Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

All About Blackout Periods

We recently had some questions about how blackout periods work, and I learned a lot by consulting some of our TPA (third party administrator) colleagues and the DOL website.

A blackout period is basically a time that participants temporarily lose control of their retirement accounts.  During this period, no changes can be made to investment allocations.  Also, loans and distributions are not allowed.  Participants may be unable to access their accounts online as well. The most common reason for needing a blackout period is due to a change in TPA or service provider.  Blackout periods may also be required in the event of a corporate merger or acquisition.

Blackout rules were actually established as a result of the Sarbanes-Oxley Act of 2002 (SOX), which came about in the wake of the Enron scandal.  The blackout rule was meant to restrict executives from stock activity within retirement plans during certain periods of time.  However, Congress felt there was a need to protect the rights of and educate other types of participants when it came to account restrictions, so those SOX requirements now apply to all defined contribution plans.

Plan sponsors/administrators are required to provide written notice of blackout periods to plan participants that includes the following:

– The reason for the blackout period

– An explanation of all participant rights affected (suspended activities)

– The expected beginning date of the blackout period and length of the blackout period (which is usually given as a range as it can be difficult to estimate specific dates)

– A statement informing participants that they should evaluate their accounts prior to the start of the blackout period

– The contact information of the person designated to answer questions about the blackout period

The notice must be given to participants at least 30 days, but not more than 60 days, in advance.  Obviously, there is an exemption to the 30-day requirement in the event of unforeseeable circumstances that were beyond the control of the plan sponsor/administrator.  Once the notice has been provided, plan sponsors are required to give updated notices in the event that there is a change to the original information (including the reason for any changes.)

Failing to comply with blackout notice requirements can result in civil penalties assessed by the DOL of $100 per participant per day.  So a 500-participant plan that fails to give proper notice of a 14-day blackout period could be looking at potential penalties of $700,000!  I’m sure it goes without saying that in the event a penalty is assessed, it cannot be paid from plan assets.

Jessica Puckett, CPA, CFE

Comments

  1. […] posting is a follow-up to “All About Black-Out Periods” posted here.  In that posting we talked about what a black-out period is, and what the plan administrator’s […]