INSIGHT

ESOP Audits and Valuations: Unique Considerations for Employee Stock Ownership Plans

Ryan Davis • June 30, 2026

Services: Employee Benefit Plan Audit

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Employee stock ownership plans sit at an unusual intersection of retirement plan compliance and business ownership. When your company has an ESOP, your employees aren’t just participants in a benefit plan, they’re shareholders. That changes the nature of both the audit and the valuation work considerably.

For plan sponsors and fiduciaries navigating ESOP requirements, understanding what makes these plans different from a standard 401(k) is the first step toward staying compliant and protecting the people who depend on the plan. This article covers the key audit and valuation considerations that make ESOPs a distinct category of employee benefit plan work.

The Valuation is the Foundation of Everything

With most retirement plans, the plan’s assets consist of publicly traded securities with readily available market prices. With an ESOP, the primary asset is typically shares of a privately held company, and there’s no market price to look up. That means the plan needs an independent annual valuation to establish the fair market value of those shares.

The valuation determines how much participants’ accounts are worth, what the company pays when employees redeem shares, and whether transactions involving the ESOP meet the “adequate consideration” standard required under ERISA. A flawed or inadequately supported valuation creates fiduciary risk, and the Department of Labor pays close attention to this area.

The valuation work requires an independent business valuation expert who understands both valuation methodology and the specific requirements that apply to ESOPs. Methodologies typically include some combination of income, market, and asset approaches, and the appraiser must document the basis for every significant assumption, including growth rates, discount rates, marketability discounts, and other key inputs.

What the Audit Actually Covers

An ESOP audit follows the same general framework as any employee benefit plan audit required under ERISA, but the subject matter is more complex. Auditors examine the plan’s financial statements, test contributions and distributions, and verify that plan operations follow the terms of the plan document. For ESOPs, that work expands to include several additional considerations. For plan sponsors managing that added complexity, working with the right employee benefit plan audit firm can make the process more efficient and better aligned with ERISA and DOL expectations.

• First, auditors review the valuation to assess whether the process was independent, adequately documented, and prepared in a manner that is consistent with applicable and appropriate valuation standards. The auditor needs enough information to evaluate whether the valuation was reasonable and whether the trustee appropriately relied on it.
• Second, leveraged ESOPs add another layer of complexity. Many ESOPs are funded through a loan, where the company borrows money to purchase shares and then contributes shares to the plan over time as the loan is repaid. Auditors need to understand the loan structure, trace debt service payments, verify share release calculations, and confirm that the plan’s financial statements reflect all this accurately.
• Third, distributions and repurchase obligations require careful attention. When participants leave the company or retire, the plan typically must buy back their shares. For growing ESOPs with a maturing participant population, this repurchase obligation can become a significant financial commitment. Auditors and plan sponsors alike need to understand the magnitude of that obligation and how the company plans to fund it.

Fiduciary Responsibility Takes on a Different Weight

Plan sponsors of any ERISA-covered plan carry fiduciary responsibilities, but ESOP fiduciaries face additional scrutiny. Because the plan’s primary investment is company stock, a single, illiquid, non-diversified asset, regulators and courts hold ESOP trustees to a high standard of prudence.

Appointing an independent trustee is common practice, particularly for transaction-related decisions. But even with an independent trustee in place, plan sponsors and named fiduciaries need to understand their own ongoing obligations. Staying current on regulatory guidance, maintaining adequate documentation of decisions, and working with advisors who understand the ESOP landscape all matter here.

Regulatory Scrutiny Has Increased

The DOL has grown more active in examining ESOPs, particularly around the initial transaction valuation when a company first establishes the plan. If the company paid more than fair market value for shares when setting up the ESOP, that creates serious legal and financial exposure. But ongoing annual valuations and plan operations also attract attention, especially when participants believe their account values don’t reflect reality.

Working with auditors and advisors who stay current on DOL enforcement priorities, emerging case law, and 2026 employee benefit plan changes is part of managing the plan responsibly.

Working With BPM

BPM’s employee benefit plan audit services work with ESOP sponsors on both the audit and the advisory support that surrounds it. The team understands the intersection of ERISA compliance, valuation standards, and fiduciary responsibility that makes ESOP work distinct, and brings that knowledge to every engagement. Not just at audit time, but throughout the year as questions and operational issues arise.

If your organization sponsors an ESOP and you want a team that knows the territory, we’d welcome the conversation. Contact BPM to connect with our employee benefit plan audit professionals.