401K Blackout Period

[Guest NancySue]

Due to a merger, company stock in the 401K plan is scheduled to be exchanged for cash about Sept 1st, with a blackout date of August 30. Notice of those dates is dated August 6th, not postmarked until August 20th and not received until August 23rd. This does not give a participant (and former employee) very much time to complete their planning about withdrawing company stock from the plan, selling it and taking advantage of paying only 15% capital gains tax on the NUA, regular tax on the basis, and a 10% penalty for being under 59 1/2.

My understanding is that Federal law generally requires that a participant in a 401K plan be given at least 30 days notice of any pending blackout period.

Does a participant have any recourse when they receive much so less than 30 days notice?

[Guest rmeigs]

There are some exceptions to the 30 day notice.

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.

Here are the penalties for failure to give proper 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 x 5 x $100 or $100,000.

This information was provided by McKay Hochman Co.

[E as in ERISA]

"Blackout" only includes temporary suspensions. A permanent elimination of a fund -- such as the employer stock fund is not a blackout subject to the 30-day notice rules. (Generally fiduciary principles still apply. But the DOL wouldn't get you for the Sarbanes Oxley penalty). However, you do have to consider the replacement fund -- any delays in getting into a new fund? That might be a temporary suspension that is a blackout. See the preamble to the Sarbanex Oxley regulations for the example.