Originally published July 27, 2005
On July 13, 2005, the Internal Revenue Service ("IRS") published proposed regulations addressing the use of electronic media by employers and plan administrators to provide notices to plan participants and beneficiaries, and by participants to transmit elections or consents relating to employee benefit plans. The proposed regulations coordinate existing rules with the requirements of the Electronic Signatures in Global and National Commerce Act (E-SIGN) and expand both the types of plans for which notices can be provided electronically, including health plans and cafeteria plans, and the types of elections that can be made electronically, including qualified joint and survivor annuity elections. The regulations are proposed to apply prospectively and cannot be relied upon until they are issued as final regulations.
Existing Guidance The Internal Revenue Code ("Code") and the Employee Retirement Income Security Act ("ERISA") include a number of rules that require retirement or other benefit plan notices, elections or consents to be made in writing. The Taxpayer Relief Act of 1997 authorizes the Treasury to issue guidance to interpret the manner in which the notice, election or consent requirements under the Code and ERISA apply to the use of new technologies by plan sponsors and administrators. Pursuant to this law, the IRS and Treasury have issued several items of guidance relating to the use of electronic media by plans.
- Notice 99-1 (1999-1 C.B. 269) provides guidance on the use of electronic media by qualified retirement plan participants or beneficiaries to make elections or conduct transactions that are not required by law or other rules to be in writing, such as plan enrollments, beneficiary designations and direct rollover elections.
- Regulations issued ("2000 Regulations") govern the use of electronic media for the transmission of notices and consents under Code sections 402(f) (direct rollover notice), 411(a)(11) (consent to distribution), and 3405(e)(10)(B) (withholding election). Under the 2000 Regulations, a qualified retirement plan may provide notices electronically through a medium that is reasonably accessible to the participant, as long as the participant has been informed of his or her right to request and receive paper copies of the notices at no charge. If certain conditions have been met, the 2000 Regulations also permit use of an electronic consent to satisfy the requirement that a participant consent in writing to a distribution.
- Regulations issued in 2003 ("2003 Regulations") provide the rules governing the manner of delivering a notice of a prospective reduction in the rate of benefit accrual under Code section 204(h), which includes a safe harbor method for delivering a section 204(h) notice electronically.
Applicability of the Proposed Regulations
The proposed regulations generally would apply to any notice, election or similar communication that is provided to or made by a participant1 under any qualified plan, 403(b) plan, SEP, SIMPLE retirement plan, 457(b) plan, accident or health plan, cafeteria plan, educational assistance program, qualified transportation fringe program, Medical Savings Account or Health Savings Account. The proposed regulations would even apply to notice and election requirements under Code sections and regulations that do not cross-reference the proposed regulations, so long as the particular rule required that the notice or election be provided in writing. Thus, for example, if the requirements of the proposed regulations are met, an employer that chose to make safe harbor contributions rather than perform the 401(k) test would be able to provide an electronic safe harbor notice under Code section 401(k)(12)(D), though the Code says this notice must be provided in writing.
In addition to covering notices or participant elections that are required to be in writing, the proposed regulations would also establish a safe harbor for notices or participant elections that are not required to be in writing, for example, participant enrollments or investment changes. Under this safe harbor, those notices or participant elections could be communicated electronically so long as the timing, content and manner of the communication would comply with the requirements of the proposed regulations.
Despite their broad application, the proposed regulations would not apply to any notice, election, consent or disclosure required under title I or title IV of ERISA for which either the Department of Labor ("DOL") or the Pension Benefit Guaranty Corporation ("PBGC") has interpretative authority. Similarly, the proposed regulations would not apply to Code section 411(a)(3)(B) (relating to suspension of benefits), Code section 4980B(f)(6) (relating to an individual’s COBRA rights), or any other provision of the Code that the DOL or PBGC has the authority to interpret. In addition, the rules in these regulations would apply only to notices and elections relating to a participant’s rights under a plan but would not apply to other requirements under the Code, such as requirements relating to tax reporting, maintaining tax records or substantiation of expenses.
Overview of the Proposed Regulations
The proposed regulations would amend a number of regulations under the Code and add Treas. Reg. §1.401(a)-21. Under the proposed regulations, an electronic notice must be reasonably designed to be no less understandable to a participant than a written paper notice. When the electronic notice is provided, the participant must be alerted to its significance and be provided with any instructions needed to access it.
In addition to these general requirements, the proposed regulations would also incorporate the consumer consent requirements of E-SIGN. Under E-SIGN, before information can be transmitted electronically, a consumer must affirmatively consent to receive the information electronically in a manner that reasonably demonstrates his or her ability to access the information in the electronic form. Also, prior to giving consent, the consumer must receive certain disclosures, such as the hardware and software requirements for access to and retention of the electronic records, the consumer’s right to withdraw consent, the procedures for requesting a paper copy, and the cost, if any, of obtaining a paper copy. For purposes of these consumer consent requirements, the proposed regulations indicate that neither an oral communication nor a recording of an oral communication is considered an electronic communication.
Recognizing that the consumer consent requirements of E-SIGN could impose a substantial burden on plans and that the rules under Notice 99-1, the 2000 Regulations and 2003 Regulations are not as stringent, the proposed regulations would include an alternative method for providing notice electronically that is similar to the methods in those existing rules. Specifically, the proposed regulations would provide an exemption from the consumer consent requirements of E-SIGN for plan notices if: (1) the participant is effectively able to access the electronic medium used to provide the notice, and (2) when the notice is provided, the participant is advised that he or she may request and must receive a paper copy of the notice at no charge.2
In addition, the proposed regulations would adopt the requirements of the 2000 Regulations that allow participant elections to be made using an electronic media. The proposed regulations would require that the participant making the election be effectively able to access the electronic medium and that the electronic medium be reasonably designed to preclude any other person from making the election. For example, a participant could be required to enter a personal identification number (PIN) before transmitting his or her election. In addition, the participant must have a reasonable opportunity to review, confirm, modify or rescind the terms of his or her election before it becomes effective and must receive a paper or electronic confirmation that satisfies the requirements of the proposed regulations.
The proposed regulations would also allow an electronic acknowledgement or notarization of any participant election, including a spousal consent, that is otherwise required to be witnessed by a plan representative or a notary public. The proposed regulations would require that the plan representative or notary public be physically present to witness the participant’s or spouse’s consent; however, the IRS has requested comments on whether there should be any exceptions to this rule requiring the physical presence of the spouse for a notarization of the spouse’s consent.
If a plan uses an electronic system to provide participant elections and ensures that the system is effectively available to participants, the regulations would not require that the plan also provide paper election forms. However, if the plan requires that elections be made electronically, and one or more participants cannot effectively access the system, the plan may not be able to demonstrate that it satisfies the nondiscrimination requirements of Code section 401(a)(4) or other requirements applicable to the particular plan.
Endnotes
1 In this Legal Alert, we have used the term a "participant" to refer to any person to whom an applicable notice is to be provided or who is eligible to make an election under a plan, including an alternate payee, beneficiary or employee.
2 The proposed regulations would replace the requirement of the 2000 Regulations that an electronically transmitted notice be "reasonably accessible" with the requirement that the recipient be "effectively able to access" the notice. This change in language is not intended to reflect a substantive change in the rule, but is intended to avoid confusion with DOL regulations interpreting the words "reasonably accessible" under ERISA section 101(i)(2)(D).
© 2005 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.