DOL Issues Final Regulations for Blackout Notice Requirements Under Sarbanes-Oxley
February 14, 2003
On January 24, 2003, the U.S. Department of Labor (DOL) issued final regulations regarding "blackout period" notice requirements for individual account plans. These regulations implement Section 306(b) of the Sarbanes-Oxley Act (SOA), which amended the Employee Retirement Income Security Act of 1974. The regulations require individual account plan administrators to provide participants with at least 30 days advance notice of "blackout periods" or periods of time when such participants’ rights to direct investments, take loans or obtain distributions are suspended. The final "blackout period" notice regulations became effective January 26, 2003
A "blackout period" is a period of time greater than three consecutive business days during which the ability of participants or beneficiaries to direct or diversify their accounts, obtain loans or obtain distributions is suspended, limited or restricted if that ability is otherwise available under the plan. The regulations list specific examples of restrictions that are not "blackout periods." These include restrictions imposed by reason of the application of certain securities laws; previously disclosed (pursuant to summary plan descriptions or summaries of material modification) regularly scheduled restrictions pursuant to the terms of the plan; a qualified domestic relations order; or an act or failure to act on the part of an individual participant. Blackout periods often occur as a result of a merger or acquisition, company restructuring or change in record keeper.
Affected Plans
Section 306(b) of SOA and the related final regulations apply to "individual account plans," which generally include any retirement plan that provides for an individual account for each participant and for benefits based solely upon the amount contributed to such account, plus earnings and minus any losses. Accordingly, most defined contribution plans, including 401(k) plans, money purchase pension plans, profit sharing plans and employee stock ownership plans would fall within the definition of an "individual account plan."
Notice Requirements
An individual account plan administrator must provide notice of any blackout period in accordance with detailed rules set forth in the regulations. To summarize, all participants and beneficiaries, including alternate payees under Qualified Domestic Relations Orders (or proposed QDROs), must be notified and the notice must be written such that an average participant will understand his or her rights. The notice must describe the reason for the blackout period, the rights that will be suspended, limited or restricted, the expected beginning and ending dates of the blackout period (or alternatively the calendar week during which the blackout period is expected to begin and end), the investments affected and a statement informing participants to evaluate the appropriateness of such investments in light of the upcoming blackout period, and the name, address and telephone number of the contact person for answering questions regarding the blackout period. The notice must be provided at least 30 days and no more than 60 days before the last date on which the participants and beneficiaries could exercise the affected rights (special rules apply in the case of notices that cannot be provided within this time frame, including the fact that notice must be provided to newly eligible participants). The notice must be provided in writing, but may be provided electronically in accordance with the applicable DOL regulations. If the length of the blackout period is extended, an additional notice informing participants and beneficiaries of the change must be provided as soon as reasonably possible, which notice must describe the reasons for the extension And finally, if the restrictions relate to employer securities held by the plan, then the notice must also be given to the issuer of the securities.
The DOL guidance includes a model blackout notice, a copy of which is available here. This model should be modified to fit the particular facts of any specific blackout period.
Penalties for Failure to Comply
Concurrently with the issuance of the blackout period notice regulations described above, the DOL issued regulations under Section 502(c)(7) of ERISA establishing the procedure for assessing civil penalties for the failure to provide a required blackout period notice. The new regulations provide that the DOL may impose a civil penalty of up to $100 per day per participant for failure to provide such notice, beginning on the date such notice was required and ending on the last day of the blackout period.
