Incorrectly valuing stock can be a costly mistake for ESOPs. The U.S. Department of Labor (DOL) has recovered millions of dollars for ESOP violations, many of which involved improper valuations.

Making sure stock is valued correctly is the responsibility of the ESOP’s advisor or valuation expert, but it is also the responsibility of the employer. Fortunately, there are steps employers can take to make sure their ESOPs are buying and selling stocks within the law. Phyllis C. Borzi, assistant secretary of labor for employee benefits security, recommends the following:

• Choose carefully. Make sure the advice comes from a trustworthy source that would not be influenced by conflicts of interest.
• Ensure accurate data. To accurately determine a stock’s value, the valuation advisor relies on complete, accurate, up-to-date information. Employers are responsible for getting that information to the advisor.
• Check and double-check. When you receive advice, make sure it is reasonable. Thoroughly read the report and assess it for consistency and accuracy. Check for assumptions about growth projections, financial statements, business risks, and other factors that might influence stock value.

Also, in its settlement with a company that allowed an ESOP to purchase stock above fair market value, the DOL laid out a set of appraisal guidelines that employers can follow to ensure they’re making wise and prudent decisions. The guidelines can be found at http://www.dol.gov/ebsa/pdf/esopagreement.pdf.

Source: ESOP 101: Tips for Business Owners, by Phyllis C. Borzi, September 24, 2014; http://social.dol.gov/blog/esop-101-4-tips-for-biz-owners.