401(k) Match with Private Company Stock - Valuation required?

[Guest MarieLittle]

We are a private company whose stock is valued by the Board of Directors at quarterly intervals. We added a company match to our 401k plan in 1998. The match is in the form of company stock only. (Employees can invest their own contributions in 14 different funds managed by Fidelity.)

When we were setting up this plan we were trying to determine whether or not we would need an independent valuation of the stock. Our attorneys told us this:

"An employer contributing non-publicly traded stock in the form of a match to the employer sponsored 401(k) is not subject to the ERISA section 406 prohibited transaction rules. Specifically, section 406 refers only to "acquisitions" of employer securities. A contribution of employer securities is not an acquisition of securities for purposes of section 406.

Due to the fact that a contribution of employer stock in the form of a match to the 401(k) plan is not subject to the prohibited transaction rules, ERISA does not require an independent valuation of the stock. Valuation by an independent appraiser or independent valuator as required under the ERISA adequate consideration rules is not required in this situation."

We concluded that we did not need an independent valuation of the stock and implemented the plan. All seemed fine and dandy until our annual 401(k) audit. Our auditors are telling us that we do need to get an independent valuation.

Our company does NOT want to have to get an independent valuation of the stock.

Any of you wise and wonderful 401(k) experts have an opinion on whether or not we really need one? Any ideas will be appreciated.

Thanks,

Marie