Employee Benefits Plans -- Alert

by Norman J. Misher, Allen J. Erreich
Published: December 30, 2002
Source: R & H Letter to Clients & Friends

Blackout Notice Client Letter (00103330.DOC;1)

Plan administrators of 401(k) plans and other defined contribution plans with participant directed investments must soon comply with a new notice requirement.  The Sarbanes-Oxley Act of 2002 (the "Act") amended ERISA to require that plan administrators provide participants and beneficiaries with 30-days advance notice of any "blackout period".  The Department of Labor has now issued interim final rules regarding the new notice requirements.


Under the Act and interim final rules, plan administrators must notify affected participants (including beneficiaries) at least 30 but not more than 60 days prior to any blackout period.  A blackout period is any period of more than three business days during which the ability of the participants to direct or diversify the investment of their accounts or to obtain loans or distributions from the plan is temporarily suspended, limited or restricted.  The notice must explain the reasons for the blackout period, the expected beginning and ending dates of the blackout period and describe the rights that will be temporarily suspended, limited or restricted.  The notice must also contain a statement advising participants to evaluate the appropriateness of their current investments in view of the upcoming blackout period restrictions and must provide them with the name of a person to contact with any questions regarding the blackout period.  If the notice is not furnished on a timely basis, the plan administrator must advise participants why it did not timely comply with the notice requirement.  There are some limited exceptions to the 30-day advance notice requirement.


The Act also prohibits directors and executive officers from trading in employer securities during a blackout period where securities of the employer are held in participants' accounts under a plan and the trading of such accounts by plan participants is affected by the blackout period.  The Securities and Exchange Commission has issued proposed rules regarding the restrictions imposed on directors and executive officers under the Act which are beyond the scope of this letter.


The Department of Labor has issued a model notice together with the interim final rules which may be used by plan administrators to assist them in complying with the blackout period notice requirements.  The model notice may also be used to provide the required notice to issuers of employer securities where a plan holds employer securities that are subject to a blackout period.


The new 30-day notice requirement is generally effective on January 26, 2003.  Under a transitional rule provided in the interim final rules, plan administrators are required to provide notice of blackout periods commencing between January 26, 2003 and February 25, 2003 as soon as reasonably possible prior to the commencement of the blackout period.


If a plan administrator fails to comply with the blackout period notice requirements, ERISA, as amended by the Act, permits the Department of Labor to impose on all individuals who are responsible for administering the plan, civil penalties of up to $100 per day for each participant or beneficiary who has not received the required notice.  The interim final rules also clarify that all individuals responsible as administrators of a plan for the failure to comply with the blackout period notice requirements are jointly and severally liable on a personal basis for any penalty.  Given the potential severity of the penalties for noncompliance, plan administrators must be very careful to both timely and completely comply with all of the blackout period notice requirements.


We would be pleased to assist you in reviewing and implementing procedures for complying with the new blackout period notice requirements.  If you have questions or would like further information, please call Norman J. Misher at (212) 903-8733; Allen J. Erreich at (212) 903-8769; Cheryl Fisher Burman at (212) 903-8770; or Ann Cochran-Becchina at (212) 903-8767.