Forms 5500, Annual Returns/Reports of Employee Benefit Plan and Forms 5500-SF have a two-part question about plan compliance with the blackout notice rules. The first part asks if an individual account plan had a blackout period. If the answer is yes, the follow-up question asks whether a blackout notice was provided or if one of the exceptions applied.
The IRS is monitoring compliance with blackout period and notice rules. Here is a review.
Definition of Blackout Period
A blackout period is defined as a period of more than three business days during which a participant is “temporarily suspended, limited, or restricted” from any one of the following activities:
- Directing or diversifying assets credited to his or her account,
- Obtaining a distribution, or
- Obtaining a loan.
Not every instance of suspended or r
- Restrictions or third-party actions, such as a tax levy or beneficiary dispute of a deceased participant’s account
- “Regularly scheduled” restrictions, such as a regularly scheduled freeze on an investment, if the restriction has been disclosed beforehand in a summary plan description, summary of material modifications, enrollment form, or investment material
- Permanent restrictions, such as eliminating loan provisions from a plan or eliminating participant direction of investments
- Restrictions on investment education services
Blackout Notice General Rules
The notice must be written so the average plan participant can understand it. It must be provided to participants between 30 and 60 calendar days before the last date on which one of the three previously mentioned activities may be exercised. For example, if the last day participants can direct their assets is June 20, the blackout notice must be provided between April 21 and May 21.
The notice must include the length of the blackout period and provide the beginning and ending dates. The notice may indicate the calendar weeks in which the blackout period begins and ends as long as the notice includes a toll-free phone number and/or free website so participants can obtain the exact starting and ending dates. The notice must also include contact information, which may be the name, address, and phone number of an individual, or a department name (such as human resources).
The notice must specify only the rights being suspended. For example, if only plan loans are being suspended, then the notice should only address loans.
Here are some additional poi
- If the blackout dates change after the notice is sent, a second notice must be provided to reflect the change.
- Different restrictions may be included in the same notice. For example, the same notice may be used to announce a 25-day blackout for withdrawals and a 20-day blackout for investment changes.
- Single participant plans are exempt from the blackout notice rules.
- Directors and executive officers are prohibited from trading in employer stock during a blackout period imposed on participants in individual account plans. It is important to note that the restriction applies to stock owned outside of the plan subject to the blackout.
Blackout Notice Exceptions
In the following cases, notices must be given “as soon as reasonably possible.” The 30-day time period may be shortened if:
- Postponing the blackout period would violate ERISA’s exclusive purpose rule or prudence rule,
- The blackout period begins due to events that were unforeseeable or circumstances that were beyond the control of the plan administrator, or
- The blackout period occurs solely in connection with a merger, acquisition, divestiture, or similar transaction involving the plan sponsor
If providing a notice is completely impossible, then none is required.
Blackout Notice Penalties
A daily penalty of $100 will be imposed for each participant/beneficiary who does not receive a blackout notice. The penalty is imposed on a per-day-late, per-violation basis. For example, if a plan has 200 participants and the blackout notice is five days late, the penalty would be 200 × 5 × $100, or $100,000. The plan administrator is liable for the penalty; it may not be shifted to the plan.