Because 401(k) plans are tax-qualified defined contribution
plans that include a CODA, they must satisfy all of the requirements
for qualified plans, the special requirements of IRC Sec. 401(k),
and all the Employee Retirement Income Security Act (ERISA)
requirements that apply to defined contribution plans, including
minimum participation and vesting standards, fiduciary rules, and
reporting and disclosure requirements. Many special rules apply to
401(k) plans, including special vesting and nondiscrimination testing
requirements. In addition, the rules on plan loans and blackout periods,
while they impact other types of retirement plans, most often affect
the design and administration of 401(k) plans.
Please see the
national ERISA, national Benefits
Recordkeeping and Disclosures
While many 401(k) plans only include a CODA, they often
also provide for employer-matching contributions and discretionary
employer contributions. Many CODAs are part of a larger defined contribution
plan that may include a profit-sharing component. For some employers,
a 401(k) plan is part of a retirement package that may include a defined
benefit plan or a hybrid plan.
Matching contributions. Perhaps the most crucial design consideration for a 401(k) plan
sponsor is whether and how to provide matching contributions. Matching
contributions are the best way to encourage employees to participate
in a 401(k) plan. A 100 percent match is a large incentive to participation
but is also expensive. Common match formulas are 50 percent of employee
contributions up to the first 6 percent of compensation and no match
on the portion of the contribution that exceeds 6 percent of compensation.
Contributions of unused paid
time off. The IRS has ruled that a 401(k) plan may permit
contributions of payments employees would receive for unused vacation
or other similar leave at the end of the year or at termination of
employment, whether the contributions are employer contributions or
elective 401(k) contributions (Rev. Rul. 2009-31 and Rev. Rul. 2009-32). The 401(k) nondiscrimination tests must still be passed and the
contributions may not exceed any applicable limits including the limit
on total contributions to an individual's account during a year. In
addition, a plan participant does not include in gross income the
dollar equivalent of unused paid time off that is not contributed
to the 401(k) plan until the year in which the amount is paid to the
The IRS provides for dollar limitations on benefits and
contributions under qualified retirement plans, including 401(k) plans.
These limits are adjusted annually for cost-of-living increases. For
current limits on an employee’s elective deferrals to a 401(k) plan,
. A plan may provide for
the employer to match all, part, or none of an employee's deferrals.
Employer contributions to defined benefit plans, including
matching contributions to 401(k) plans, must vest either 100 percent
after 3 years of service or 20 percent per year of service beginning
after the second year and reaching 100 percent after 6 years.
SEP and SIMPLE IRA (and other IRA-based) plans require
that all contributions to the plan are always 100 percent vested.
Because ERISA's fiduciary rules bar employers from using
plan assets for their own benefit, the Department of Labor (DOL) has
issued regulations that define when employees' contributions to a
benefit plan become plan assets, must no longer be in the employer's
possession, and must be deposited into a plan account. This is the
number one fiduciary trouble spot. Late deposits are an invitation
for an audit by DOL.
In general, amounts that a participant had withheld from
his or her wages by an employer for contribution to an ERISA plan
are deemed to be plan assets on the earliest date on which such contributions
can reasonably be segregated from the employer's general assets. However,
in no case may pension benefit plan and welfare benefit plan deposits
of employee contributions be made later than the 15th business day
of the month following the month in which such amounts would otherwise
have been payable to the participant in cash. This rule also applies
to SIMPLE individual retirement accounts (IRAs) and salary reduction
Warning: DOL's rule
of thumb is that small plans sponsored by an employer with a simple
payroll process should be able to make deposits of employee contributions
within 7 days. Large plans, which may have multiple locations and
multiple paydays, should be able to make deposits within 10 to 14
days, in DOL's view. The deposit timing rules apply to withholding
for plan loan repayments as well as employee contributions.
Small employer safe harbor. DOL regulations create a safe harbor for plans with fewer than 100
participants if deposits of employee contributions are made within
7 business days of receipt or withholding. Thus, if such plans make
their deposits within 7 business days, the deposit is deemed to be
on time without having to determine when they reasonably could be
segregated. To qualify for the safe harbor, loan repayments must also
be deposited within 7 business days. Participant contributions are
considered deposited when placed in an account of the plan, without
regard to whether the contributed amounts have been allocated to specific
participants or investments. The safe harbor also applies to SIMPLE
IRAs and salary reduction SEPs.
Generally, distributions from a 401(k) plan cannot be
made until a distributable event occurs. A “distributable event” is
an event that allows distribution of a participant’s plan benefit
and includes the following situations:
• The employee dies, becomes disabled, or otherwise has
a severance from employment.
• The plan is terminated and no other defined contribution
plan is established or continued.
• The employee reaches the age of 591/2 or suffers a financial hardship.
Tax on early distributions. If a distribution is made to an employee before he or she reaches
the age of 591/2, the employee may have to pay
a 10 percent additional tax on the distribution. This tax applies
to the amount received that the employee must include in income. The
10 percent tax does not apply to distributions before the age of 591/2 if the distribution is:
• Made to a beneficiary (or to the estate of the employee)
on or after the death of the employee
• Made due to the employee having a qualifying disability
• Made as part of a series of substantially equal periodic
payments beginning after separation from service and made at least
annually for the life or life expectancy of the employee or the joint
lives or life expectancies of the employee and his or her designated
beneficiary (The payments under this exception, except in the case
of death or disability, must continue for at least 5 years or until
the employee reaches age 591/2, whichever is
the longer period.)
• Made to an employee after separation from service if
the separation occurred during or after the calendar year in which
the employee reached the age of 55
• Made to an alternate payee under a qualified domestic
relations order (QDRO)
• Made to an employee for medical care up to the amount
allowable as a medical expense deduction (determined without regard
to whether the employee itemizes deductions)
• Timely made to reduce excess contributions under a 401(k)
• Timely made to reduce excess employee or matching employer
contributions (excess aggregate contributions)
• Timely made to reduce excess elective deferrals
• Made because of an IRS levy on the plan
• Made as a qualified reservist distribution
Distribution starting requirements. Benefit payment must begin when required. Unless the participant
chooses otherwise, the payment of benefits to the participant must
begin within 60 days after the close of the latest of the following
• The plan year in which the participant reaches the earlier
of age 65 or the normal retirement age specified in the plan
• The plan year that includes the 10th anniversary of the
year in which the participant began participating in the plan
• The plan year in which the participant terminates service
with the employer
Minimum distribution requirements. A 401(k) plan must provide that each participant will either:
• Receive his or her entire interest (benefits) in the
plan by the required beginning date (defined below), or
• Begin receiving regular periodic distributions by the
required beginning date in annual amounts calculated to distribute
the participant's entire interest (benefits) over his or her life
expectancy or over the joint life expectancy of the participant and
the designated beneficiary (or over a shorter period).
These required distribution rules apply individually
to each qualified plan. The required distribution from a 401(k) plan
cannot be satisfied by making a distribution from another plan. The
plan document must provide that these rules override any inconsistent
distribution options previously offered. When the participant’s account
balance is to be distributed, the plan administrator must determine
the minimum amount required to be distributed to the participant each
The required beginning date for distributions is April
1 of the first year after the later of:
• The calendar year in which the participant reaches the
age of 701/2, or
• The calendar year in which the participant retires.
However, a plan may require that the participant begin
receiving distributions by April 1 of the year after the participant
reaches the age of 701/2, even if the participant
has not retired.
If the participant is a 5 percent owner of the employer
maintaining the plan, the participant must begin receiving distributions
by April 1 of the first year after the calendar year in which the
participant reaches age 701/2.
Distributions after the starting
year. The distribution required to be made by April 1 is
treated as a distribution for the starting year. (The starting year
is the year in which the participant reaches the age of 701/2 or retires, whichever applies, to determine the participant’s
required beginning date.) After the starting year, the participant
must receive the required distribution for each year by December 31
of that year. If no distribution is made in the starting year, required
distributions for 2 years must be made in the next year (one by April
1 and one by December 31).
IRS regulations set out the requirements for hardship
distributions from a 401(k) plan. The plan must specifically permit
such a distribution. In addition, a distribution qualifies as a hardship
distribution only if it is both (1) made because of an immediate and
heavy financial need of the employee and (2) is necessary to satisfy
the financial need. The determination of the existence of an immediate
and heavy financial need and of the amount necessary to meet the need
must be made in accordance with nondiscriminatory and objective standards
set forth in the plan and must be made separately. The maximum amount
of a hardship distributable amount is an employee’s total elective
contributions as of the date of distribution, reduced by the amount
of previous distributions of elective contributions.
Determination of an immediate
and heavy financial need. Whether an employee has an immediate
and heavy financial need is to be determined based on all the relevant
facts and circumstances. A financial need may be immediate and heavy
even if it was reasonably foreseeable or voluntarily incurred by the
employee. A distribution is deemed to be due to an immediate and heavy
financial need of the employee if the distribution is for:
• Medical care expenses of the employee, the employee's
spouse, dependents, or a primary beneficiary under the plan
• The purchase of a principal residence for the employee
(excluding mortgage payments)
• Tuition, related educational fees, and room and board
expenses, for up to the next 12 months of postsecondary education
for the employee, the employee’s spouse, children, dependents, or
a primary beneficiary under the plan
• Preventing eviction from or foreclosure of the mortgage
on the employee’s principal residence
• Burial or funeral expenses for the employee’s deceased
parent, spouse, children, dependents, or a primary beneficiary under
• Repairing damage to the employee’s principal residence
that could qualify for the casualty deduction on the employee's federal
income tax return
A “primary beneficiary under the plan” is an individual
who is named as a beneficiary under the plan and has an unconditional
right to all or a portion of the participant’s account balance under
the plan upon the death of the participant.
In order for a distribution to be necessary to satisfy
the financial need, the distribution may not exceed the amount needed,
including any amounts necessary to pay any federal, state, or local
income taxes or penalties reasonably anticipated to result from the
distribution. In addition, the employee must have no other resources
that are reasonably available to the employee, including assets of
the employee’s spouse and minor children. Employers may rely on an
employee's written representation that there are no other resources
to relieve a need unless the employer has actual knowledge that the
employee has certain other resources.
A distribution is deemed necessary to satisfy an immediate
and heavy financial need if each of the following requirements are
• The employee has obtained all other currently available
distributions and nontaxable loans under the plan and all other plans
maintained by the employer; and
• The employee is prohibited, under the terms of the plan
or an otherwise legally enforceable agreement, from making elective
contributions and employee contributions to the plan and all other
plans maintained by the employer for at least 6 months after receipt
of the hardship distribution.
403(b) and 457 plans. The hardship distribution rules also apply to 403(b) and 457 plans.
The IRS has published a list of seven steps to take to
ensure that both the legal and plan requirements are met with regard
to hardship distributions.
Step 1: Review the
terms of the plan, including:
• Whether the plan allows hardship distributions;
• The procedures the employee must follow to request a
• The plan’s definition of a hardship; and
• Any limits on the amount and type of funds that can be
distributed as a hardship from an employee’s accounts.
Step 2: Ensure that
the employee complies with the plan’s procedural requirements. For
example, make sure the employee has provided a statement or verification
of his or her hardship in the form required by the plan.
Step 3: Verify that
the employee’s specific reason for hardship qualifies for a distribution
using the plan’s definition of what constitutes a hardship. For instance,
the plan may limit a hardship distribution to pay burial or funeral
expenses and not for any other reason.
Step 4: If the plan,
or any of the employer's other plans in which the employee is a participant,
offers loans, document that the employee has exhausted them prior
to receiving a hardship distribution. Likewise, verify that the employee
has taken any other available distributions, other than hardship distributions,
from these plans. Under some plans, a hardship distribution is not
considered necessary if the employee has other resources available,
such as spousal and minor children’s assets (excluding property held
for the employee’s child under an irrevocable trust or under the Uniform
Gifts to Minors Act).
Step 5: Check that
the amount of the hardship distribution does not exceed the amount
necessary to satisfy the employee’s financial need. However, the amount
required to satisfy the financial need may include amounts necessary
to pay any taxes or penalties that are due because of the hardship
Step 6: Make sure
that the amount of the hardship distribution does not exceed any limits
under the plan and is made only from the amounts eligible for a hardship
distribution. For example, the plan may permit a hardship distribution
of only 50 percent of an employee’s salary reduction contributions.
Step 7: Most plans
also specify that the employee is suspended from contributing to the
plan and all other plans that the employer maintains for at least
6 months after receiving a hardship distribution. Inform the employee
and enforce this provision. Failing to enforce the plan’s suspension
provision is a common plan error but may be corrected through the
Employee Plans Compliance Resolution System.
There is an exemption from the 10 percent early withdrawal
penalty for individuals ordered or called to active duty after September
11, 2001, that applies to distributions after September 11, 2001,
that are qualified reservist distributions. A "qualified reservist
distribution" is a distribution that is:
• Made from an IRA or attributable to elective deferrals
under a 401(k) plan, 403(b) annuity, or certain similar arrangements;
• Made to an individual who was ordered or called to active
military duty for a period in excess of 179 days or for an indefinite
• Made during the period beginning on the date of such
order or call to duty and ending at the close of the active duty period.
A 401(k) plan does not violate the distribution restrictions
if it makes a qualified reservist distribution.
An individual who receives a qualified reservist distribution
may, during the 2 years following the end of his or her active duty,
make one or more contributions to an IRA of the amount of such distribution.
One of the most popular features of 401(k) plans is a
provision allowing participants to borrow money from their own accounts.
Under DOL regulations, the loan must be available to all participants
and beneficiaries on a reasonably equivalent basis, must not be available
to highly paid employees in an amount greater than available to other
employees, must be specifically provided for in the plan document,
must bear a reasonable interest rate, and must be adequately secured.
The loan may be secured by the participant's account balance. A loan
secured by 50 percent of the account balance is considered adequately
secured. A loan is not treated as a distribution by IRS (resulting
in income tax consequences) if it meets at least the following specific
• The loan plus the participant's other outstanding loans
from the plan may not exceed $50,000.
• The outstanding balance of loans may not exceed the greater
of one-half of the participant's vested benefits.
• Unless the proceeds are used to purchase a principal
residence, the loan must be paid back in 5 years or less.
• The loan must be paid back in equal payments made at
least four times per year.
• The loan is evidenced by an enforceable agreement.
Note: The Sarbanes-Oxley Act of 2002 Sec.
402 makes it illegal for publicly held companies to make personal
loans to their directors and executive officers. This arguably includes
401(k) loans unless the Securities and Exchange Commission (SEC) grants
an exemption. An exemption from the SEC is not likely to come in the
near future. In view of the steep penalties that may be imposed for
violating Sarbanes-Oxley, a very conservative approach would be to
advise executive officers not to make new 401(k) loans or amend 401(k)
plans to bar loans to executive officers.
Employers may not force an employee whose accrued vested
benefit is worth more than $5,000 to take a distribution of benefits
when the employee terminates employment. The employer must allow the
employee to keep the money in the plan until retirement age. Plans
may require that terminating employees with accrued vested benefits
of less than $5,000 take a cash-out, thus reducing the administrative
cost of maintaining small accounts and keeping track of former employees.
Employer-mandated cash-outs of more than $1,000 from
a qualified retirement plan must be paid as a direct rollover to an
IRA setup by the employer for the employee unless the terminating
employee elects to have the amount rolled over to another retirement
plan or IRA or to receive the distribution directly. In circumstances
in which a portion of the distribution is attributable to a previous
rollover contribution, the rollover requirement may apply to distributions
of more than $5,000. The portion of the account attributable to the
previous rollover is not counted for the determination of whether
the present value of the accrued vested benefit is $5,000 or less.
On the other hand, the amount attributable to the previous rollover
is counted when determining if the cash-out exceeds $1,000.
Plans that provide for mandatory distributions have to
include a provision reflecting the automatic rollover requirements.
The plan administrator must notify the distributee in
writing that the distribution may be paid in a direct rollover to
an IRA. The notice may be mailed to the participant's most recent
mailing address in the records of the employer or plan administrator.
This notice may also be distributed electronically.
The automatic rollover provisions apply to governmental
plans, including deferred compensation plans under IRC Sec. 457, to
403(b) plans, and to church plans.
DOL regulations provide for a safe harbor to protect
retirement plan fiduciaries from liability when they select an institution
to provide the IRAs and select the investments for these accounts.
For the safe harbor to apply, the selected IRA provider must be qualified
to offer individual retirement plans; the investment options must
be designed to preserve principal; and the fees and expenses may not
exceed those charged by the selected provider to its other IRA customers.
Avoiding the rollover requirement. Many employers are avoiding the complications of required rollovers
by not cashing out accounts with a balance of more than $1,000.
Special nondiscrimination rules apply to 401(k) plans
in addition to all the regular requirements for tax-favored retirement
plans. These rules are designed to prevent discrimination in elective
contributions, matching contributions, and employee after-tax contributions.
These rules, the actual deferral percentage (ADP) test and the actual
contribution percentage (ACP) test, are also very complex and discourage
many employers from adopting a 401(k) plan. Under the ADP test, the
ADP for eligible highly compensated employees (HCEs) must either:
• Not be more than 125 percent of the ADP for nonhighly
compensated employees (NHCE); or
• Not more than 2 percentage points greater than that of
the NHCE and not be more than 200 percent of that of the NHCE.
The ACP applies similar formulas to the sum of employee
contributions and employer-matching contributions. If a plan is going
to fail the ACP or ADP tests, corrections must be made that often
involve reducing the deferrals of HCEs.
IRS's final 401(k) regulations include a provision designed
to prevent plans from circumventing the nondiscrimination rules. Under
this antiabuse provision, a plan will not be treated as satisfying
the nondiscrimination requirements if there are repeated changes to
plan testing procedures or plan provisions that have the effect of
distorting the ADP so as to increase significantly the permitted ADP
for HCEs. In addition, plans are barred from otherwise manipulating
the nondiscrimination rules, if a principal purpose of the changes
was to increase or distort the ADP for HCEs.
ADP/ACP safe harbors. 401(k) plans will generally be eligible for a safe harbor that may
automatically satisfy the nondiscrimination requirements if they are
designed to meet either of the following criteria:
• Provide guaranteed, 100 percent vested contributions
of at least 3 percent of compensation for each non-HCE who is eligible
to participate; or
• Provide a 100 percent vested matching contribution on
all of each non-HCE's elective contributions up to 3 percent of compensation
and on 50 percent of the elective contribution that is between 3 percent
and 5 percent of compensation.
401(k) plans, however, are required to specify the method
they will use to satisfy the nondiscrimination requirements in their
plan documents. Thus, a safe-harbor plan may not specify that ADP
testing will be used if the safe-harbor requirements are not satisfied.
In addition, 401(k) safe-harbor plans must provide each
eligible employee with a written notice of the employee’s rights and
obligations under the plan. This notice may be provided electronically.
The notice must be sufficiently accurate and comprehensive to inform
employees of the their rights and obligations under the plan, be written
in a manner calculated to be understood by the average employee eligible
to participate in the plan, and contain the following information:
• The safe-harbor matching contribution or safe-harbor
nonelective contribution formula used under the plan (including a
description of the levels of safe-harbor matching contributions, if
any, available under the plan)
• Any other contributions under the plan or matching contributions
to another plan on account of elective contributions or employee contributions
under the plan (including the potential for discretionary matching
contributions) and the conditions under which such contributions are
• The plan to which safe-harbor contributions will be made
(if different than the plan containing the cash or deferred arrangement)
• The type and amount of compensation that may be deferred
under the plan
• How to make cash or deferred elections, including any
administrative requirements that apply to such elections
• The periods available under the plan for making cash
or deferred elections
• Withdrawal and vesting provisions applicable to contributions
under the plan
• Information that makes it easy to obtain additional information
about the plan (including an additional copy of the summary plan description)
such as telephone numbers, addresses, and, if applicable, electronic
addresses of individuals or offices from whom employees can obtain
such plan information
A plan may satisfy the requirements to provide information
about other contributions or matching contributions to another plan,
the plan to which safe-harbor contributions will be made, or the type
and amount of compensation that may be deferred under the plan by
providing cross-references to the relevant portions of a summary plan
description that provides the same information and has been provided
(or is concurrently provided) to employees.
The notice must be provided within a reasonable period
before the beginning of the plan year (or within a reasonable period
before an employee becomes eligible). This requirement is deemed satisfied
if the notice is provided at least 30 days and no more than 90 days
before the beginning of each plan year. For newly eligible employees,
who become eligible after the 90th day before the beginning of the
plan year, the notice must be provided no more than 90 days before
the employee becomes eligible and no later than the date the employee
A 401(k) safe-harbor plan must generally be adopted before
the beginning of the plan year and be maintained throughout a full
12-month plan year. IRS's 401(k) regulations also make it easy for
employers to implement safe-harbor plans by allowing plan sponsors
to wait until 30 days before the end of the plan year to adopt a 3
percent automatic contribution feature. The plan must specify that
it will use NHCEs' current year ADPs in the event that the sponsor
decides not to utilize the safe harbor. A contingent notice must be
given 30 to 90 days before the beginning of the plan year indicating
that safe-harbor nonelective contributions may be made. A follow-up
notice must be provided at least 30 days before the end of the plan
year stating that safe-harbor contributions will be made. Plans are
not required to continue using that feature in the following year
and are not limited on the number of times that they may switch back
Although safe-harbor 401(k) plans provide generous benefits,
they are also attractive because they greatly simplify plan administration
and eliminate the possible need for HCEs to take back a portion of
their elective deferrals to satisfy nondiscrimination requirements.
Note: One of the
drawbacks to adopting a safe-harbor plan has been the rapid vesting
of the mandatory employer contributions. With the gap between safe-harbor
vesting and non-safe-harbor vesting narrowed by the minimum vesting
requirements for matching contributions to 401(k) plans, the cost
increase of adopting a safe-harbor plan is diminished, especially
for employers that already provide a “3 percent of” compensation match.
In addition, while lower-paid employees are not likely to take advantage
of the increased contribution limits because they generally make contributions
that are well below the current limits, higher-paid employees are
going to want to take advantage of the increased limits. This will
make it more difficult for plans to pass the ADP and ACP tests. Utilizing
a safe harbor may not be too much of an expense, especially when it
keeps key employees happy, because they can maximize their 401(k)
contributions and reduce the time and expense of performing the antidiscrimination
tests and correcting any excess contributions.
Suspending nonelective contributions
to safe-harbor plans due to business hardship. The IRS
final regulations allow employers to reduce or suspend safe-harbor
contributions (nonelective or matching) in the event of financial
hardship. Safe-harbor matching contributions may be reduced or suspended
under a mid-year amendment only if the employer is operating at an
economic loss, or if the notice provided to participants before the
beginning of the plan year discloses that the contributions might
be reduced or suspended mid-year, that participants will receive a
supplemental notice if that occurs, and that the reduction or suspension
will not apply until at least 30 days after the supplemental notice
is provided. Additionally:
• All eligible employees must be provided a supplemental
notice of the reduction or suspension when it occurs;
• The reduction or suspension of safe-harbor nonelective
contributions can be effective no earlier than the later of 30 days
after eligible employees are provided the supplemental notice or the
date the amendment is adopted;
• Eligible employees must be given a reasonable opportunity
(including a reasonable period after receipt of the supplemental notice)
before the reduction or suspension of the safe-harbor nonelective
contributions to change their contribution elections; and
• The plan must be amended to provide that the ADP test
(and/or ACP test) will be satisfied for the entire plan year in which
the reduction or suspension occurs, using the current year testing
The supplemental notice requirement is satisfied if each
eligible employee is given a notice that explains:
• The consequences of the amendment reducing or suspending
• The procedures for changing deferred or post-tax contribution
• The effective date of the plan amendment.
The Sarbanes-Oxley Act requires prior notices of 401(k)
blackout periods and bars directors and executives from trading employer
stock during blackout periods.
Blackout period definition. A "blackout period" is any period of more than 3 consecutive business
days during which the ability of participants or beneficiaries under
an individual account plan to direct or diversify assets credited
to their accounts, to obtain loans from the plan, or to obtain distributions
from the plan is temporarily suspended, limited, or restricted. A
blackout period does not include a suspension, limitation, or restriction
• Occurs because of the application of the securities laws
• Is regularly scheduled under the plan and that has been
disclosed to affected plan participants and beneficiaries through
an official plan document
• Occurs because of a qualified domestic relations order
or because of a pending determination whether a domestic relations
order filed (or reasonably anticipated to be filed) with the plan
is a qualified order
• Occurs by reason of an act or a failure to act on the
part of an individual participant or by reason of an action or claim
by a party unrelated to the plan involving the account of an individual
Blackout notice requirements. At least 30 days before a blackout period, the plan administrator
is required to provide a notice to affected plan participants and
beneficiaries written in simple language. A similar notice must be
provided at the same time to issuers of employer securities. DOL regulations
include a model notice that may be used.
Blackout notice contents. The notice must contain the following information:
• The reasons for the blackout period
• An identification of the rights otherwise available under
the plan that will be temporarily suspended, limited, or restricted
• The length of the blackout period by reference to the
expected beginning and ending dates or the expected beginning or ending
calendar weeks, provided that during such weeks, information about
whether the blackout period has begun or ended is readily available
without charge, such as via a toll-free number or access to a specific
website, to affected participants and beneficiaries
• A description of how to access the blackout period information
• A statement that the participant or beneficiary should
evaluate the appropriateness of their current investment decisions
in light of their inability to direct or diversify assets credited
to their accounts during the blackout period
• The name, address, and telephone number of the plan administrator
or other contact responsible for answering questions about the blackout
Blackout notice timing. The notice must be furnished to all affected participants and beneficiaries
at least 30 days, but not more than 60 days, in advance of the last
date on which such participants and beneficiaries could exercise the
affected rights before the blackout period. The 30 days' advance requirement
does not apply if:
• Postponing the blackout period would result in a violation
of ERISA's exclusive benefit and prudence requirements, and a fiduciary
of the plan reasonably so determines in writing.
• The inability to provide the advance notice of a blackout
is the result of events that were unforeseeable or circumstances beyond
the reasonable control of the plan administrator, and a fiduciary
of the plan reasonably so determines in writing.
• The blackout period applies solely in connection with
certain participants or beneficiaries becoming, or ceasing to be,
participants or beneficiaries of the plan as a result of a business
In these cases, the notice must be provided as soon as
If the notice is not furnished within the prescribed
time limits (unless the blackout period applies solely in connection
with certain participants or beneficiaries becoming, or ceasing to
be, participants or beneficiaries of the plan as a result of a business
reorganization), it must include a statement that federal law generally
requires that the notice be furnished to affected participants and
beneficiaries at least 30 days in advance of the last date on which
they could exercise the affected rights immediately before the commencement
of a blackout period and an explanation of the reasons why at least
30 days' advance notice could not be furnished.
The notice may be provided electronically if recipients
would have reasonable access to an electronic notice.
If the blackout period dates are changed, a revised notice
must be provided as soon as reasonably practicable explaining what
has changed and the reasons for those changes.
Blackout notice violations. If a plan administrator refuses or fails to provide the blackout
notice in a timely manner, DOL may assess a civil penalty of up to
$100 per day for each participant or beneficiary who did not receive
Notice to issuer of employer
securities. A similar notice must be provided within the
same time frames to the issuer of employer securities held by the
plan and subject to the blackout period.
Insider trading restrictions. The Sarbanes-Oxley Act prohibits directors or executive officers
(insiders) from engaging in transactions involving employer securities
outside of the plan during a blackout period. The insider trading
prohibition applies to any employer securities acquired in connection
with the insider's services or employment.