If you run a company with an ESOP, the idea of a Department of Labor (DOL) audit can feel a little intimidating. These reviews—handled by the Employee Benefits Security Administration (EBSA)—are meant to make sure your ESOP follows ERISA rules and that fiduciaries are acting in the best interests of employees.

The DOL rarely explains why an audit starts, but common triggers include participant complaints, issues in your Form 5500, or simple computer targeting. And once an audit begins, certain problem areas show up again and again. Some lead to required fixes, and others can escalate into costly penalties or even litigation.

Here’s a rundown of the issues the DOL most often flags in ESOP audits:

1. Overpaying for Company Stock (“Adequate Consideration” Problems)

This is the big one—and the most litigated. ESOPs aren’t allowed to pay more than fair market value for company stock, so the DOL takes a very close look at initial transactions and annual valuations.

Common pitfalls include:

• Flawed valuations: Think unrealistic projections, using the wrong valuation methods, ignoring key risks, or adding control premiums when the ESOP doesn’t actually have control. The DOL often brings in its own experts to challenge the numbers.
• Weak trustee oversight: Trustees are expected to behave independently and actively engaged—not just rubber-stamping the appraiser’s work.
• Conflicts of interest: If the appraiser has ties to management or selling shareholders, expect scrutiny. Particularly during transactions, the trustee should also be independent.
• Rushed deals: Transactions pushed through quickly, often to meet tax deadlines, without enough time for due diligence, are a major red flag.

2. Breach of Fiduciary Duty

Trustees and other fiduciaries are held to a high standard, and valuation issues often overlap with fiduciary ones. But breaches show up in other ways too:

• Not acting prudently: This includes failing to monitor service providers, not understanding the ESOP’s financial condition, not providing quality financials to the valuator, or making decisions without proper investigation.
• Not putting participants first: Any action that benefits the company or selling shareholders at the expense of employees is a serious violation.
• Improper expense handling: A common mistake is charging “settlor” expenses—like plan design or ESOP setup—to the plan, when they should be paid by the company.

3. Administrative and Operational Errors

Even well-run ESOPs can get tripped up by administrative details or poor communication among service providers.

Some frequent issues include:

• Incorrect share release calculations: Especially in leveraged ESOPs, incorrect formulas or amortization schedules can lead to major allocation errors.
• Wrong participant allocations: If the plan’s definition of compensation isn’t followed precisely, employees may receive too many—or too few—shares.
• Late deposits of contributions: If your ESOP includes a 401(k) feature, late deferral deposits are a huge audit trigger.
• Failure to cash out terminated participants: Not doing so can inflate participant counts and unnecessarily trigger large-plan audit requirements.

4. Reporting and Disclosure Problems (Form 5500)

The Form 5500 is the DOL’s window into your ESOP. Mistakes here almost always attract attention.

Common issues include:

• Late or incomplete filings: Simple errors, but costly ones, due to steep daily penalties.
• Wrong plan size classification: Marking a plan as “small” when it actually requires a full audit can lead to rejection and further examination.
• Red flags on schedules: Inconsistent data, unexplained prohibited transactions, or excessive fees can all prompt follow-up questions.

While ESOPs remain a powerful way to build employee ownership, today’s regulatory environment demands more than good intentions. Strong valuations, diligent fiduciary oversight, and tight administrative practices are essential to keeping your ESOP both compliant and healthy.

In a rare moment of total agreement, the U.S. Senate just passed two major pro-ESOP bills—S. 2403, the Promotion and Expansion of Private Employee Ownership Act, and S. 1728, the WORK Act—both with unanimous support. For ESOP trustees and owners, this is big news. These bills are designed to make it easier for companies to start and maintain ESOPs, while strengthening the programs and resources that keep them running smoothly. In short, Washington is sending a clear message: employee ownership works, and it deserves strong, ongoing support.

Retire Through Ownership Act (S. 2403)

What This Bill Does

This bill is all about making the rules for Employee Stock Ownership Plans (ESOPs) much clearer. Its main job is to clarify how the value of privately-held company stock is determined for retirement accounts.

The Impact for ESOP Companies & Trustees

Think of this as a major headache reliever for companies and the trustees who run the ESOPs:

• Legal Protection: It creates a “safe harbor.” ESOP fiduciaries can now confidently rely on valuations provided by independent appraisers who use the well-known IRS Revenue Ruling 59-60 guidelines.
• Stops Lawsuits: This clarity is designed to cut down on frivolous lawsuits and government investigations (known as “regulation by litigation”) that have targeted ESOPs for decades over stock valuations.
• Encourages Growth: By lowering the legal risk, the bill makes it much easier and less scary for business owners to choose an ESOP as their company’s succession plan.

The Impact for Employee-Owners

For employees who participate in the ESOP, this means greater peace of mind about their retirement savings:

• More Security: The value of your company stock—the asset that makes up your retirement wealth—will be determined using a consistent, legally-backed method.
• Stronger Plans: By making the rules more certain for company leaders, the bill helps ensure the overall stability and long-term health of your employee ownership plan.

Essentially, it’s a bipartisan effort to strengthen the whole concept of employee ownership by removing a huge area of legal uncertainty.