employee stock ownership plan (as defined in section 407(d)(6) of ERISA). |
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Summary of the Legal Basis: The Department is proposing the rule pursuant to authority in ERISA sections 3(18)(B), 408(e), and 505 (29 U.S.C. 1002(18)(B), 1108(e), 1135). This rulemaking satisfies the congressional directive in SECURE 2.0 Act of 2022, sec. 346. |
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Alternatives: The Department considered as an alternative finalizing the regulations proposed in 1988. The Department, in consultation with Treasury, will consider additional alternatives that will be addressed in the notice of proposed rulemaking |
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Anticipated Costs and Benefits: The proposed regulation will provide clarity and certainty to ESOP plan fiduciaries who acquire or sell a security for which there is not a generally recognized market. Estimates of the cost are still under development and will be reflected in the notice of proposed rulemaking. |
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Risks: The Department believes a regulation is necessary to protect and safeguard the interests of participants and beneficiaries of ESOPs that invest in employer stock without a generally recognized market. ESOPs can provide employees with valuable retirement benefits. When an ESOP acquires employer stock with a generally recognized market from the employer or other party in interest, the price is set by reference to the market price for the stock. However, for stock without a generally recognized market, the price paid by the ESOP is generally negotiated by the ESOP trustee or other fiduciary. Because the price of such stock is not set by reference to a public market price, there is greater risk that the ESOP may pay more than fair market value. Overpayment effectively diverts value to the sellers of stock, depriving the ESOP’s participants and beneficiaries of important retirement benefits and full compensation for their labor. Additionally, if an ESOP transaction is financed by its sponsoring employer, overpayment can result in the employer taking on excessive debt, which can impact both the ESOP’s investment in employer stock as well as participants’ jobs. |
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Timetable:
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Regulatory Flexibility Analysis Required: Undetermined | Government Levels Affected: Undetermined |
Federalism: Undetermined | |
Included in the Regulatory Plan: Yes | |
RIN Data Printed in the FR: No | |
Agency Contact: Jeffrey J. Turner Deputy Director, Office of Regulations and Interpretations Department of Labor Employee Benefits Security Administration Room N5669, 200 Constitution Avenue NW, FP Building, Room N-5655, Washington, DC 20210 Phone:202 693-8500 |