Congress Enacts Pension Legislation as Part of Accounting Reform

There has been an effort by various members of Congress over the past few weeks to attach parts of the Enron-inspired pension legislation to the accounting reform bill which moved swiftly through Congress. Although most of the proposed pension legislation was not included, the accounting reform bill signed into law by the President on Tuesday, July 30, included three provisions affecting pensions. Specifically, the provisions are a new blackout notice requirement, a restriction on insider trading during a blackout, and increased ERISA penalties. A more detailed summary of these three provisions is set forth below. ASPPA's Government Affairs Committee has worked closely with congressional staff in order to perfect the legislative language as much as possible.

By no means does this suggest that we are done with pension legislation this year. The President has publicly stated recently that he wants a more comprehensive pension bill, and Senate Majority Leader Tom Daschle (D-ND) has pledged in several speeches to bring a pension bill to the Senate floor in September.

Brian Graff, Esq.
ASPPA Executive Director

Notice Requirement for Blackout Periods

The provision amends ERISA to require a defined contribution plan administrator to provide participants and beneficiaries affected by a blackout period with at least 30 days advance notice. One-participant plans are exempt from this requirement. The notice must include: (1) the reasons for the blackout period; (2) the investments or other rights affected; (3) the expected length of the blackout; (4) a statement that the participant or beneficiary should evaluate their investment choices in light of the impending blackout period; and (5) such other matters prescribed by the DOL. The notice can be delivered in writing or electronically. If there is a change in the expected length of the blackout period, the plan administrator would have to notify participants and beneficiaries of the change as soon as reasonably practicable. Notice of the change would also have to specify whether any of the other matters outlined in (1) through (5) above have also changed. To the extent the plan holds employer securities, the plan administrator would have to also provide the blackout notice to the issuer of the securities (the plan sponsor). This requirement (which for many companies will simply be a notice to itself) is required whether or not the employer securities are publicly-traded.

The critical element to this provision is the definition of "blackout period." The term blackout period means any suspension, restriction, or limitation for a period of more than 3 consecutive business days on the ability of participants or beneficiaries as otherwise available under the terms of the plan to direct the investments of assets in their accounts, to obtain loans, or to obtain distributions. The more than 3 business day rule was included at the request of ASPPA to make sure that inadvertent blackouts or blackouts necessitated by routine system upgrades are not subject to the provision. One thing not clear is the meaning of the phrase "otherwise available under the terms of the plan." The phrase is intended to provide that if the plan only allows for quarterly investment direction, notice is not required every quarter. However, it may be read to require that investment direction and other rights be specified in the plan document. We will be asking DOL for a clarification of this provision. Perhaps an outline of investment direction rights in other plan materials incorporated by reference in the plan document may suffice, for example.

The provision specifically provides that any suspension, limitation, or restriction necessitated in connection with a QDRO or by reason of the application of securities laws is not considered a blackout period. Further, some changes to plans that otherwise provide for a regularly scheduled suspension, limitation, or restriction (e.g., quarterly investment direction) will also not be considered blackout periods, although the effect of this exception is unclear and will also need to be clarified by DOL.

Some exceptions to the 30-day advance notice requirement are provided in the case of an emergency. If a plan fiduciary determines that complying with the requirement would violate his or her fiduciary responsibility (e.g., an investment option comes under investigation by the SEC due to fraud) or if the inability to provide the 30-days advance notice is due to events that were unforeseeable or circumstances beyond the reasonable control of the plan administrator, the notice can be provided as soon as reasonably possible or even after the blackout period if providing notice would be impracticable. In order to take advantage of this exception, the plan fiduciary or plan administrator would have keep a written record of the facts and rationale justifying the exception. (Yes, this would seem to require a "memo to the file.") A further exception to the 30-day advance notice requirement is provided in the case of certain mergers and acquisitions involving the plan or plan sponsor, in which case the notice needs to be provided as soon as reasonably practicable.

DOL could assess up to a $100 per day penalty for each failure to comply with the requirements of this provision.

Importantly, this provision is effective 180 days after the date of enactment. (This was done because it is consistent with the general effective date of the accounting reform bill.) DOL is directed to issue a model notice and other guidance relating to this provision, including possible other exceptions to the notice requirement, by January 1, 2003, with interim guidance required 75 days after date of enactment. Good faith compliance applies in the absence of this guidance in case the guidance is not issued in time. Any plan amendments required by this provision (not clear, as discussed above) must be made by the end of the first plan year beginning after the effective date of the provision. For calendar year plans, this would mean amendments would have to be made by the end of the 2004 plan year.

Restrictions on Insider Trading During a Blackout Period

Corporate officers and directors are prevented from trading in employer securities acquired in connection with their employment during any defined contribution plan blackout period to the extent the plan holds employer securities. This prohibition only applies with respect to publicly-traded employer securities. An individual violating this prohibition would have to forfeit to the issuer of the securities any profits that results from the trading.

A blackout period is defined as a period of more than 3 consecutive business days during which the ability of no less than 50 percent of participants to direct the investment of employer securities is suspended, limited or restricted. Any regularly scheduled suspension, limitation, or restriction (i.e., quarterly investment direction) previously disclosed to participants is not considered a blackout period. Also, a suspension, limitation, or restriction arising in connection with a merger or acquisition involving the plan or plan sponsor is not considered a blackout.

The issuer of the employer securities (presumably the plan sponsor) is responsible for timely notifying affected corporate officers and directors and the SEC of the plan blackout period.

This provision is under the regulatory jurisdiction of the SEC, in consultation with DOL.

Increased ERISA Criminal Penalties

The potential criminal penalties for a willful violation of the Title I requirements under ERISA were increased from 1 year one year and/or $5,000 ($100,000 for a person not an individual) to ten years and/or $100,000 ($500,000 for a person not an individual).