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January 28, 2003
401(k) Blackout Rule Taking Effect
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The regulation, issued by the Labor Department last Thursday, stems from a law adopted last summer to deal with a wave of corporate accounting scandals, particularly the one at Enron.
Blackout periods typically occur when plans change record keepers or investment options, or add participants due to corporate merger or acquisition.
On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002 giving the Secretary of Labor authority to promulgate rules and a model notice implementing the blackout notice provisions. The act requires that participants and beneficiaries be given a 30-day advance notice of a blackout period. When a blackout period affects a plan that includes employer stock as an investment option, the plan must also notify the corporate issuer of the employer stock so that corporate insiders are aware that they may not trade employer securities or exercise options during the blackout. The law is effective for blackout periods occurring on or after Jan. 26, 2003.
Under the final rules, 401(k) plan administrators must provide blackout notices that contain the reasons for the blackout, a description of the workers' rights that will be suspended, the start and end dates of the blackout period, and a statement advising workers to evaluate their current investments based on their inability to direct or diversify assets during the blackout period.
Changes made to the interim final rules in the final regulations include:
* flexibility for plan administrators in describing the starting and endings dates of the blackout period;
* clarification of situations that are not blackout periods such as suspensions resulting from pending qualified domestic relations order determinations and actions by individual participants; and
* a special rule for issuers of company stock who are also the plan administrators.
Failure or refusal to provide the required notice will result in civil penalties. A second set of final rules issued by the department adopts the interim final rules that provide for civil penalties of up to $100 per day per participant for plan administrators who fail or refuse to comply with the notice requirement.
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