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Case of the Week: Valuing Employer Stock

Case of the Week

The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call from a financial advisor in Wisconsin is representative of a common inquiry related to valuing stock of the sponsoring employer in qualified retirement plans. The advisor asked: 

“My client has an employee stock ownership plan (ESOP). How does he value the stock within the plan if it is not traded on a securities market?”

Highlights of the Discussion

For employer securities that are not readily tradable on an established securities market, the IRS requires the shares be valued by an independent appraiser [IRC 401(a)(28)(C)]. There are a number of factors to consider when determining the value of an asset within a qualified retirement plan. In its examination guidelines, the IRS supports the use of Revenue Ruling 59-60, which relates to valuing assets for estate tax and gift tax purposes, for valuing assets in qualified retirement plans as well.

When valuing the stock of closely held corporations or the stock of corporations where market quotations are not available, all available financial data, as well as all relevant factors affecting the fair market value must be considered. For example, some factors to consider include:

  • the nature and history of the business issuing the security;
  • general economic outlook and the outlook for the specific industry;
  • book value of the securities and the financial condition of the business; 
  • the company’s earning capacity;
  • the company’s dividend paying capacity;
  • goodwill value; and
  • recent stock sales.

The list of factors to consider in Rev. Rul. 59–60 is not an exclusive list for valuing closely held employer securities. It may be necessary to consider other factors when appropriate. Also, not all of the listed factors will be relevant to all companies and transactions. The IRS’s examination guidelines note that the independent appraisal will not, in and of itself, be a good faith determination of value unless all relevant factors are considered.

IRS examiners will look at Form 5500 (Schedule R, line 12) to the question: Does the ESOP hold any stock that is not readily tradable on an established securities market? If the answer is yes, examiners are directed to determine if the securities were valued that year and by whom in order to confirm it was done by an independent, third-party auditor.


An ESOP that holds employer securities that are not readily tradable on an established securities market must follow specific guidelines for annual asset valuation. The valuation requires the use of an independent auditor who observes the requirements of Rev. Rul. 59-60.

Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation. 

©2019, Retirement Learning Center, LLC. Used with permission.