The Sarbanes-Oxley Blackout Notice and Its Requirements
by Gunnar Kuehl
What is a Sarbanes-Oxley blackout notice?
The Sarbanes-Oxley Act is the first legislation enacted in response to the Enron Corporation bankruptcy and related events that led to the demise of the company’s retirement plan and extensive financial losses by plan participants.
One of the requirements imposed by this Act is that retirement plan sponsors provide plan participants and beneficiaries with a “blackout notice,” which must be given before any suspension of access or rights under the plan that will last more than three consecutive business days.
This advance notice requirement is intended to protect plan participants and beneficiaries from unexpectedly losing the ability to direct or access their retirement plan assets. Otherwise, participants and beneficiaries with insider information about a pending blackout (most likely to be owners and highly-placed executives) could act to the advantage of their own retirement assets in advance, without providing the same opportunity to other participants and beneficiaries.
What is a blackout period?
A “blackout period” generally is defined as a period of time during which plan participants and beneficiaries lose the ability to take such actions as directing or diversifying assets, obtaining loans, or receiving plan distributions. Common reasons for blackout periods include corporate mergers, acquisitions, spin-offs, and investment or recordkeeper changes.
What information must be included in the blackout notice?
The notice must be written in a manner that can be understood by the average plan participant, and must include the following information.
Reasons for the blackout period
Rights that will be temporarily suspended, limited, or restricted
Investments subject to the blackout period
Expected beginning and ending dates of the blackout period or the calendar week during which the blackout period is expected to begin and end, provided that during such week information as to whether the blackout has begun or ended is readily available to participants and beneficiaries
A statement that the participants and beneficiaries should evaluate the appropriateness of their current investments because of the inability to direct or diversify investments while in a blackout period
If the notice is not being provided timely, a statement that federal law generally requires at least 30-day advance notice and the reasons why timely notice was not provided
The name, address, and telephone number of the plan administrator or other contact person responsible for answering questions about the blackout period
Department of Labor (DOL) regulations include a model notice to assist employers in satisfying these blackout notice requirements. Use of the model notice is not mandatory, however.
When must the blackout notice be provided?
In general, the employer must provide the blackout notice to all affected participants and beneficiaries at least 30 days, but not more than 60 days, before the last date the affected rights could be exercised before the blackout period begins.
There may be exceptions to this timing requirement if there is an event that is unforeseeable or beyond the employer’s control, or if it would not be prudent to continue allowing participants to direct investments into certain investment options., For example, an employer with company stock as an investment alternative anticipates filing for bankruptcy, and determines that it would not be prudent to continue to allow participants to direct investments into that company stock.
If it is not possible to provide at least 30-day advance notice, or if there’s a change to the blackout period after the initial notice has been provided, the employer generally must provide an updated notice as soon as reasonably possible.
What are the potential consequences of not providing a timely blackout notice?
Failure to provide the notice at the proper times could result in civil penalties assessed by the DOL of up to $139 per day (2019), per participant or beneficiary. DOL regulations state that this penalty is a personal liability of the employer and not a liability of the plan. The penalty is calculated from the date that the employer failed to provide the notice, up to and including the final day of the blackout period.
Merely failing to provide a timely notice does not automatically result in the maximum penalty being enforced. The DOL must first provide written notice of its intent to assess a penalty, and provide the employer the opportunity to show whether there were circumstances that justify a waiver or reduction of the penalty.
