Lugar de Noticias Haynes and Boone

Pension Blackout Rules for Individual Account Retirement Plans
02/03/2003
John M. Collins, Jesse J. Gelsomini, Charles F. Plenge, Tiffany Walker, Susan A. Wetzel

The Department of Labor (“DoL”) has issued final rules that implement the pension blackout provisions of the Sarbanes-Oxley Act of 2002 (the “Act”).  These rules require plan administrators of individual account plans to deliver advance notice of blackout periods and will be effective for blackouts which begin on or after January 26, 2003.

Unlike other blackout provisions of the Act that apply only to publicly-traded corporations, these blackout rules apply to all individual account plans covered by ERISA, including all 401(k) plans and individual account plans that are designed as “top-hat” plans.

Definition of Blackout Period.

The blackout period notice requirements apply to more than simply investment blackout periods.  “Blackout Period” means any period for which the ability to direct or diversify assets under the plan, to obtain loans from the plan, or to obtain distributions from the plan is temporarily suspended, limited, or restricted for a period of more than three consecutive business days.  There are exclusions for certain suspensions imposed by the securities laws, the rules regarding qualified domestic relations orders, for certain regularly-scheduled suspensions, and for certain account restrictions triggered by the participant’s actions, such as receipt of a tax levy or the failure of the participant to obtain a PIN number.

Notice Period.

Administrators of individual account plans must furnish a blackout notice to all affected participants and beneficiaries at least 30 days, but not more than 60 days, in advance of the last date on which the participants and beneficiaries could exercise the affected rights immediately before the blackout period.  However, for blackouts that begin between January 26 and February 25, 2003, notice must be furnished as soon as reasonably possible.

Form and Content of Notice.

The blackout notice must be written in a manner calculated to be understood by the average plan participant.  The notice must include the reason for the blackout period, a description of the rights affected by the blackout period, the length of the blackout period, and other requirements that depend on the circumstances of the blackout.  The length of the blackout period may be identified by reference to the expected beginning date and ending date of the period or the calendar week (beginning with Sunday) during which the blackout period is expected to begin and end.  For example, the notice for a four-week blackout period that is expected to begin on February 10, 2003 and end on March 7, 2003 could provide the blackout period will begin the week of February 9, 2003 and end the week of March 2, 2003.  If the blackout period is identified by reference to calendar weeks, then during such weeks the participants must have access, without charge, to information such as a toll-free number or a specific web site to determine whether or not the blackout period has actually begun or ended, and the blackout notice must describe how to access such information.  Furthermore, if calendar weeks are used, the 30 to 60-day advance notice period must be calculated from the earliest possible beginning date identified in the notice (e.g., February 9, in the case of the “week of February 9”). The DoL has issued a model notice which will assist with compliance with these form and content requirements.

Delivery of Notice.

The notice may be hand-delivered, sent by first class mail, sent via certain private delivery services or, subject to certain rules applicable to electronic delivery, sent electronically.  Posting the notice on a bulletin board will not satisfy the delivery requirements.  The blackout notice is considered furnished by the date of mailing, if mailed by first class mail, certified mail, or Express Mail, the date of the electronic transmission, if delivered electronically, and the date of delivery to an acceptable private delivery service.

Penalties for Non-Compliance.

A civil penalty equal to $100 per day per each affected participant or beneficiary may be incurred for failure to provide the blackout notice.

Delivery of Notice to Issuer.

The final rules also implement the requirement that plan administrators send a blackout notice to the “issuer” of any employer securities that are held by the plan and subject to the blackout period.  The term “issuer” is generally defined as a publicly-traded corporation, and thus this requirement does not generally apply to closely-held corporations.  The plan administrator can meet this requirement by delivering the notice to the issuer’s agent for service of legal process or to the person identified by the issuer to receive the notice.  If the issuer identifies the plan administrator as the person to receive the notice, the notice is deemed delivered to the issuer on the same date the blackout notice is delivered to the affected participants and beneficiaries.

There are additional rules regarding changes in blackout periods and exceptions to the 30-day notice requirement.  For additional information on the blackout period notice rules or for a copy of the model form of notice, please feel free to contact your regular Haynes and Boone attorney or any member of our Employee Benefits/Executive Compensation Practice Group listed above.