Blackout Notice — Basic Principles
Rev. 03/19/10; E-mail Alert 2010-5

The Department of Labor issued the final regulations on the Blackout Notice, including a Sample Blackout Notice on January 24, 2003.

Blackout Period Definition
A blackout period is defined as a period of more than three-business days during which a participant has been “temporarily suspended, limited or restricted” from any one of the following:

1. directing or diversifying assets credited to their account,
2. obtaining a distribution, or
3. obtaining a loan.

Events That Are Not Considered A Blackout

• QDRO restrictions on an individual's account.
  
• Restrictions on an Individual Account or Third-Party Actions. Such as a tax levy or beneficiaries disputing a deceased participant's account.
  
• “Regularly Scheduled” Restrictions – If disclosed beforehand in an SPD, SMM, enrollment form or investment material, a regularly scheduled freeze on an investment is not a blackout.
  
• Permanent restrictions are not blackouts; for example, eliminating loan provisions from a plan. Another example would be if the employer amends the plan document and removes the provision for participant direction of investments. Since participant direction is permanently being eliminated, this is not a blackout period. The employer would still want to inform participants in advance.
  
• Restrictions on Investment Education Services.

Blackout Notice General Rules
As with most disclosures, the notice is to be written in a manner to be understood by the average plan participant. The blackout notice must be provided to participants and beneficiaries between 30 and 60 days before the last date on which one of the above three transactions may be exercised. This is to include the last day that participants may exercise affected rights.

For example, if the last day the participants could make a transaction is June 20, and the blackout would last 10 days, the blackout notice period of 30 to 60 days earlier than June 20 would be from April 21 to May 21. For all blackout notice purposes, the days being counted are calendar days, not business days.

The notice must contain the length of the blackout period and specify the beginning date and the ending date for the blackout period. An alternative is available permitting use of the calendar week in which the blackout will begin and end; but if the calendar week method is used, the notice must provide affected participants and beneficiaries with the information to access a toll-free number and/or a free website to obtain the specific beginning and ending date. For this purpose, a calendar week is 7-days and starts on Sunday.

The blackout notice should only include language about the specific rights that are being suspended. For example, if the plan has loans and that is the only one of the three blackout notice alternatives that is being suspended, then the notice should only address loans.

Some other blackout notice points to know:

• If the blackout dates change after the notice is given, then a second notice must be provided to reflect the change.
• The same blackout notice may be provided to address different restrictions. For example, a 25-day blackout for withdrawals and a 20-day blackout for investment changes may be addressed in the same notice.
• Blackout notices are only required for plan level suspension of rights. Thus, the suspension of an individual's rights due to a QDRO would not trigger the requirement for a blackout notice.
• Single participant plans are exempt from the blackout notice rules.
• If the issuer of the stock and the plan administrator are the same entity, no “notice to yourself” is required.

Mailing Issues
The notice may be provided by electronic means, first class mail, certified mail, Express Mail, designated private delivery service or hand delivery, including inter-office mail. If the notice is sent by first class mail, compliance with the 30-day notice period is determined from the date mailed. If the notice is sent electronically, compliance with the 30-day notice period is determined from the date it is electronically sent. A blackout notice sent to the last known address of a participant or beneficiary is sufficient to comply with the notice requirements. The blackout notice may be mailed with other materials, provided the blackout information is prominently identified.

Exceptions to the Notice Being Provided 30 Days Prior to the Blackout:
In those situations where 30 days' advance notice is not furnished, participants and beneficiaries should be furnished an explanation as to why the plan was unable to furnish at least 30 days' advance notice. In the following cases, the notice must be given “as soon as reasonably possible” unless it is completely impossible, in which case no notice would be required.

• If deferral of the blackout period would violate the exclusive purpose rule or the prudence rule of ERISA, or if the blackout commences due to events that were unforeseeable, or circumstances that were beyond the control of the plan administrator, the 30-day time period may be shortened.
• If a blackout period occurs solely in connection with a merger, acquisition divestiture or similar transaction involving the plan sponsor.

Contact for Information about the Blackout
Contact information provided in the notice may be an individual's name, address and phone number. The contact need not be a person but may be a department name, such as, human resources, as well a phone number where a contact person who can answer questions will be, provided this information is clearly identified in the notice.

Company Directors and Executive Officers Blackout Rules under ERISA and Sarbanes-Oxley
During a blackout period imposed on participants in individual account plans of the employer, directors and executive officers are prohibited from trading in employer stock. Any profit realized by an officer or director from insider trading during a prohibited period would have to be paid back to the issuer.

ERISA Penalties for Failure to Provide the Blackout Notice

• A separate $100 penalty will be imposed for each participant and beneficiary who does not receive the notice.
  
• The plan administrator is liable for the penalty. Liability for the penalty may not be shifted to the plan.
  

The $100 penalty is imposed on a per-day late, per-violation basis. For example, if there are 200 participants and the notice is 5 days late; the penalty would be 200 participants x 5 days late x $100 or $100,000.

Click here for Sarbanes-Oxley Act provisions for the blackout period and blackout notice.