Navigating ESOP Regulations: Key Responsibilities of ESOP Trustees for Compliance and Success

October 10, 2023

Choosing an ESOP trustee for your organization is an important decision. Your ESOP should be placed into the hands of only the most trustworthy and experienced fiduciary partner, who can follow all ESOP regulations and standards. A trustee is needed to make the initial transaction as well as to provide ongoing, administrative services.

Understanding the Vital Role of ESOP Trustees

Every Employee Stock Ownership Plan (ESOP) must have a trustee, per federal law. Although it isn’t mandatory to have an independent trustee, it’s advisable to choose a third-party partner that is outside of your organization. This ensures an objective and unbiased professional relationship. By law, this partner must act only in the employees’ best interest.

Transactional Trustee
A company’s initial ESOP transaction must be managed by a fiduciary partner to act as its trustee. This transactional trustee is legally bound to work in the best interest of the employees. The amount of time can be as little as 3 months but up to 9 months to set up an ESOP, depending on the financing of the transaction.

Ongoing Trustee
An ESOP requires ongoing management to monitor operations and financial performance. This also includes an annual stock valuation.

Fiduciary Duty and Legal Obligations of ESOP Trustees

Every ESOP trustee must fulfill ERISA obligations in an ethical and prudent manner. “ERISA” refers to the Employee Retirement Income Security Act of 1974, which established minimum standards to protect plan participants. These fiduciary and legal requirements include:

  • Acting only in the interest of plan participants and beneficiaries
  • Defraying reasonable plan expenses
  • Diversifying the investments of the plan, unless it is clearly prudent not to.
  • Acting in accordance with the plan’s documents.

Key Responsibilities of ESOP Trustees for Regulatory Compliance

Once engaged, your ESOP trustee takes charge of the following areas to help ensure ESOP success for your organization.

  • Retain the services of an independent ESOP appraiser

At Aegis, we utilize an experienced fiduciary advisory committee as well as an independent financial advisor to appraise organizations.

  • Set the annual ESOP stock price for an organization

The stock price is determined following a careful analysis of financial statements, while working with the independent ESOP appraiser. Aegis is an active participant throughout the valuation process on behalf of our clients.

  • Voting to choose the Board of Directors

This depends on whether the trustee is a directed or discretionary trustee. ESOP plan documents and state law will determine how ESOP board members are elected. The trustee is responsible for voting the ESOP shares.

  • Managing assets within the ESOP trust

With company stock held in a trust, your ESOP trustee is responsible for diversifying that trust’s investments and managing the portfolio.

  • Ensuring compliance with plan documents

An ESOP plan document governs the entire arrangement, and it is reviewed by the IRS, Department of Labor, and ERISA. Your ESOP trustee ensures the plan document is meticulously followed.

  • Rigorously documenting decision-making processes

Your ESOP trustee maintains thorough records to protect themselves and your organization. This documentation provides a clear record of all decision-making.

An ESOP is Transformational

An ESOP isn't just a benefits program — it’s a powerful incentive program that empowers employees to own a piece of the company they are working for, day in and day out. Companies that offer ESOPs are more productive and enjoy a positive corporate culture. In fact, the National Center for Employee Ownership (NCEO) found that productivity increased 4-5% in the first year after an ESOP was established.

However, navigating the complexities of ESOPs, with their rigorous rules and guidelines, demands expert oversight. That's where Aegis Trust Company steps in, standing as the benchmark for excellence in ESOP administration.

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Get in touch with us to see how we can help your company transition to an ESOP or provide ongoing trustee services.

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