OLR Research Report

December 12, 2002





By: Jerome Harleston, Senior Attorney

You want to know the (1) law that governs the portability of employer-sponsored 401(k) plans when the employer is sold and (2) type of notice the employer must give employees when plan eligibility and other terms and conditions of the plan are changed.

401(k) plans are a feature within a profit sharing plan that allows employees to make contributions on a tax-preferred basis. 401(k) plans get their name from the Internal Revenue Code Section 401(k), which allows for pretax voluntary savings. In addition to the pre-tax contributions, the investment earnings also accumulate tax deferred until paid out at retirement.


The Employee Retirement Income Security Act of 1974 (ERISA) governs 401 (k) plan portability and notice requirements.

Plan administrators must provide participants or beneficiaries receiving benefits from a plan notice of plan amendments or modifications within 210 days after the plan year in which the amendment or modification was adopted.


If a plan sponsor is sold or merges with another company, there are three common outcomes for an employee's 401(k) plan:

● The plan may be terminated

● The plan may continue

● The may be merged with the plan of the new corporate entity

Although pension plans must be established with the intention of being continued indefinitely, employers may terminate them. If a plan

is terminated, ERISA provides some protection. In a tax-deferred plan, the employee's benefit becomes 100 % vested immediately upon plan termination.

Plan terminations come in two forms. In the first, the plan is shut down and all the assets are distributed to participants. In the second, the plan continues but new contributions are not permitted nor are employees' assets distributed. Participants are allowed to change investments and withdraw funds at retirement.

If the plan is merged, employees may or may not see features and investments retained from the old plan. The employer may choose to merge his plan with another plan. If the employer's plan is terminated as a result of the merger, the benefit employees would be entitled to receive after the merger must be at least equal to the benefit they were entitled to receive before the merger.

Merging plans is an intricate process that takes time. While this is done employees will be “locked out” of their plan for a period of time.

Blackout Period

The federal Sarbanes-Oxley Act (SOA) added a new section (101(i)) to ERISA. It requires 401(k) administrators to give affected plan participants and beneficiaries between 30 and 60 days advance notice of any lockout or “blackout period,” as it is known under the act.

Under the act, a blackout period is defined as a period during which the ability of participants or beneficiaries to direct or diversify assets credited to their accounts to obtain loans or distributions from the plan is temporarily suspended, limited, or restricted for more than three consecutive business days.

The notice must include, at a minimum: (1) the reasons for the blackout period; (2) a description of the rights available to participants and beneficiaries that will be affected by the blackout period; including identification of any investment subject to the blackout period, (3) the expected beginning and ending dates of the blackout period; and (4) the name, address, and telephone number of the administrator or other person responsible for answering questions about the blackout period.

SOA authorizes the U.S. Department of Labor to assess a civil penalty of up to $100 per day per each affected participant or beneficiary if a plan administrator's fails or refuses to provide a blackout notice in the time and manner required.


ERISA requires plan administrators to give employees in writing the most important facts they need to know about their pension plan. The plan administrator must provide some of these facts regularly and automatically. Others are available upon request.

One important document employees are entitled to receive automatically when they become participants of an ERISA-covered pension plan or a beneficiary receiving benefits under such a plan, is a summary of the plan, called the summary plan description (SPD).

The SPD tells employees what the plan provides and how it operates. It tells employees how service time and benefits are calculated, when benefits become vested, when they will receive payment and in what form, and how to file a claim for benefits.

It also must tell employees either through a revised SPD, or in a separate document called a summary of material modifications (SMM), if a plan is changed.

The plan administrator must furnish the SPD to participants automatically within 90 days of their becoming covered under the plan and automatically every 5 years if the plan is amended. The plan administrator must furnish the SMM to participants or beneficiaries receiving benefits from the plan automatically within 210 days after the end of the plan year for which the plan has been amended or modified (distribution of a revised SPD satisfies this requirement).


Three federal government agencies have authority to investigate possible violations of the rules for private pension plans and to bring lawsuits or assess penalties against individuals engaged in illegal actions: the Department of Labor (DOL), the Internal Revenue Service, and the Justice Department.

If the plan trustees or others responsible for investing employee's pension money have been violating the rules, the field office of the U.S. DOL's Pension and Welfare Benefits Administration (PWBA) should be contacted. The DOL has authority to investigate complaints of fund mismanagement. If an investigation reveals wrongdoing, DOL can take action to correct the violation, including asking a court to compel plan trustees and others to put money back in the plan. Courts can also impose penalties of up to 20 % of the recovered amount and bar individuals from serving as trustees and plan money managers.

If individuals providing services to the plans have gotten loans or otherwise taken advantage of their relationship to the plan, the Employee Plans Division of the Internal Revenue Service should be contacted. It is authorized to impose tax penalties on people involved in unlawful "party in interest" transactions.

Cases of embezzlement or stealing of pension money, kickbacks, or extortion should be referred to the Federal Bureau of Investigation or the DOL's field office. If illegal activities are found, the case can be referred to the U.S. Department of Justice for prosecution. Criminal penalties can include fines and prison sentences, or both.

Federal pension law makes it unlawful for employers to fire or otherwise retaliate against employees who provide the government with information about their pension funds' investment practices.