Guest Article
(Reprinted from The 401(k) Handbook, published by Thompson Publishing Group, Inc.)

Moving to the Paperless HR Department: The New Electronic Signature Law's Potential

by Martha Priddy Patterson

Employers wanting to move to a paperless human resources department could come very close to that goal, especially for 401(k) plans, under the newly enacted Electronic Signatures in Global and National Commerce Act. This new law allows us to sweep away at least three millennia of the burden of writing and return to the days when an "X" served as an individual's witness to be bound by his or her pledges. The act applies to far more than mere signatures.

When the law takes effect in October, it will apply to virtually every business transaction conducted in the U.S. Most of the attention surrounding the new law focuses on the ability to obtain mortgages and sign other legal documents. In fact the new law has the potential to greatly increase the use of electronic communication, authorizations and recordkeeping for ERISA plans, as well as for nearly all other areas of employee benefits and compensation. Whether and how this potential will be exercised remains to be seen. But the provision could supercharge the use of "e-benefits" in human resources departments - if employers decide the savings are worth it and if they encourage the Department of Labor (DOL) and the IRS to continue their regulatory approval of paperless communication.

The following provisions illustrate the extraordinary sweep of the law. This law:

• applies to "any transaction in or affecting interstate or foreign commerce"... "notwithstanding any statute, regulation or other rule of law" and covers "a signature, contract or other record relating to such transaction... ";
• provides that electronic records and contracts will satisfy all statutory requirements to retain records;
• directs all federal agencies in adopting regulations under their authority to be consistent with the electronic transaction mandates of the Act;
• authorizes the "electronic signature" of a person acting as a notary or a person otherwise acknowledging or verifying transactions;
• limits the application of state law to specific federal requirements outlined in the Act or applicable to the state, except in cases of state procurement law; and
• specifically extends its application to the insurance industry, which is ordinarily not regulated by federal law.

To further emphasize the intended broad scope of the new law, Congress specifically provided a narrow list of exceptions to the validity of electronic transactions, records and signatures. The exceptions apply only to matters involving:

• health or life insurance termination notices;
• wills, adoption, divorce or other family matters;
• court orders;
• notices regarding termination of utility services;
• actions on debts secured by the home;
• product recalls;
• contracts or records covered by the Uniform Commercial Code; or
• documents required accompanying hazardous materials transportation.

Other Statutory Rights and Obligations Preserved

Even though the law is broad in scope, it affirms that other legal requirements protecting individuals' rights and obligations are not affected by the Act. There are no changes in the ERISA duties of 401(k) plan sponsors' to disclose to participants and inform them regarding their benefits and matters affecting their plans.

To the extent that participants do not have access to electronic communications, paperless administration of 401(k) plans and other human resources needs will not be affected. But for those employees having access to electronic communications - or for those employers that want to make access available by giving employees home computers, modems and communication services - electronic communication could become the sole means of benefit communication except for health and life insurance notices.

State Law Preemption

The new law essentially prohibits any state from drafting laws that conflict with this federal law unless the state law is an adoption of the Uniform Electronic Transactions Act (UETA). It is also acceptable for the state law to specify alternative procedures that could be used in addition to the requirements of the federal law. A number of states have already adopted the UETA.

Direct Effects on 401(k) Plans

Loans from 401(k) plans can now be totally "paperless" if the employer set up a mechanism for electronic signature for those plan participants seeking loans. With appropriate software, the processing of a plan participant's loan could be completely automatic. The check for the loan proceeds could even be eliminated by providing for wire transfer to the participant's bank. With a few keystrokes, the participant could borrow money from his or her 401(k) account, transfer it to a personal checking account and use the money to buy a new home or to pay for emergency expenses.

Recent IRS final regulations permit electronic delivery of most notices and participants' consents. In issuing these regulations, the IRS noted that it could not permit various electronic spousal consents for plan payments or beneficiary designations because the statute required that such consents be delivered in person or notarized. However, the new Act contemplates "electronic" notarizations. Consequently, once states develop a procedure for electronic notarization, the IRS should be able to expand the regulations to permit electronic spousal consents with electronic notarization.

Some Unanswered Questions

One of the questions already raised is whether this Act would preempt any state laws that require employee signatures to make reductions in or deductions to an employee's paycheck. This is a critical question in various "automatic enrollment" benefits, including 401(k) plans. The legislative history on the law gives no guidance on this issue.

Generally speaking, under rules of legal interpretation, when a law specifies the exemptions to the overall application of the law, other exceptions cannot be assumed. Such an interpretation would suggest that any state laws requiring signatures on paper would no longer be effective, if the employer had set up an electronic signature for each employee. However, the fact that written signatures would no longer be required for automatic enrollment would have no effect on those state laws that restrict the percentage of compensation that can be withdrawn from an employee's pay. These laws may hinder 401(k) plan or other types of automatic enrollment. In short, the new law would appear to bolster automatic enrollment, but its exact effects remain unclear.

Until agencies such as the IRS, the DOL and the Department of Health and Human Services begin to review their regulations in light of the new law, it is impossible to know exactly how the many ERISA, health plan, and other disclosures, notices and employee consents, including the transfer of documents such as summary plan descriptions and spousal consents, will be treated. The law appears to permit regulations that could allow most such transactions to occur electronically if all participants and beneficiaries could be reached. The exceptions may be any notices dealing with the termination of health care coverage.

Experience has shown that with employers' encouragement, the agencies are willing to expand electronic transaction communications. Under the new electronic signature law, employers will be able to simplify the administration of human resource functions - including all aspects of 401(k) plan management and communication - by using electronic communications.

Martha Priddy Patterson is director of employee benefits policy analysis with Deloitte & Touche LLP's Human Capital Advisory Services in Washington, D.C. Patterson is the contributing editor of The 401(k) Handbook.

Reprinted with permission from the July 2000 supplement to The 401(k) Handbook, ©Thompson Publishing Group, Inc., 2000. All rights reserved.

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