Choosing the Right ESOP Trustee

September 28, 2023

Choosing an Employee Stock Ownership Plan’s trustee must be done very carefully, as an ESOP trustee is the legally responsible entity that must ensure that the ESOP is operated for the exclusive benefit of plan participants. There is no legal requirement to how an ESOP trustee is chosen. Yet this does not diminish the importance of selecting a competent trustee.

The Significance of a Competent ESOP Trustee

The Department of Labor (DOL) and the Internal Revenue Service (IRS) require an ESOP trustee to act solely in the best interest of the ESOP plan participants. By guaranteeing that the rules and regulations governing ESOPs are followed, a trustee is the advocate for plan participants and the safeguard against lawsuits.

Legal and Fiduciary Duties of an ESOP Trustee

To comprehensively fulfill the requirements set out by the Department of Labor (DOL) and the Internal Revenue Service (IRS), a trustee needs an in-depth knowledge of the Employee Retirement Income Security Act of 1974, as well as the legal regulations surrounding the creation and management of ESOPs.

An ESOP trustee must annually vet and hire an independent ESOP valuation appraiser to evaluate the fair market value (FMV) of the ESOP shares. This valuation ensures the shares are set at FMV for the benefit of plan participants. After the valuation, it is the trustee’s responsibility to review the results and set the share price (to learn more see An introduction to ESOP Valuations or the Fundamentals of ESOP Valuation).

An ESOP trustee must manage the ESOP trust and its assets, by carefully monitoring the company’s operations and financial performance. Additionally the trustee will oversee the annual distribution of shares and the share transactions.  A good trustee will be sure that the plan participants understand the value of their ESOP shares and account. The trustee must all the meanwhile keep proper documentation of all decisions in order to provide proof that the ESOP is in compliance with ERISA.  

Factors to Evaluate When Selecting an ESOP Trustee

When considering an ESOP trustee, the following factors should be taken into consideration. Is the potential trustee:  

  • Completely free from any conflicting interest?
  • Able to maintain the trust of your board of directors so as to have clear communication and cooperation?
  • Fit to hire an impartial ESOP appraiser and annually determine the EOSP stock price based on the stock valuation from the appraiser?
  • Able to prudentially and ethically follow the requirements of ERISA?

The importance of a competent ESOP trustee cannot be undervalued. The U.S. Department of Labor maintains that the ESOP trustee’s primary role “is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.”

An Expert Trustee for an Exceptional ESOP

In short, an expert trustee is necessary for an exceptional ESOP. Managing an ESOP is no small feat and requires extensive knowledge and experience in ESOPs. Aegis Trust Company can serve as your trustee and only provide the best experience. Aegis also offers consultations to help your business learn more about the regulations and processing of ESOPs.Learn more about Aegis’s services as an ESOP trustee, by contacting Aegis’s experts today.

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DISCLAIMER: The Articles displayed on this website do not constitute legal advice, nor do they substitute for the advice of qualified professionals. While the Articles displayed on this website are designed to provide information regarding the subject matter covered, we cannot guarantee the accuracy of any statements contained therein. If any legal advice or expert assistance is required, the services of qualified professionals should be sought.

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