Who Must Receive Retirement Plan Blackout Notices?

DWC | 10/3/17

Facts

We have selected a new recordkeeper for our 401(k) plan. We are told that there will be a period of eight business days when our participants are not able to log in and manage their accounts. We know that we have to provide notice at least 30 days ahead of time to everyone who is affected.

Question

How do we determine who is affected by the blackout? Do we have to give the notice to everyone who is eligible for the plan or just those who have account balances?

Answer

The regulations identify several specific rights that have to be limited or suspended in order for there to be a blackout. Those rights are the ability of the participant to direct the investment of his or her account in the plan, request a loan, and request a distribution. In order for there to be a blackout period, those rights must be limited or suspended for more than three business days. The blackout notice must be provided to affected participants 30 to 60 days before the start of the blackout period.

That leads us to the question of what it means for a participant to be affected. This is where things can get a little murky. The retirement plan rules indicate that anyone who is eligible for a plan is considered a plan participant even if he or she does not have a balance in the plan. The blackout period regulations indicate that a participant (or beneficiary or alternate payee from a QDRO) is affected if his or her “rights under the plan are temporarily suspended, limited, or restricted by the blackout period.”

If a participant does not have an account balance, there are no investments to direct and no source from which to take a loan or a distribution. As a result, common sense says that such a participant isn’t affected by the blackout and, therefore, should not need to be provided the notice. It is important to note that it is completely possible that an employee could start contributing after the initial notices go out. Since he or she would then have a balance and be affected by the blackout, it would be necessary to provide the blackout notice as soon as possible even though it might be less than 30 days before the start of the blackout period.

There is an alternative interpretation that suggests that anyone who has the right under the terms of the plan to direct their investments or request a loan or a distribution must receive the blackout notice. The argument is that if the terms of the plan confer those rights, then the blackout period limits those rights by definition, regardless of whether there is any actual account balance.

We believe the stronger argument is that only those with account balances are required to receive the notice. But for those who approach things a little more conservatively, there is also nothing wrong with providing the notice to those who do not have account balances. Since it is not overly burdensome to do so in most cases, it would certainly insure that all bases are covered. And, it lines up with the mantra of an acquaintance of ours who is an ERISA litigator: “Well informed participants don’t sue.”

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Topics: Question of the Week, Participant Loans, Distributions, Directing Investments, Blackout Period

The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.