DOL Issues Enron-Driven "Blackout" Rules

Department of Labor (DOL) interim final rules under ERISA require companies to give 30–60-day advance notice of "blackout periods" to Sec. 401(k) and other plan participants, who will temporarily be prevented from self-directing investments, obtaining loans or receiving distributions.

The DOL rules amplify new ERISA Sections 101(i) and 502(c)(7), as added by Sarbanes-Oxley Act of 2002 (SOA) Section 306(b), and are separate from Securities Exchange Act of 1934 changes made by SOA Section 306(a) for executive disgorgement of profits during blackout periods. In addition, the new blackout-period requirements may be merely the "tip of the iceberg" of retirement plan changes resulting from Enron, Worldcom and other recent corporate failures.

The rules are effective for blackout periods beginning after Jan. 25, 2003. Violators are subject to penalties of as much as $100 per participant per day. Tax advisers should consider the new requirements if a client is contemplating a blackout period, to avoid the risk of incurring penalties.

General Requirements

A "blackout period" is the time during which a participant’s ability to direct or diversify plan assets, obtain plan loans or receive distributions is temporarily suspended, limited or restricted for more than three consecutive business days.

A company must provide notice to a participant (including a beneficiary) who self-directs investment of plan assets in a defined contribution plan and is affected by the blackout period. It must also provide "timely" notice to the issuer of any employer securities held by a plan subject to the blackout provisions.

A blackout period does not include a suspension, limit or restriction (1) due to the application of the securities laws, (2) regularly scheduled to occur and already disclosed to participants or (3) pursuant to a qualified domestic relations order.

Content

The notice must be written in plain English, so as to be understood by the average plan participant, and provide the following information:

• The reasons for the blackout period;
• A description of the participants’ plan rights affected by the blackout;
• The expected beginning and ending dates;
• A statement that participants should evaluate the appropriateness of current investments in light of the blackout period;
• If the notice is not furnished at least 30 days in advance, an explanation why it could not be furnished, including a statement that Federal law generally requires a 30-day notice (this provision does not apply in certain mergers, acquisitions, divestitures or similar transactions involving a plan sponsor); and
• The name, address and phone number of the plan administrator or other person responsible for answering questions on the blackout period.

Timing

The notice must be provided by the plan administrator at least 30 days (but not more than 60 days) before the last date on which a participant could exercise the rights affected by the blackout period. However, the 30-day requirement will not apply if a plan fiduciary determines in writing that (1) a deferral of the blackout period would violate the fiduciary duty provisions of ERISA Section 404(a)(1)(A) and (B); or (2) the inability to provide notice 30 days in advance is due to unforeseeable events or circumstances beyond the plan administrator’s reasonable control (the DOL indicates that this exception can be relied on only in rare circumstances). In either event, the notice must be given as soon as reasonably possible.

Other Provisions

The DOL rules also include the following provisions:

Changes in blackout period. If the blackout period’s beginning or ending date changes after the notice is given, an updated notice explaining the reasons why and identifying all material changes must be provided as soon as reasonably possible, unless such notice would be impracticable.

Form and manner. The notice must be in writing and transmitted electronically or in such other form reasonably accessible to the participant. It is deemed furnished on the date mailed or transmitted electronically.

Model notice. The DOL rules also include a model notice deemed to meet the notice requirements and can be used by plan administrators.

From David J. Kautter, Washington, DC