March 25, 2020

COVID-19 Impact on ESOPs and the Value of their Underlying Stock

When Is an Interim Valuation Necessary? Who Makes This Determination?

By Patrice Radogna, ASA, CPA, ABAR, Director, Advisory Services

Related Services ESOP Valuation Services, Advisory, Coronavirus Resource Center

COVID-19 Impact on ESOPs and the Value of their Underlying Stock ESOP Valuation Services

Economies and businesses of all sizes – all over the world – are reeling from the sudden impact of COVID-19. Regarding publicly traded stocks in the U.S., we are witnessing unprecedented market volatility in the stock markets. As the economy has come to a screeching halt, the value of public stocks have plummeted. The root cause of this market volatility, COVID–19, is impacting the high majority of businesses – public or privately held, including the stock of ESOP companies1. While the uncertainty of the current economic conditions is easily observed in the public stock market, the value of privately held stock – in this case the stock of ESOP companies – is not so easily ascertained.

As of this writing, business appraisers – along with the Trustees of ESOPs – are working diligently to determine the value of the sponsor stock held by the ESOP as of December 31, 2019 (calendar year end valuation date is the update valuation date in almost all ESOP Plan (the “Plan”) documents. The conundrum is that distributions based on these values will not have gone out to eligible participants as of the date that we tie the bow on our valuation reports (generally in the March through July time period). Due to the extreme change in market conditions, should an interim valuation be prepared as of a current date, for purposes of determining ESOP participant distributions and diversifications? What is the perspective of both the ESOP Plan Administrator2 (“Plan Administrator”), and the business appraiser, who conduct the valuations?

Plan Administrator’s perspective3

In order to appreciate how a Plan Administrator would navigate this tight rope act, it is useful to understand the legal standards to which the Plan Administrator is held in his or her fiduciary capacity. The standards for fiduciaries under ERISA4 encompass three primary duties – prudence, loyalty, and to follow the documents and other instruments governing a Plan (unless they are inconsistent with ERISA). The last of these three duties, namely, to follow the documents, requires the Plan Administrator to carefully read and understand the Plan Document. The Plan Document typically is either 1) silent on whether or not an interim valuation should be considered in light of compelling circumstances (i.e., requires judgment) or 2) may explicitly state that interim valuations are permissible, yet not required (again, requires judgment).

Bottom Line – After a review of the Plan document, it will be the judgment of the Plan Administrator as to whether or not the current circumstances warrant an updated valuation.

Appraiser’s perspective

As long as the underlying economy, industry and company risk factors, and financial outlook do not change significantly, it is generally believed that a business valuation remains reasonably indicative of value for an extended period, up to a year. However, that assumes a general normalcy in general operating conditions. Various references to authoritative sources cite that a valuation of a certain date, must take into account the facts available at that valuation date.

Context is thus critical

If assumptions underlying any of the methodologies employed to determine value change significantly, then a valuation opinion as of a prior date may not be suitable for a current use. Some of the key factors that the COVID-19 virus is creating that uncertainty around include: future revenue orders, supplier risks, customer risks and overall market risk factors and market multiples of public guideline companies. To the extent that COVID-19 would materially impact the valuation, then Rev. Ruling 59-60 would suggest that the valuation needs to be updated.


If the Plan calls for a valuation to be performed as of calendar year-end, then a December 31, 2019 valuation must be completed. These valuations cannot take into account the current economic downturn because it was not reasonably foreseeable as of December 31, 2019.


A sample of some items that the Plan Administrator might consider in making this decision are:

  1. Plan Documents – Does the Plan document permit interim valuations? If so, should an update be contemplated?
  2. Plan Amendments – If the Plan does not provide for interim valuations, the Plan may need to be amended and the Plan Administrator will need to consider the potential impact on the affected participants to ensure that an interim valuation will not violate ERISA anti-cutback provisions under IRC Section 411(d)(6)(C). This IRC section relates to whether or not the terminated participant has the right to demand a certain valuation date. Whether or not the Plan permits an interim valuation may be the issue studied in this instance.
  3. Fiduciary Obligations – Under ERISA, the fiduciary must operate the Plan in the best interest of the participants and beneficiaries. This means all of the participants. Making payouts to some participants at higher values, can be seen as robbing the future value for the remaining participants.
  4. Financial viability of the Company – Is there a sustainability issue with the sponsoring company if the 2020 distributions (based on the 2019 stock price) does not take the COVID-19 into account?
  5. Extraordinary Conditions – As a matter of process, is there a threshold in place, stating what extraordinary conditions that should exist for when the Plan Administrator will consider an interim valuation?
  6. Timing – Where is the line in the sand drawn for the appropriate date of an interim valuation? Clearly, COVID-19 is an evolving situation and the economic and business environment is likely to continue to change. It is not practical to do multiple interim updates.

If the decision is made to conduct an interim valuation by the Plan Administrator, then the interim valuation (say as of March 31, 2020) must take into account all facts known or knowable as of the interim valuation date, which certainly would include the impact of COVID-19.

If you have any questions, please contact Patrice Radogna, Co-Leader of Marcum’s National ESOP practice and Director, Advisory Services, at 617.807.5219 or email Patrice.


1. ESOP companies are privately held companies that have an Employee Stock Ownership Plan (“ESOP”) for purposes of contributing shares of its corporate stock as a retirement benefit to employees.
2. ESOP Plan Administrator is a legal position occupied by the person or entity designated by the board of directors (usually as defined in the ESOP Plan document) as the primary party responsible for the reporting of benefits to IRS and ESOP participants.
3.This is understood to be the most likely perspective of the Plan Administrator. This paragraph is not citing opinion or fact.
4. ERISA is the Employment Retirement Income Security Act of 1974 that provides legislation regarding employee benefit plans.

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