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Guest Article

Deloitte logo

(From the October 23, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Issues Final Regulations on Electronic Notices, Consents


The Treasury Department and IRS on October 18, 2006 issued final regulations on using electronic media for providing certain notices to employee benefit plan participants and permitting participants to transmit certain elections or consents electronically. 71 FR 61877 (October 20, 2006). The final regulations update and replace previous IRS guidance -- including regulations issued in 2000 -- on using electronic media to distribute IRC § 402(f) notices and to receive participant consents for distributions as required by IRC § 411(a)(11), among other requirements. They also expand upon existing guidance by permitting plans subject to the IRC § 417 qualified joint and survivor annuity (QJSA) requirements to accept QJSA waivers electronically. The final regulations closely follow the proposed regulations Treasury and IRS issued last year.

Scope of Final Regulations

The final regulations establish rules for using electronic media by all employee benefit plans, including qualified retirement plans, accident and health plans, IRC § 125 cafeteria plans, IRC § 127 education assistance programs, IRC § 132 qualified transportation fringe benefit programs, and health savings accounts (HSAs). In addition, the final regulations apply to IRC § 403(a) and 403(b) annuity contracts, simplified employee pensions (SEPs), IRC § 408(p) simple retirement plans, and IRC § 457(b) eligible governmental plans.

Significantly, the final regulations do not apply to summary plan descriptions (SPDs), summary annual reports (SARs), COBRA notices, or any other notice, election, consent, or disclosure requirements under the Department of Labor's (DOL) or Pension Benefit Guaranty Corporation's (PBGC) regulatory jurisdiction. The DOL has issued regulations (DOL Reg. § 2520.104b-1(c)) relating to using electronic media to distribute SPDs, SARs, and certain COBRA notices, et al., and PBGC regulations (Part 4000) permit electronic issuances of ERISA Title IV notices.

Summary of Final Regulations

The final Treasury regulations provide the exclusive rules for using electronic media to satisfy an Internal Revenue Code (IRC) requirement that an employee benefit plan communication to or from a participant be in writing. Examples include the IRC § 402(f) notice qualified retirement plans must give participants before making an eligible rollover distribution, the QJSA explanation qualified pension plans subject to IRC § 417 must give to participants, and the "204(h) notice" qualified pension plans must give participants before amendments providing for a significant reduction in the rate of future benefit accrual (IRC § 4980F).

Additionally, the final regulations provide a safe harbor for using electronic media to provide notices or transmit elections that do not have to be in writing or in written form. An example of this would be creating a system to accept electronically transmitted beneficiary designations.

Of course, the final regulations only supplement the otherwise applicable rules for each relevant notice and participant election. In addition to the rules for using electronic means to transmit the notice or participant election, the plan still must satisfy the applicable timing, content, and other general requirements relating to the notice or election.

Notices

With respect to notices to be provided electronically, the regulations require plans to satisfy specific consumer consent requirements mandated by the Electronic Signatures in Global and National Commerce (E-SIGN) Act. Specifically, the regulations require plans to:

  • obtain the recipient's affirmative consent to receive the notice electronically in a manner that demonstrates the recipient can access the applicable notice in the relevant electronic format;
  • provide a pre-consent disclosure statement to the recipient that provides information about the recipient's right to request a paper copy of the notice and the hardware and software requirements needed to access and retain the notice, among other things; and
  • permit a potential recipient to withdraw consent before the notice is delivered.

An exemption from the consumer consent requirements is available if certain conditions are satisfied. Specifically, the exemption applies if the recipient is "effectively able" to access the electronic medium used to provide the notice, and if, at the time the notice is provided, the recipient is advised that he or she can request and receive a paper version of the notice at no charge.

In all cases the regulations require the electronic system of delivery to be "reasonably designed to provide the information in the notice to a recipient in a manner that is no less understandable to the recipient than a written paper document." Also, the regulations require the electronic transmission to "alert the recipient ... to the significance of the information in the notice (including identification of the subject matter of the notice), and provide any instructions needed to access the notice, in a manner that is readily understandable."

Elections

For participant elections to be delivered electronically, the regulations require the use of an electronic system "reasonably designed to preclude any person other than the appropriate individual from making the election." For example, the system could require a participant to enter an account number and a personal identification number (PIN), and then match that information against the participant's records, before allowing the participant to transmit the election. The system also must give the participant a "reasonable" opportunity to review, confirm, modify, or rescind the election before it becomes effective, and provide the participant a confirmation of the effect of the election. (The confirmation could be furnished electronically so long as the requirements for electronic notices, discussed above, are satisfied.)

Additionally, the final regulations require that participants eligible to make elections be "effectively able to access" the plan's electronic medium for making such elections. The following example from the final regulations illustrates how this issue might come up, and how it might be resolved.

Example 6. (i) Facts. Plan E, a qualified plan, permits participants to request distributions by e-mail on the employer's e-mail system. Under this system, a participant must enter his or her account number, personal identification number (PIN), and e-mail address. This information must match that in Plan E's records in order for the transaction to proceed. If a participant requests a distribution by e-mail, the plan administrator provides the participant with a section 411(a)(11) notice by e-mail. The plan administrator also advises the participant by e-mail that he or she may request the section 411(a)(11) notice on a written paper document and that, if the participant requests the notice on a written paper document, it will be provided at no charge. Participant Q requests a distribution and receives the section 411(a)(11) notice from the plan administrator by reply e-mail. However, before Participant Q elects a distribution, Q terminates employment. Following termination of employment, Participant Q no longer has access to the employer's e-mail system.

(ii) Conclusion. In this Example 6, Plan E does not satisfy the participant election requirements under paragraph (d) of this section because Participant Q is not effectively able to access the electronic medium used to make the participant election. Plan E must provide Participant Q with the opportunity to make the participant election through a written paper document or another system that Participant Q is effectively able to access, such as the automated telephone systems described in Example 4 and Example 5 of this paragraph (f).

Furthermore, the regulations clarify that an election is not "made available" to an otherwise eligible participant for purposes of IRC § 401(a)(4) if he or she is "not effectively able to access the electronic medium for making the participant election." This is significant because IRC § 401(a)(4) and Treas. Reg. § 1.401(a)(4)-4(a) require qualified plans to make elections (and other benefits, rights, and features) available to participants in a nondiscriminatory manner.

Special Rules for Elections That Must be "Witnessed"

Certain elections, such as QJSA waivers by a participant's spouse, must be witnessed by a plan representative or a notary public. In these cases, the regulations specify that electronic notarizations pursuant to E-SIGN and applicable state law will be acceptable "if the signature of the individual is witnessed in the physical presence of a notary public."

Effective Date

The final regulations apply to notices provided, and participant elections made, on or after January 1, 2007. However, there is retroactive protection for electronic notices distributed and participant elections made on or after October 1, 2000, and before January 1, 2007, in a manner consistent with the final regulations.


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Laura Morrison 202.879.5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

Copyright 2006, Deloitte.


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