Employee Benefits Bulletin, October 2002
Plan Blackout Period Notices
New DOL Regulations Provide More Details
The August 2002 edition of the Employee Benefits Bulletin discussed the Sarbanes-Oxley Act of 2002 ("SOA"). The SOA amended ERISA Section 101 to provide that an explanatory notice must be given to participants and beneficiaries of defined contribution plans (e.g., 401(k) plans) 30 days prior to a blackout period.
Once it has been determined that a suspension, limitation, or restriction of a plan is, in fact, a "blackout period" as defined by the SOA, the next step is to craft and deliver an SOA-acceptable notice to participants and beneficiaries. The notice must be written in a manner that the average plan participant will understand and must include:
(1) The reasons for the blackout period;
(2) An identification of the investments and other rights affected;
(3) The expected beginning date and length of the blackout period;
(4) In the case of investments affected, a statement that the participant or beneficiary should evaluate the appropriateness of their current investment decisions in light of their inability to direct or diversify assets credited to their accounts during the blackout period; and
(5) Any other requirements imposed by regulations.
The SOA required the Department of Labor ("DOL") to fill in the gaps and questions left by the new ERISA provisions. On October 21, 2002, the DOL published interim final regulations and a model notice in the Federal Register (29 CFR Parts 2520, 2560, and 2570) to provide additional guidance on the new ERISA requirements. The new regulations basically track the requirements put into place by the SOA. (For information on the general requirements of the SOA, please see the August 2002 Employee Benefits Bulletin.) The clarifications and expansions of SOA requirements found in the new regulations are outlined in this article.
When You Must Comply
- The regulations are effective January 26, 2003, and apply to blackout periods commencing on or after that date. However, for blackout periods commencing between January 26 and February 25, 2003 (i.e., when it would be impossible to accomplish a 30 day advance notice period without adhering to the new regulations before their effective date), plan administrators must only furnish notice "as soon as reasonably possible."
Notice Content
- In addition to the SOA content requirements listed on Page 1, the blackout notice must include the expected beginning date and ending date (not just the expected length) of the blackout period.
- If 30 days advance notice is not furnished, an explanation why the plan was unable to furnish the required notice must be included in the text of the notice.
- The name, address and telephone number of the person who can answer questions about the blackout period must be included in the notice.
- The interim regulations include a model notice for satisfying the content requirements. (See the text of the model notice on Page 3 of this Employee Benefits Bulletin.) However, use of the model is not mandatory.
Notice Delivery
- The 30 day period is determined by counting back calendar days (not just business days) from the last date the participant may manipulate his or her account before the blackout period. The regulations provide the following example to illustrate this rule:
Under a plan that permits participants to direct investments during the first fifteen days of each month, it is determined that in order to change recordkeepers, participant direction of investments will have to be suspended from the 1st to the 15th of May. If the 30-day notice period were counted from April 30, the date immediately preceding the beginning of the blackout period, notice could be provided on April 1st. . . . [However, in this example] the last date on which participants could take action in anticipation of the blackout period would be April 15th, accordingly notice would have to be provided not later than March 16th.
- The blackout notice may be provided in any manner that is acceptable under the DOL's general rules for disclosure under §2520.104b-1. If delivered electronically or by first class mail, the notice is treated as sent on the date of mailing or transmission. If delivered via private delivery service, the 30 days begin to run from the time the notice is received.
30 Day Timing Exceptions
- There are statutory exceptions to the 30 day rule. The notice only has to be provided "as soon as reasonably possible" instead of 30 days in advance if moving the blackout dates to a later time (in order to accomplish the 30 day period) would violate fiduciary standards in ERISA §404 or if the lack of a 30 day period is due to unforeseeable events or circumstances beyond the control of the plan administrator. If either of these exceptions apply, the regulations require the plan fiduciary to document the situation with a signed and dated determination of how the plan satisfies the exception. Plan administrators should note that if these exceptions apply and a late notice is sent, an explanation must be provided in the notice (see Notice Content section above).
- No notice is required if an exception applies and it is impracticable to give notice prior to blackout termination.
Failure to Comply
- Plan administrators are personally liable for the civil penalty imposed for noncompliance. Since the liability is a personal liability of the plan administrator and not a liability of the plan, the penalty may not be paid with plan assets.
- Each participant or beneficiary who does not receive a notice is treated as a separate violation. Therefore, the penalties can add up quickly. For example, in a plan containing 50 participants, the potential penalty is $5,000 (50 x $100) for each day a notice is late.
- The violation duration is computed from the date of failure up to the final day of the blackout period. Therefore, additional penalties do not accrue after the ending date of the blackout period.
- Additionally, interim final rules implementing the new civil penalties applicable for failure to provide the blackout notice also appear in the October 21, 2002 issue of the Federal Register. For more information on the new civil penalties, see the August 2002 Employee Benefits Bulletin.
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