Ongoing ESOP Trustee Responsibilities

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Tue, Feb 11, 2014
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trustee esopThe ESOP Trustee is an integral part of the ESOP Corporate Governance process.  An ESOP Trustee serves as the legal shareholder of the shares held by the ESOP Trust and has many responsibilities.  

Satisfy ERISA Fiduciary Responsibilities

The ESOP Trustee is an ERISA fiduciary that has primary duties defined in ERISA.  

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Engage the Independent ESOP Appraiser

Since the ESOP Trustee is responsible for determining the Valuation of Company Stock each year, it is important to take the decision of selecting an independent ESOP Appraiser very seriously.  This starts with making sure the ESOP Appraiser is Independent, both in fact and appearance.  The ESOP Trustee also has to make sure the ESOP Appraiser has relevant and significant ESOP experience and should perform due diligence and revisit this decision on a regular basis.

Establish the Annual ESOP Stock Price

One of the most important fiduciary responsibilities of an ESOP Trustee is to establish the annual ESOP stock price

Companies with a calendar year end should have already started the valuation process by working on their financial statements.  The company has to close its books and then work with the accountants to record the appropriate journal entries.  In addition, the accountant may be compiling, reviewing, or auditing the financial statements.  At the same time they will be preparing to work on the company’s tax return.  All of these steps take time.

In order for the ESOP Appraiser to get started they will need a copy of the financial statements.  It is a best practice to have a timing discussion with the independent ESOP Appraiser – they may be able to get started earlier with draft financials.

An ESOP Trustee must act as a prudent person would in a similar situation.  In other words, an ESOP Trustee cannot just hire someone and blindly rely on their expertise – they have to be actively engaged in the valuation process because ultimately they are responsible for the work of the experts that they have hired.  This is essential when establishing the ESOP stock price, as the ESOP Trustee should be sure to employ, at a minimum, the following practices:

  1. Read the valuation report and make an effort to understand it.  Make sure the report provides a clear basis for its conclusion. 

  2. Verify the company information in the report is accurate and that the assumptions made by the ESOP Appraiser are reasonable. 

  3. Review the report with the ESOP Appraiser and verify that the valuation methods employed by the ESOP Appraiser are appropriate. 

  4. Understand how the ESOP repurchase obligation is factored in the valuation. 

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 Vote ESOP Shares to Select the Board of Directors

The voting requirements are governed by state law, the Articles of Incorporation and Bylaws, and the plan document.  As the legal shareholder, the ESOP Trustee is responsible for voting the ESOP shares in most cases, including selecting the Board of Directors.  The plan document specifies the voting rules for each individual plan.  The ESOP Trustee is legally required to pass-thru voting to the employees for certain infrequent major corporate issues (e.g. liquidation, sale of all or substantially all the assets, recapitalization, merger).

Manage Assets of the ESOP Trust

The ESOP assets, which primarily consist of the stock of the company, are required to be held in a trust and managed by the ESOP Trustee.  The ESOP Trustee is the individual with authority and discretion over the plan assets.  This includes developing an investment policy of both cash and stock investments.

The ESOP Trustee should be familiar with the fiduciary duty to diversify, remembering that by definition an ESOP is "designed to invest primarily in qualifying employer securities" and that Courts Almost Always Give Presumption of Prudence For Company Stock in ESOPs. They should also be aware of the ESOP Diversification Rules.

Follow Plan Documents

A fiduciary is required by ERISA to follow the terms of the plan documents.  This means that the ESOP Trustee must fully understand the plan and trust documents.  In order to do so, an ESOP Trustee should make sure the ESOP plan documents are compliant with the necessary rules and regulations and that they are aware of the 5-year remedial amendment cycle and the status of the ESOP plan document.

Document the Process

The process of making a fiduciary decision is just as important as the result of the process.  The decision-making process should be clearly defined and executed as planned.

It is important to take and keep thorough notes.  Maintaining minutes and internal memos are recommended practices.  Many ESOP Trustees will keep a marked up copy of the appraisal report on file to document their review process.


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Topics: Employee Stock Ownership Plan (ESOP), ESOP Repurchase Obligation

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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