Source: https://www.federalregister.gov/articles/2003/01/24/03-1430/final-rule-relating-to-notice-of-blackout-periods-to-participants-and-beneficiaries
Timestamp: 2016-07-26 02:35:13
Document Index: 306531980

Matched Legal Cases: ['§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2510', '§ 2520', '§ 2520', '§ 2520', '§ 2520', '§ 2520']

Federal Register | Final Rule Relating to Notice of Blackout Periods to Participants and Beneficiaries
A Rule by the Pension and Welfare Benefits Administration on
68 FR 3716
-3729 (14 pages)
Document Number: 03-1430
Shorter URL: https://federalregister.gov/a/03-1430 Related Topics
Blackout Notice Regulation 3 actions from October 21st, 2002 to January 26th, 2003
67 FR 64765
2. Content of the Notice § 2520.101-3(b)(1)
3. Timing of the Notice § 2520.101-3(b)(2)
4. Form and Manner of Furnishing Notice § 2520.101-3(b)(3)
5. Changes in Length of Blackout Period § 2520.101(b)(4)
6. Notice to Issuer of Employer Securities § 2520.101-3(c)
7. Definitions § 2520.101-3(d)
8. Model Notice § 2520.101-3(e)
9. Effective Date § 2520.101-3(f)
B. Overview of Final Rule and Comments Back to Top
Paragraph (a) of § 2520.101-3 of the final rule, like the interim final rule, describes the general requirement of section 101(i) of ERISA that administrators of certain individual account plans provide notice of blackout periods to participants and beneficiaries whose rights under the plan will be temporarily suspended, limited or restricted by a blackout period (the “affected participants and beneficiaries”), as well as to issuers of employer securities held by the plan.
Paragraph (b)(1) of § 2520.101-3 of the final rule, like the interim final rule, sets forth the content requirements for notices to be furnished to affected participants and beneficiaries. Paragraph (b)(1) provides that the notices shall be written in a manner calculated to be understood by the average plan participant and sets forth the specific content requirements applicable to the notices. The content requirements of the regulation essentially track the requirements of section 101(i)(2)(A) of the Act. Paragraph (b)(1)(ii), like the interim final rule, provides that the notice must include a description of the rights otherwise available under the plan to affected participants and beneficiaries that will be temporarily suspended during the blackout period, in addition to the identification of the investments subject to the blackout period.
The Department continues to believe that it is important that participants and beneficiaries have sufficiently specific information to factor the duration of the blackout into their pre-blackout period investment and other decisions and to apprise participants and beneficiaries as to when they will be able to recommence exercising their rights under the plan. However, the Department also recognizes the difficulty of projecting specific beginning and ending dates thirty or more days in advance of a blackout period and that there may be significant costs to providing updated notices, most or all of which will be charged to the individual accounts of the plans' participants.
Second, the Department had determined that the notice should contain the name, address and telephone number of a person who can answer questions concerning the blackout period. Specifically, paragraph (b)(1)(vi) provided that the notice must contain the name, address and telephone number of the plan administrator or other person responsible for answering questions regarding the blackout period. The Department received one comment on this provision requesting a clarification that the contact person is not required to be an individual and could be the department employing the individual who would be answering questions (such as the benefits department). The regulation is not intended to require the identification of a specific person. Rather, the regulation is intended to require the identification of a sufficiently specific source for answering questions concerning the blackout period that participants and beneficiaries will not be confused as to whom their questions should be addressed. The Department has modified paragraph (b)(1)(vi) of the final rule and paragraph 6 of the model notice (at paragraph (e)(2) of the final rule) by substituting “contact” for “person” to clarify this matter.
Like the interim final rule, the final rule, at paragraph (b)(2)(ii)(A) and (B), sets forth two circumstances under which the 30-day advance notice requirement does not apply. The first circumstance is where a deferral of the blackout period would result in a violation of the exclusive purpose and prudence requirements of section 404(a)(1)(A) and (B) of the Act. For example, the ABC Company has announced that it is filing Chapter 11 bankruptcy. The ABC company's 401(k) plan has ABC common stock as one of its investment options. F, the 401(k) plan fiduciary and administrator, determines that, given this event, it would be prudent to temporarily suspend investments in the ABC company stock, effective immediately. In such a situation, F would not, pursuant to § 2520.101-3(b)(2)(ii)(A), be required to give 30 days notice to the affected participants and beneficiaries, but would be required to notify them in writing as soon as possible of the blackout period.
The second circumstance under which the 30-day advance notice requirement does not apply is where commencement of the blackout period is due to events that were unforeseeable or circumstances that were beyond the control of the plan administrator. For example, the DEF company's profit-sharing plan's recordkeeper has informed plan administrator G that due to a major computer failure, the computer program for recording and processing loans and distributions from the plan has been incapacitated and that it will take approximately ten days to fix the system. In such a situation, G would not, pursuant to § 2520.101-3(b)(2)(ii)(B), be required to give 30 days' notice to the affected participants and beneficiaries of their temporary inability to receive loans and distributions from the plan, but would be required to notify them as soon as reasonably possible, unless G determines that such notice in advance of the termination of the blackout is impracticable. The Department anticipates that plan administrators will rely on this exception only in rare circumstances. In this regard, the Department notes that problems attendant to changes in recordkeepers will rarely be unforeseeable or beyond the control of the plan.
Two commenters suggested that the timing rules should not apply with respect to new participants inasmuch as furnishing such notice as part of the plan enrollment package might be a problem because different third-party vendors may prepare the materials and, in addition, new participants are likely to have little, if any, funds that would be affected by the blackout period. The Department is not persuaded that administrative burdens and small account balances justify an exception to the timing rules for new plan participants. Accordingly, no exception from the timing requirements has been adopted for new participants. The Department notes, however, that if an employee becomes a participant after blackout notices have been furnished to the plan's participants and beneficiaries, the administrator would be required to furnish a notice to the newly eligible employee as soon as reasonably possible pursuant to the exception in § 2520.101-3(b)(2)(ii)(B).
Like the interim final rule, paragraph (b)(3) of the final rule provides that the blackout notice must be in writing and may be furnished in any manner permitted under 29 CFR 2520.104b-1, including through electronic media. One commenter indicated that the “reasonably accessible” standard of the SOA is intended to be broader than the standards under § 2520.104b-1 and the regulation, therefore should be modified accordingly. The Department disagrees with the commenter's interpretation of the statute. It is the view of the Department that the standards set forth in § 2520.104b-1(c), relating to the use of electronic media, are intended to ensure reasonable access to electronic communications by participants and beneficiaries consistent with the statute. Accordingly, the provision of the interim final regulation is being retained without modification.
In the preamble to the interim final rule, the Department indicated that a blackout notice will be considered furnished as of the date of mailing, if mailed by first class mail, or as of the date of electronic transmission, if transmitted electronically. Two commenters indicated that the circumstances under which a notice is considered to be furnished should be expanded to include delivery by overnight mail, third class mail, private delivery services, and interoffice mail. It is the view of the Department that interoffice mail is essentially hand delivery and, therefore, a document would not be considered furnished until received by the participant. On the other hand, the Department agrees that with the commenters that there are other methods of delivery that should be accorded the same deference as electronic transmission and first class mail. In this regard, it is the view of the Department that a blackout notice will be considered furnished on the date of mailing if it is accomplished by first class mail, certified mail or Express Mail; or on the date of delivery to a “designated private delivery service” within the meaning of 26 U.S.C. 7502(f). In the case of notices furnished electronically, notices will be considered furnished on the date of transmission.
One commenter requested clarification of whether furnishing notice to the last known address of a participant or beneficiary is sufficient. Furnishing a notice to the last known address of a participant or beneficiary would be sufficient where the plan utilizes a method of delivery described in § 2520.104b-1 and the fiduciaries of the plan have taken reasonable steps to keep plan records up-to-date and to locate lost or missing participants.
Paragraph (c) of § 2520.101-3 of the final rule, like the interim final rule, describes the plan administrator's obligation to provide notice of a blackout period to the issuer of employer securities held by the plan and subject to the blackout period. Paragraph (c)(1) generally provides that the content and timing requirements applicable to the furnishing of notices to participants and beneficiaries also apply to the furnishing of notices to the issuer of employer securities. As with the interim final rule, it is the view of the Department that a plan administrator may satisfy its obligation to notify the issuer by providing the same notice furnished to participants and beneficiaries. Paragraph (c)(2) provides that the notice of the blackout period shall be furnished to the agent for service of legal process for the issuer, unless the issuer has provided the plan administrator the name of another person for service of such notice. Paragraph (c)(2) is intended to ensure that there is no ambiguity as to whom the administrator must serve notice of the blackout period. Pursuant to section 306(a)(6) of the SOA, issuers are required to notify directors, executive officers, and the Securities and Exchange Commission of the blackout period.
Three commenters suggested that notice to the issuer should not be required when the plan administrator and issuer are the same person. The Department does not believe that merely because an issuer and the plan administrator may, as a technical matter, be the same legal entity, that the parties will necessarily be privy to the same information. Nonetheless, there is nothing in the regulation that precludes an issuer of employer securities from designating the plan administrator as the party to receive notices of blackout periods. The Department has amended the regulation, at § 2520.101-3(c), to add a new subparagraph (3) making clear that where an issuer designates the administrator as the person to be furnished notice of a blackout period, the issuer shall be deemed to have been furnished notice on the same date as notice is furnished to affected participants and beneficiaries, thereby relieving the administrator of the obligation to notify itself of a blackout period.
Paragraph (d)(1) of § 2520.101-3 defines the term “blackout period.” The interim final rule adopted the definition set forth in ERISA section 101(i)(7). The Department received a number of comments on the interim final regulation requesting clarification of specific exclusions from the “blackout period” definition, as well as clarification that certain suspensions, limitations or restrictions imposed on an individual participant's account do not constitute a blackout period as contemplated by the statute or regulation.
“Regularly Scheduled” Exclusion Back to Top
First, the Department does not believe that Congress, in enacting ERISA section 101(i)(7), intended to include preexisting regularly scheduled suspensions, limitations, or restrictions in the definition of the blackout period to the extent such suspensions, limitations, or restrictions are disclosed to participants and beneficiaries. In this regard, the Department notes that section 101(i)(7)(A) of ERISA and paragraph (d)(1)(i) of the regulation, in defining “blackout period,” references “any period for which any ability of participants or beneficiaries under the plan, which is otherwise available under the terms of such plan, to direct or diversify assets * * *.” (Emphasis supplied). The Department reads the clause “which is otherwise available under the terms of such plan” as referring to preexisting regularly scheduled suspensions, limitations or restrictions. The Department also notes that the “blackout period” definition contained in SOA section 306(a)(4), to be administered by the Securities and Exchange Commission, generally provides that a blackout period does not include “a regularly scheduled period,” if such period is incorporated into the plan and timely disclosed to employees. Nonetheless, in an effort to clarify this issue and more closely align the exclusion in ERISA section 101(i)(7)(B)(ii) with SOA section 306(a), the Department has amended paragraph (d)(1)(ii)(B) of the regulation.
QDRO Exclusion Back to Top
A number of commenters also expressed concern that the language of paragraph (d)(1)(ii)(C), relating to suspensions, limitations, or restrictions as a result of a qualified domestic relations order (QDRO), did not take into account the obligations of a plan administrator to impose certain restrictions on the account of a participant during the pendency of a determination as to whether a domestic relations order is qualified. Given the specific obligations imposed on plan administrators pursuant to ERISA section 206(d)(3)(H), the Department does not believe that Congress, in drafting section ERISA 101(i)(7)(B)(iii), intended to limit the subject exclusion only to those restrictions arising after a determination that a domestic relations order is qualified. Accordingly, the Department has amended paragraph (d)(1)(ii)(C) to clarify the application of the exclusion to restrictions imposed during the pendency of a QDRO determination. As amended, paragraph (d)(1)(ii)(C) excludes a suspension, limitation or restriction “which occurs by reason of a qualified domestic relations order or by reason of a pending determination (by the plan administrator, by a court of competent jurisdiction or otherwise) whether a domestic relations order filed (or reasonably anticipated to be filed) with the plan is a qualified order within the meaning of section 206(d)(3)(B)(i) of ERISA.”
Individual Participant Actions Back to Top
Commenters generally requested clarification that the term “blackout period” is not intended to include account restrictions triggered by individual participant actions. Examples of such actions include: Receipt of a tax levy, a dispute over a deceased participant's account among putative beneficiaries, failure of a participant to obtain a PIN number, or allegations that the participant committed a fiduciary breach or crime involving the plan. It is the view of the Department that Congress did not intend to encompass within the meaning of “blackout period” restrictions on investment direction, plan loans and plan distributions imposed solely in response to an action involving an individual participant and affecting only the account of that participant, such as those actions identified in the preceding sentence. Rather, the blackout notice requirements are intended to ensure that plan participants and beneficiaries are afforded advance notice of plan-imposed restrictions on their rights in order that they may take appropriate steps in anticipation of the restriction. In the case of actions involving individual participants, the Department agrees with commenters that the affected participant or beneficiary typically will already have notice of any restriction and reasons for such restriction. In response to these comments, the Department has amended the definition of blackout period at paragraph (d)(2) of the regulation to clarify that suspensions, limitations and restrictions precipitated by a participant's action or the action of a third-party with respect to an individual participant's account are excluded from the definition of “blackout period.” Specifically, new paragraph (d)(2)(D) excludes from definition of blackout periods, a suspension, limitation and restriction that “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 participant.
Permanent Restrictions Back to Top
Commenters, noting that the definition of “blackout period” refers to rights that are “temporarily suspended, limited or restricted,” requested clarification that permanent elimination of certain rights would not constitute a “blackout period.” Examples cited by the commenters included: Permanent restriction on new contributions to an investment option, replacement of one investment option with another of a similar type, and termination of the plan. The Department agrees that the blackout notice requirements were not intended to apply to rights that are eliminated, as opposed to temporarily suspended, limited or restricted. Accordingly, a permanent restriction on new contributions to an investment option, replacement of one investment option with another, a plan termination and similar types of permanent restrictions would not in and of themselves be events that give rise to a blackout notice obligation under the regulation. However, if, in connection with implementing a permanent restriction, some rights would be temporarily suspended, limited or restricted, the blackout notice requirements would apply to such temporary restriction. For example, in replacing investment option A with investment option B, the plan permanently restricts new contributions to option A and during the transfer of funds from option A to option B temporarily suspends participant direction of the funds transferred to option B for 5 days during which transfers and accounts will be reconciled. In this situation, the restriction on new contributions to option A would not constitute a blackout period, but the 5 day temporary restriction on the direction of funds in option B would constitute a blackout period with respect to which notice must be provided under the regulation. On the other hand, if there was no restriction on the direction of funds in option B or if the restriction was for 3 or fewer consecutive business days, there would be no blackout period with regard to such funds under the regulation.
As with the interim final rule, the final rule adopts the statutory definition of “one-participant retirement plan” set forth in section 101(i)(8)(B) of ERISA, as amended by section 306(b)(1) of the SOA. One commenter suggested the definition of “one-participant retirement plan” be amended to apply the definition in 29 CFR § 2510.3-3(c)(1) and (2) for purposes of the blackout notice requirements. The Department has not adopted this suggestion and retained the statutory definition “one-participant retirement plan” without change.
Like the interim final rule, paragraph (d)(4) of the final rule defines the term “issuer” for purposes of the blackout notice provisions. Consistent with the provisions of section 2(a)(7) of the SOA, issuer means an issuer as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c),
the securities of which are registered under section 12 of the Securities Exchange Act of 1934, or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934, or files or has filed a registration statement that has not yet become effective under the Securities Act of 1933 (15 U.S.C. 77a et seq.), and that it has not withdrawn.
Paragraph (e) of § 2520.101-3 provides a model notice to facilitate compliance with the blackout notice requirements by plan administrators. Use of the model is not mandatory. However, like the interim final rule, the final rule provides that use of the advisory statement set forth at paragraph 4 of the model notice will be deemed to satisfy the notice content requirements of paragraph (b)(1)(iv) of the rule pertaining to advising participants and beneficiaries about the importance of reviewing their plan investments in anticipation of their inability to direct or diversify their investments during the blackout period. The final rule, like the interim final rule, also provides that use of the general statement set forth in paragraph 5 of the model notice will be deemed to satisfy the requirement of paragraph (b)(1)(v)(A) that the notice contain a general statement that Federal law requires furnishing of blackout notices in advance of the blackout period.
As discussed earlier, the model notice has been revised to accommodate changes in the final rule. Paragraph 3 of the model (relating to length of the blackout period) has been changed to reflect alternative approaches to describing the length of the blackout period and paragraph 4 (encouraging participants and beneficiaries to review their investments in anticipation of the blackout period) has been modified to make clear that the last two sentences of the paragraph (relating to investments in individual securities) apply only to plans that offer investments in individual securities. Paragraph 6 of the model also was modified to make clear that individual persons are not required to be named as contacts for information about blackout periods. One commenter suggested that paragraph 4 of the model not be required when notice is furnished as soon as reasonably possible under the circumstances, but after the date on which affected participants and beneficiaries can take action in anticipation of the blackout period. The Department agrees that including paragraph 4 of the model in a notice furnished after the date on which participants and beneficiaries can effectuate changes in anticipation of the blackout period will be of no value to participants and beneficiaries and, accordingly, may be deleted.
Paragraph (f) of § 2520.101-3 sets forth the effective date of the final rule. Like the interim final rule, paragraph (f) provides that the rule is effective on January 26, 2003, the effective date of the SOA section 306 amendments to ERISA. Paragraph (f) provides that the notice requirements shall apply to blackout periods commencing on or after January 26, 2003, and that, for blackout periods beginning between January 26, 2003 and February 25, 2003, plan administrators shall furnish notice as soon as reasonably possible. This provision is intended to ensure that a statutorily required notice be provided with respect to blackout periods which commence before February 26, 2003. In no event, however, is a blackout notice required to be furnished under the regulation prior to the January 26 effective date. Pursuant to section 553(c) of the Administrative Procedure Act, the Department finds good cause for this rule to be effective less than 30 days after publication. The Department believes that having the rule effective on the effective date of the underlying statutory provisions will avoid confusion for plan administrators. Moreover, the limited extent of the differences between the instant rule and the interim rules will minimize any difficulties in complying with the rule by the effective date.
Administrators of about 85,150 affected plans are estimated to incur costs of approximately $13.9 million each year to prepare and distribute blackout notices to 12 million covered participants. This total consists of about $8 million per year for 295,000 small plans (an average of about $110 per plan), and $5.8 million per year for 45,000 large plans (an average of about $510 per plan). These costs are primarily attributable to the effect of the statutory provisions, and would in fact be estimated to be greater in the absence of a model notice due to higher notice drafting time. Because plans commonly provide advance notice of blackout periods voluntarily, much of this cost is inherent in normal business practice, and the incremental cost attributable to the advance notice requirement will be less than total estimated here. Because the costs of the statute arise from notice provisions, the data and methodology used in developing these estimates are fully described in the Paperwork Reduction Act section of this statement of regulatory impact.
As noted, the Department received comments concerning the difficulty of including specific beginning and ending dates in the notice pursuant to paragraphs (b)(1)(iii), and the applicability of the notice requirement of paragraph (c) when an issuer designates the plan administrator as the party to receive notices of blackout periods affecting securities of the issuer. The Department has addressed these and other issues raised by commenters with modifications previously described in this preamble. In addition, one commenter expressed the view that the Department's estimates were understated to the extent that they incorporated the use of electronic media for distribution of the notices. The commenter further stated that the use of electronic technology for communicating with participants and beneficiaries is generally not viable due to the absence of computer capability in certain industries. While the Department did not describe its methodology for incorporating electronic disclosure assumptions in detail in the interim final rule, the methodology does take a variety of factors into account, including the distribution of plan sponsors and participants across industries, data related to access to computers in different industries, survey data on the use of electronic communication methods by plan sponsors and administrators, and comments received in response to the Department's Notice of Proposed Rulemaking on Use of Electronic Communication and Recordkeeping Technologies by Employee Pension and Welfare Benefit Plans (64 FR 4506, January 28, 1999; finalized April 9, 2002, 67 FR 17264).
Specifically, in order to develop estimates of distribution expenses saved through the use of electronic communication technologies, the Department utilized a Census Bureau household survey published in 2001 on computer use
and a separate 1999 Census Bureau household survey
on pension and health benefit plan participation. Analysis of this information indicates that approximately 21 percent of participants have appropriate access to electronic media at their workplaces, and another 38 percent have such access at home. The pension and health coverage rates were then applied to the computer use rates industry-by-industry to account for the likelihood that computer use is greater among plan participants and especially among large plan participants, because such participants are concentrated in certain industries (e.g., the financial services industry).
The estimated burden for distribution of blackout notices takes several factors into account, including an assumed number of participants affected annually, the number of the notices that will be distributed electronically, and on paper, and the differential costs of electronic and paper distribution methods. The estimates of the rate of use of electronic distribution methods are consistent with those used in determining the savings associated with the Department's Final Rules Relating to Use of Electronic Communication and Recordkeeping Technologies by Employee Pension and Welfare Benefit Plans (67 FR 17264, April 9, 2002). Those participants not calculated to receive notice electronically are assumed to receive the notice on paper. Paper distribution is estimated to require one minute per notice for copying and mailing, plus $0.40 for paper and postage. No time or direct cost is attributed to electronic distribution methods other than the time required to prepare the notice, because it is assumed that notices are drafted in electronic form, plan administrators use existing infrastructure to communicate electronically, and the cost of electronic transmission is negligible. Paper notice distribution is estimated to require 123,500 hours, and cost about $3 million annually.
Total Annual Cost (Operating and Maintenance):$ 9,351,400.
29 U.S.C. 1021-1025, 1027, 1029-31, 1059, 1134 and 1135; Secretary of Labor's Order No. 1-87.
2.Revise § 2520.101-3 to read as follows: § 2520.101-3 Notice of blackout periods under individual account plans.
(3) Form and manner of furnishing notice. The notice required by paragraph (a) of this section shall be in writing and furnished to affected participants and beneficiaries in any manner consistent with the requirements of § 2520.104b-1 of this chapter, including paragraph (c) of that section relating to the use of electronic media.