United States: Employee Benefits Legal Alert

Co- authored by Jennifer Schumacher, Mark Wincek, David Pickle, Lois Colbert and Bill Wright

DOL Issues Final "Blackout" Period Rules

The Sarbanes-Oxley Act amended ERISA to require administrators of individual account plans to provide advance notice to plan participants and beneficiaries (collectively, "participants") of any "blackout" period. On Friday, January 24, 2003, the U.S. Department of Labor issued final rules for advance notices of blackout periods that begin on or after January 26, 2003. The final rules generally track the interim rules, which were issued on October 21, 2002 and detailed in our October 2002 Employee Benefits Legal Alert. However, the DOL also has provided some important clarifications and changes to the interim rules.

Under both the interim and final rules, administrators of individual account plans (that is, all defined contribution plans except plans that cover only partners or sole proprietors and their spouses) must provide participants with advance written notice ("Notice") of any blackout. A blackout is any period of three or more consecutive business days during which participants’ ability to (1) "direct or diversify assets credited to their account," (2) obtain a loan from the plan or (3) obtain a distribution from the plan is "temporarily suspended, limited or restricted."

The Notice must set forth (1) the reasons for the blackout, (2) a description of the rights affected by the blackout, (3) the blackout’s expected beginning and ending dates (or the week in which the blackout is expected to begin and end as long as participants are told how to learn the exact start and end dates (e.g., website URL, toll-free number, etc.), and (4) the contact information identifying the person or group responsible for answering questions about the blackout. If the blackout affects participants’ abilities to direct investments, the Notice must state that participants should evaluate the appropriateness of their investments in light of the blackout. If the plan permits participants to hold individual securities (including, presumably, funds that invest in individual securities such as employer stock funds), the Notice must alert participants to the risks associated with such investments and the inability to redirect their investments during the blackout. (See the attached DOL model Notice for details). The Notice also must be "written in a manner calculated to be understood by the average plan participant."

The Notice must be furnished at least 30 days but not more than 60 days in advance of the last date on which participants could exercise any one of the three rights whose suspension triggers a blackout (reinvestments, loans and distributions). For example, if a blackout beginning February 1 will prevent participants from changing investments or obtaining loans or distributions and January 31 is the last date on which participants could exercise all three rights, the Notice must be given not later than January 1 (30 days) and not before December 2 (60 days). If more than one right is affected and the last date on which the rights may be exercised differs, the 30/60 day calculation must be made with respect to each right and the last date on which it could be exercised. Thus, depending on when a plan permits participants to exercise certain rights, more than one Notice may be required. Where timely Notice is not possible, the Notice must be provided as soon as possible and include an explanation of why the Notice could not be timely issued. If the length of the blackout changes after the first Notice is given, an updated Notice that describes the reasons for the change and details differences from the first Notice must also be distributed. The Notice is deemed to be furnished on the date of mailing (in the case of first-class mail, certified mail or express mail) and on the date of transmission if furnished electronically.

In contrast, hand delivery, interoffice mail or other private delivery is deemed furnished only on the date of delivery.

In order to make certain that the ERISA blackout periods mesh with the new SEC blackout periods imposed by the Sarbanes-Oxley Act (see, our November 2002 Employee Benefits Legal Alert), the plan administrator must also provide the Notice to "the issuer of employer securities" (normally the employer or its corporate parent) if the plan holds employer securities. This requirement applies even if the "issuer" and the "plan administrator" are the same entity. However, in an apparent attempt at simplicity, the DOL noted that the issuer may designate the plan administrator as the person who will receive notice for the issuer and, in such cases, the issuer is notified when the plan administrator sends the Notice to participants.

Although the DOL has issued a model Notice (a copy of which is attached at the end of this Legal Alert), plan administrators are not required to use the model Notice. However, the DOL has created a partial safe harbor by providing in the rules that if a plan administrator does use model paragraph 4 (restrictions on investments) or model paragraph 5.A.(late notices), the plan administrator will be deemed to have satisfied the provisions of the regulation relating to those areas.

Failure to provide the Notice may result in a DOL-imposed civil penalty of up to $100 a day, calculated from the date of the failure (i.e., the latest date the Notice could have been provided) to the date the blackout period ends. Each affected participant to whom the Notice was not provided constitutes a separate violation. Liability for the penalty is imposed on all persons responsible as plan administrators. The DOL must issue a notice of intent to assess the penalty and, if the plan administrator can show cause for non-compliance, the DOL can waive the penalty.

The DOL has identified two situations in which late delivery of the Notice is acceptable and numerous situations in which the Notice is not required.

Exceptions to the 30/60 Day Rule. Late delivery of the Notice is excused if: (a) a delay in the imposition of a blackout period would result in a violation of ERISA’s fiduciary provisions, or (b) commencement of the blackout period is due to events that were unforeseeable or circumstances beyond the control of the plan administrator. It is important to point out that although a plan administrator may not have to comply within the 30/60 day period in the above two situations, the plan administrator is still required to distribute the Notice as soon as reasonably practicable.

As an example of the first item, the DOL posits an employer’s Chapter 11 filing as an event that would require a fiduciary to suspend investment in the employer’s stock. (We note that although this example is consistent with the DOL’s view of how employer stock funds should be managed, plan terms may not permit fiduciaries to take such action. Situations like that noted in the example require, at a minimum, a careful review of governing plan terms to determine whether the steps are consistent with the plan terms and to evaluate the fiduciaries proper course of action.)

As to the second item, the DOL states that this should be a rare exception and has specifically stated that "problems attendant to changes in record keepers will rarely be unforeseeable or beyond the control of the plan." Additionally, the DOL states that advance notice should be given to as many people as possible under the circumstances. Thus, for example, if it is possible to provide advance Notice to active employees (e.g., by e-mail) but not former employees, the plan administrator must provide the Notice to actives without waiting to contact all other participants.

Events not Constituting a "Blackout." Perhaps more importantly, the following suspensions, limitations or restrictions are not considered "blackouts" under the regulations and Notice to participants is not required:

"Regularly Scheduled" Restrictions – Preexisting and regularly scheduled restrictions, if they have been previously disclosed, are not considered "blackouts" under the regulations. Prior notice of such restrictions may be furnished via summary plan descriptions, summary of material modifications, enrollment forms, materials describing the plan’s investment alternatives, and other similar documents pursuant to which the plan is established or operated. The DOL specifically stated that quarterly freezes on the trading of employer securities that are timed to coincide with earnings reports and intended to prevent insider trading are covered by this exception if appropriately disclosed in SPDs, prospectuses or other documents.

QDRO-related Restrictions – Restrictions on a participant’s account in connection with a QDRO or during the period when the plan administrator is considering whether a domestic relations order is a QDRO are not considered "blackouts" under the regulations.

Individual Participant or Third-Party Actions – This exception includes restrictions on the account of a particular participant triggered by the actions or omissions of the participant or a third party. Examples include a tax levy, a dispute over a deceased participant’s account among putative beneficiaries, failure by the participant to obtain a PIN number, and allegations that the participant committed a fiduciary breach or crime involving the plan.

Permanent Restrictions – Permanent restrictions are not blackouts. However, if some rights are temporarily suspended in connection with a permanent restriction (e.g., if the deletion of a fund requires a temporary restriction on investments to the remaining funds), Notice of the temporary restrictions is required.

Restrictions on Investment-Education Services – Permanent or temporary restrictions on investment education, investment advice, retirement counseling, and financial planning services do not constitute a blackout.

In addition to the key changes discussed above, some other changes from the interim rule should be noted.

Beginning and Ending of the Blackout Period – The DOL recognized that in some cases it may be difficult for the plan administrator to accurately project when a blackout will begin thirty or more days in advance. The DOL granted some limited relief by allowing reference to the calendar weeks during which the blackout period is expected to begin and end, provided that during those weeks information as to whether the blackout period has begun or ended be readily available, without charge, to affected participants via a toll-free number or a specific website address.

For example, in a plan that expects to have a four week blackout period beginning February 10, 2003 and ending March 7, 2003, the Notice could indicate that the blackout period will begin the week of February 9, 2003 and end the week of March 2, 2003 as long as affected persons are told how they can determine (e.g., toll-free number, website URL, etc.), during those weeks, whether the blackout has begun or ended. Also, the timing of the advance Notice requirement is to be calculated by counting 30 and 60 calendar days back from the earliest possible date identified in the Notice (i.e., February 9, 2003).

Source of Information – In response to a comment, the DOL stated that the source of information need not be identified as a person’s name, but could be an office or organization (e.g., the corporate benefits department) as long as the source is adequately identified.

Furnishing Notice – The Notice may be provided together with other materials, as long as the blackout information is prominently identified. In addition to first class mail and electronic transmission, the Notice may be furnished by overnight, certified or express mail, or private delivery services. Sending Notice to the last known address of a participant is acceptable. But interoffice mail, in the considered view of the DOL, is the same as hand delivery and thus the Notice is not "furnished" until received in these cases.

1. This notice is to inform you that the [enter name of plan] will be [enter reasons for blackout period, as appropriate: changing investment options, changing recordkeepers, etc.].

2. As a result of these changes, you temporarily will be unable to [enter as appropriate: direct or diversify investments in your individual accounts (if only specific investments are subject to the blackout, those investments should be specifically identified), obtain a loan from the plan, or obtain a distribution from the plan]. This period, during which you will be unable to exercise these rights otherwise available under the plan, is called a "blackout period." Whether or not you are planning retirement in the near future, we encourage you to carefully consider how this blackout period may affect your retirement planning, as well as your overall financial plan.

3. The blackout period for the plan [enter the following as appropriate: is expected to begin on [enter date] and end [enter date]/is expected to begin during the week of [enter date] and end during the week of [enter date]. During these weeks, you can determine whether the blackout period has started or ended by [enter instructions for use toll-free number or accessing web site].

4. [In the case of investments affected by the blackout period, add the following: During blackout period you will be unable to direct or diversify the assets held in your plan account. For this reason, it is very important that you review and consider the appropriateness of your current investments in light of your inability to direct or diversify those investments during the blackout period. For your long-term retirement security, you should give careful consideration to the importance of a well-balanced and diversified investment portfolio, taking into account all your assets, income and investments.] [If the plan permits investments in individual securities, add the following: You should be aware that there is a risk to holding substantial portions of your assets in the securities of any one company, as individual securities tend to have wider price swings, up and down, in short periods of time, than investments in diversified funds. Stocks that have wide price swings might have a large loss during the blackout period, and you would not be able to direct the sale of such stocks from your account during the blackout period.]

5. [If timely notice cannot be provided (see paragraph (b)(1)(v) of this section) enter: (A) Federal law generally requires that you be furnished notice of a blackout period at least 30 days in advance of the last date on which you could exercise your affected rights immediately before the commencement of any blackout period in order to provide you with sufficient time to consider the effect of the blackout period on your retirement and financial plans. (b) [Enter explanation of reasons for inability to furnish 30 days advance notice.]]

6. If you have any questions concerning this notice, you should contact [enter name, address and telephone number of the plan administrator or other contact responsible for answering questions about the blackout period].