This summary discusses how to comply with ERISA and SEC disclosure requirements for a 401(k) plan that includes an option to invest employee contributions in employer securities and that is registered on SEC Form S-8. ERISA requires initial and periodic disclosure of a summary of the entire plan in the form of a summary plan description ("SPD"). Material changes must be disclosed in a summary of material modifications ("SMM"). The Securities Act also requires the same types of disclosure, the former in the form of a prospectus and the latter in the form of a prospectus supplement. Because the disclosure requirements of the two laws are similar, there are some opportunities to comply with both requirements in a single document.
When Must a SMM or Prospectus Supplement Be Provided?
Whenever there is a material change to a plan, both ERISA and the Securities Act require plan participants and beneficiaries to be given updates to their plan information. 29 U.S.C. §1022 (a)(2), 17 CFR 230.428(b)(1)(i).
Meeting the SMM Requirement
Time.
An SMM must be furnished to each participant covered under the plan and each beneficiary receiving benefits under the plan no later than 210 days after the plan year in which a material modification is adopted. 29 U.S.C. §1024(b)(2)(B). An SMM need not be furnished to retired participants, vested separated participants, or beneficiaries receiving benefits if the material modification included in the SMM does not affect their rights under the plan. 29 CFR §2520.104b-4(c). For example, if the modification involves benefits to which a retired participant had not at any time been entitled, then the retired participant need not be furnished with an SMM. 29 CFR §2520.104b-4(c).
The SMM must also be filed with the Department of Labor within the same time period (no later than 210 days after the plan year in which a material modification is adopted). 29 U.S.C. §1024(a)(4)(B), 29 U.S.C.§1024(b)(1)(B).
Method of Distribution.
Plan administrators must distribute all ERISA disclosure materials (including SMMs, SPDs and updated SPDs) using "measures reasonably calculated to ensure actual receipt of the material by plan participants and beneficiaries" and "must be sent by a method of delivery likely to result in full distribution." 29 CFR §2520.104b-1(b). In-hand delivery at the participants' worksite is an acceptable method of distribution, while placing copies of the material in a location frequented by participants is not. 29 CFR §2520.104b-1(b). First-class mail is always acceptable, but second or third class mail is only acceptable if return and forwarding postage is guaranteed and address correction is requested. 29 CFR §2520.104b-1(b). Further, if second or third class mail is returned with an address correction, it must be resent through first class mail or personal delivery at the participant's worksite. 29 CFR §2520.104b-1(b).
Form.
An SMM must be written in a manner calculated to be understood by the average plan participant. 29 C.F.R. § 2520.104(b)(3). Although the statute does not specify what information other than the material modifications should be in the SMM, plan administrators should include information necessary to facilitate filing with the Department of Labor, such as the name of the plan, the employer identification number assigned by the IRS, and the plan number assigned by the sponsor.
Meeting the Prospectus Supplement Requirement
Time.
The Securities Act requires S-8 registrants to update information required by Part I, Prospectus Plan Information, of Form S-8 "in writing in a timely manner to reflect material changes during any period in which offers or sales are being made." 17 C.F.R. §230.428.
"A timely manner," under the Securities Act, means "prior to offers and sales of the registrant's securities." Delivery must precede or accompany offers or sales of the registrant's securities in order to comply with Securities Act §5(a). Securities Act of 1933, 15 U.S.C. §77a. Under a 401(k) plan, offers and sales of securities are made continually. Therefore, any plan change that is material to investment in employer securities under the plan must be disclosed in a prospectus supplement prior to its effective date. To meet updating requirements under the Securities Act, a prospectus supplement must be provided to each employee who is eligible to participate in the plan. As with the SMMs, delivery should be by a "means reasonably calculated to ensure actual receipt of the materials" by plan participants and beneficiaries.
Plan information updating materials need not be filed with the S.E.C. However, registrants must update other information in Part II of the S-8 by filing Exchange Act reports (10-Ks, 10-Qs or 8-Ks) with the S.E.C. CCH Federal Securities Law Reporter 6 7198(G), 17 CFR § 249.306.
The Securities Act further requires that registrants deliver to employees receiving the prospectus the registrant's annual report to its shareholders containing information as required by Rule 14(b)(3) of the Securities Exchange Act of 1934 for its latest fiscal year. Most companies prepare this report annually for delivery to its shareholders, and merely add a list of eligible employees' names to the list of shareholders.
Form.
Many different forms of communication (e.g., a newsletter, memorandum or other written document) may serve as a prospectus supplement, so long as the information is presented in a clear and organized fashion and the document includes a legend in a conspicuous place at the beginning stating: "This document [Specifically designated portions of this document] constitutes [constitute] part of a prospectus covering securities that have been registered under the Securities Act of 1933." When this updating information is furnished, registrants need not redeliver documents previously furnished. 17 CFR § 230.428(2)(b)(1)(i).
Using a Single Document as an SMM and Prospectus Supplement.
If a change to a plan is considered material for both ERISA and SEC purposes, a prospectus supplement may be used to satisfy the SMM requirement, since the prospectus supplement deadline is well in advance of the SMM deadline. If a change is only material for ERISA purposes, then an SMM may be issued under the more relaxed ERISA deadline rules.
When Must a Restated SPD or Prospectus be Provided?
Both ERISA and the Securities Act require plan administrators to furnish plan participants with new SPDs and prospect uses periodically.
Meeting the Restated SPD Requirement
Time.
ERISA requires the filing and distribution of a new and updated SPD, integrating all amendments, no later than 210 days following the fifth year after the last date an SPD or updated SPD was distributed. Labor Reg § 2520.104b-2(b)(1). If there have been no amendments, a new SPD must be filed and distributed no later than 210 days after the tenth after year after the latest SPD or updated SPD was distributed.
Form.
ERISA requires the new and updated SPD be prepared and distributed in the same manner as the initial SPD. Like the initial SPD, the updated SPD must be "written in a manner calculated to be understood by the average plan participant," containing examples and cross references. 29 CFR §2520.102-2(a). The format must not have the effect of misleading or misinforming plan participants and beneficiaries, and restrictions on plan benefits should be described "in a manner not less prominent" than the way in which plan benefits are described.
Meeting the Restated Prospectus Requirement
Time.
To comply with the Securities Act, a new and revised prospectus must be issued as soon as update supplements "have obscured the readability of the plan information or render it confusing." 17 C.F.R. §230.428(b)(1)(iv). In any case, though, Securities Act §10(a)(3) provides that when a prospectus is used more than nine months after the effective date of the registration statement, "the information contained therein shall be as of a date not more than 16 months prior to such use, insofar as later information is known to the registrants." 17 CFR §230.427.
Thus, no information in the prospectus can be more than 16 months stale. If later information regarding the same subject is available, and the information in the prospectus is 16 months old, you must distribute the new information to the plan participants. It is common for registrants to furnish participants with a new prospectus annually.
Form.
The Securities Act does not specify a legal format for the prospectus plan information. In fact, the Securities Act expressly states in relevant part, that "an updated SPD ... may be used to update the Section 10(a) prospectus," provided that it: "
- (i) includes or is supplemented by an additional document or documents containing all information required by Form S-8 (See list above.);
- (ii) is appropriately legend; and
- (iii) is timely delivered to participants for purposes of the federal securities laws."
Using a Single Document as an SPD and Prospectus
So long as a document includes all of the information required by ERISA and the SEC, its form can qualify as an SPD and as a prospectus. A new prospectus must be issued considerably more frequently than a new SPD, however, because of the 16-month rule. Therefore, if a new prospectus is timely issued and its form complies with both ERISA and the Securities Act, it will also constitute a timely issued SPD.
Exhibit A
"Material" Changes Requiring Updated Information
Securities Act Materiality
A change is considered "material" under the Securities Act if a reasonable investor would rely on the information in making an investment decision. TSC Industries v. Northway, 426 U.S. 438, 449 (1976). The controlling case on Securities Act materiality, TSC Industries v. Northway, involved Section 14(a) of the 1934 Securities Exchange Act. However, its definition of materiality is considered the general standard for materiality and has been followed under other sections of the 1933 and 1934 Acts. Loss& Seligman, Fundamentals of Securities Regulation, 473. The information contained in Item 1 of the prospectus is probably information upon which a reasonable investor would rely, since it is information that the Securities Act requires to be distributed to plan participants. The following chart shows the Form s-8 information contained in Item 1. The column to the far right indicates whether the information should also be considered material under ERISA:
General Plan Information
Required Distribution |
Considered Material for ERISA |
|---|---|
| The title of the plan and the name of the registrant whose securities are to be offered pursuant to the plan; | YES |
| The general nature and purpose of the plan, its duration, and any provisions for its modification, earlier termination or extension to the extent that they affect the participants | YES |
| Whether the plan is subject to any provisions of ERISA, and the general nature of those provisions to which it is subject | YES |
| Addresses and telephone numbers which participants may use to obtain additional information about the plan and its administrators; | YES |
Securities to be offered
| Required Distribution | Considered Material for ERISA |
|---|---|
| Title and amount of securities to be offered pursuant to the plan; | YES |
| The information required by Item 202 of Regulation S-K, unless common stock is registered under Section 12 of the Exchange Act, or if plan interests are being registered; | NO |
| Employees who may participate in the plan; | YES |
Terms and procedures involved in purchasing securities pursuant to the plan and payment for securities offered
| Required Distribution | Considered Material for ERISA |
|---|---|
| The period of time within which employees may elect to participate in the plan, the price at which the securities may be purchased pursuant to the plan; | YES |
| When and the manner in which employees are to pay for the securities purchased pursuant to the plan; | YES* |
| The amount each employee is required or permitted to contribute or, if not a fixed amount, the basis of computing contributions; | YES |
| If contributions are to be made under the plan by the registrant or any employer, state who is to make such contributions, when they are to be made and the nature and amount of each contribution; | YES |
| The nature and frequency of any reports to be made to participating employees as to the amount and status of their accounts; | YES* |
| [Does not apply to this case, because it only refers to plans that are not subject to ERISA.]Resale restrictions; | YES* |
| Tax effects of plan participation; | NO |
| Investment of funds; | YES* |
| Terms and conditions under which a participating employee may withdraw from the plan and terminate his or her interest therein | YES |
| Whether, and the terms and conditions upon which, the plan permits an employee to assign or hypothecate his or her interest in the plan | YES* |
| Every event which could result in a forfeiture by, or penalty to a participant, and the consequences thereof | YES |
| Every event which could result in a forfeiture by, or penalty to a participant, and the consequences thereof; | YES |
| Charges and deductions that may be made against employees participating in the plan. | YES* |
* Not specifically identified as material for ERISA purposes, but likely would be considered
It is safe to assume that anything considered material under the Securities Act is material under ERISA as well, which will mean that the prospectus supplement should satisfy the SMM requirements as well and should be filed with the Department of Labor.
ERISA Materiality
As noted above, the items on the Securities Act Materiality chart above should be considered material for ERISA purposes as well. The following is a list of information specifically identified as material for ERISA purposes, but not specifically identified as material for Securities Act purposes. A change in any of this information should be considered material for Securities Act purposes if it might reasonably affect an employee's decision to participate in or choose investments under the plan.
- Name and address of plan sponsor, plan administrator, trustee and agent for service of legal process.
- Identification of persons performing functions for the plan.
- Forms of distribution available for plan benefits.
- Procedures for presenting claims for benefits under the plan and appealing denied claims.
- Date of the end of the plan year and description of whether plan records are kept on the basis of the calendar, fiscal or insurance policy year.
Exhibit B
Contents of Summary Plan Description
The U.S. Labor code specifies the information that must be contained in the summary plan description and summary plan must accurately reflect the contents of the plan. The details of what must be included in the plan are contained in 29 CFR 2520.102-3.