IRS Final Regulations on Electronic Notices, Elections, and Consents
Rev. 11/17/06, E-mail Alert 2006

The IRS has issued final regulations on the use of electronic notices, elections, and consents.

Use of Electronic Technologies for Employee Communications, Final Regulations of the Internal Revenue Service (IRS)
This recently finalized regulation provides the exclusive rules for the use of electronic media to satisfy requirements that an employee benefit plan communication concerning a participant’s rights under the plan be in written form. It also provides a safe harbor for any communication not required to be in the form of a written paper document. The new regulations update regulations first issued in 2000 and coordinate IRS notice and consent rules with the Electronic Signatures Global and National Commerce (E-SIGN) Act.

Effective Date
The final regulations apply to notices and participant elections made on or after January 1, 2007. However, an electronic notice or participant election made electronically between October 1, 2000 and December 31, 2006 will be legally compliant if it met the requirements of the final regulation.

Applicable Plans. The final regulations apply to the following plans:

Retirement: Qualified plans under §401(a) or §403(a); §403(b) arrangements; SEP plans [§408(k)], SIMPLE IRAs and eligible governmental §457(b) plans.

Employee Benefit Arrangements: Accident or health plans or arrangements (§104(a)(3) and 105); cafeteria plans (§125); educational assistance programs (§127); qualified transportation fringe programs (§132); Archer MSAs (§220); or health saving accounts (§223-HSAs).

IRAs: Traditional IRA; Roth IRA (§408A); or a deemed IRA (§408q).

Applicable notice defined
The final regulations govern any notice, report or statement or other document required to be provided to a recipient under a retirement plan, employee benefit arrangement, or IRA.

Examples of such notices include (but are not limited to): the safe harbor 401(k) notice, the rollover notice [§402(f)]; the participant consent for cash out prior to Normal Retirement Age if vested benefit exceeds $5,000 (or lower threshold set by terms of the plan) [§411(a)(11)]; the QJSA notice (§417); the QJSA waiver [§417(a)(2)]; the notice for a participant to elect not to have Federal withholding; the notice for cutback in benefits [§ 4980F and ERISA §204(h)]; the notice to interested parties; and elections with respect to employee benefit arrangements.

Scope of Regulation
The regulations do not apply to other IRS areas such as tax reporting, tax records or substantiation of expenses or COBRA. The IRS regulations do not extend to areas within the authority of the Department of Labor (DOL) and Pension Benefit Guarantee Corporation (PBGC). For example, DOL regulations provide the rules for SPDs, SMMs and other employee benefit plan disclosures.
NOTE: An electronic notice or participant election must be able to be electronically preserved so that it can be accurately reproduced for later reference. If not, the legal effect, validity or enforceability of such electronic record may be denied [E-SIGN §101(e)].

Requirements Related to Using an Electronic System for Notices and Participant Elections

• Timing and content. The rules applicable to a particular notice's timing and content must be satisfied.
  
• Understandability. The content and the delivery medium must be designed so that the communication is no less understandable than if delivered in paper format.
  
• Explanation of the communication's significance: The transmittal must clearly identify the subject matter of the notice and alert the recipient to its significance.
  
• Instructions to access the notice: The transmittal must provide readily understandable instructions to ensure accessibility.

CONSUMER CONSENT REQUIREMENTS

• Participant consent and electronic access. Before an electronic notice may be provided, the participant must affirmatively consent to receive it electronically. The consent may be written or given electronically. If consent is made on paper the participant must demonstrate that he or she can access the notice in the electronic form used to provide the notice. A participant has the right to withdraw his or her consent before the applicable notice is delivered.


• Disclosure required prior to consent. The participant must receive a clear and conspicuous disclosure statement, which must include information on:
  the right to receive a paper document; even after having received the electronic copy and any fees charged for such copy;
  the participant’s right to withdraw his or her consent on a prospective basis and the procedures to do so, including any fees;
  the scope of the consent, i.e. for all notices, elections or which particular ones;
  the procedures to update information used to contact the recipient electronically; and
  the hardware and software requirements.

• Post-consent change in hardware or software. If such changes create a material risk that the recipient will not be able to access or retain notices, the recipient must receive a statement of:
the revised hardware and/or software requirements;
the right to withdraw consent without the imposition of fees and without the imposition of any consequences;
the fact that a new consent to receive electronic delivery must be obtained from the participant; and
the procedures for updating information to contact the participant electronically.

Prohibition on Oral Communication for Electronic Purposes
Neither an oral instruction nor a recording of an oral instruction may be used to satisfy the requirements of an electronic record of consumer consent to receive electronic notices.

Exemption from consumer consent requirements
The exemption will be obtained only if the following requirements are met:

Effective ability to access. The participant must have the effective ability to access the electronic medium used to transmit the notices, consents, elections; and
Free Paper copy of applicable notice. Participant must be advised at the time the notice is provided that a free paper copy is available at no charge upon request.

Participant Election Requirements
Participant elections include any consent, election, request, agreement, or similar communication made by a participant, beneficiary, alternate payee, or an individual entitled to benefits under a retirement plan, employee benefit arrangement or IRA. There are four basic requirements for the electronic system process to comply with the regulations:

1. Effective availability to access. A participant must be effectively able to access the electronic system in order to transmit the election. Participants and beneficiaries must have effective access to the electronic medium used for participant elections. If a participant is not able to access that electronic medium, the participant election is treated as not being made available to the individual under the nondiscrimination rules of 401(a)(4).
   
2. Authentication. The use of a safeguard so that the participant is the only one making the election, e.g. by use of a PIN.
   
3. Opportunity to Review. The participant must be provided reasonable opportunity to review, confirm, modify or rescind the terms of the election before it becomes effective.
   
4. Confirmation of Action. A confirmation must be sent to the participant within a reasonable time either by paper or electronically, provided the electronic notice requirements are met.

MHC Commentary:
Though not specifically required in the regulations, the employer should have a system whereby they can verify that the participants and/or beneficiaries have received and opened the e-mail. These electronic receipts should be saved in a file for later production in the event of an audit.

Participant elections, including spousal consents, that are required to be witnessed by a plan representative or a notary public.
To accommodate the requirement that a spouse's waiver of QJSA rights be witnessed by either a plan representative or a notary public, the regulations require the signature of the spouse to be physically witnessed by either the plan administrator or a notary, regardless of whether the signature is in written or electronic form. (The regulations state that the Commissioner has the option to permit the use of electronic procedures that will be deemed to satisfy the physical presence requirements, as long as those procedures provide the same safeguards for participant elections as provided by the physical presence requirements.)

Bill Grossman, QPA