Electronic Communications — Part One
Rev. 08/04/05, E-mail Alert 2005-15


The IRS has issued a proposed regulation to promote the electronic delivery of notices, consents, and participant elections. This would coordinate IRS notice and consent rules with the Electronic Signatures Global and National Commerce (E-SIGN) Act.

Use of Electronic Technologies for Employee Communications, Proposed Regulation of the Internal Revenue Service (IRS)

The IRS has issued proposed regulations to promote and set standards for the use of electronic media to provide employee benefit plan participants with required notices, as well as participant elections and consents. The new regulations update regulations from 2000 and coordinate IRS notice and consent rules with the Electronic Signatures Global and National Commerce (E-SIGN) Act. Practitioners caring to comment on the proposed regulations may provide written or electronic comments that must be received by October 12, 2005. The IRS held a public hearing on November 2, 2005. The effective date of the regulations was announced in the final regulations at the end of 2006.

Examples of notices affected (as referenced in the proposal, though not an all inclusive list):

• the safe harbor notice under section 401(k)
  
• the rollover notice under section 402(f)
  
• the participant consent for cash out prior to NRA if vested benefit exceeds $5,000 under section 411(a)(11); [there is a parallel rule under ERISA 203(e)];
  
• the QJSA notice under section 417; (there is a parallel rule under ERISA section 205);
  
• the QJSA waiver under section 417(a)(2);
  
• the notice for a participant to elect not to have Federal withholding on a periodic payment under code sections 3405(e)(10)(B) and 34.3405-1,A-d-35;
  
• the notice for cutback in benefits under section 4980F [parallel ERISA 204(h)];
  
• the notice to interested parties.

The guidance is intended to maintain the protection of the rights of the participants and beneficiaries. The final regulation would provide the exclusive rules relating to the use of electronic media to satisfy any requirement under the Code that a communication to or from a participant, with respect to the participant’s rights under the employee benefit plan be in writing or in written form. Following the rules in the regulation would provide a safe harbor for any communication not required to be in the form of a written paper document.

Plans affected
The proposed regulation would apply to any notice, election or similar communication provided to or made by a participant or beneficiary under a:

• Qualified plans under section 401(a) (DB and DC such as 401(k), PS, MP, etc.)
  
• Annuity contract under 403(a) or 403(b),
  
• Simplified Employee Pension (SEP) under section 408(k),
  
• SIMPLE IRA plan under section 408(p),
  
• Eligible governmental plan under 457(b)
  
• Accident or health plan or an arrangement under 104(a)(3) or 105,
  
• Cafeteria plan under section 125,
  
• Educational assistance program under section 127,
  
• Qualified transportation fringe program under section 132,
  
• Archer Medical Savings Account under section 220, or
  
• Health Savings Account under section 223.
  

Scope of Regulation
The regulations only apply to employee benefit arrangement notices and elections and not to other IRS areas such as tax reporting, tax records or substantiation of expenses or COBRA. The IRS regulations will not cover areas within the authority of the department of Labor (DOL) and Pension Benefit Guarantee Corporation (PBGC). For example, DOL regulations provide the standards for employee benefit plan disclosures. See our article on the DOL final rules for electronic communication.

Requirements for Use of Electronic Media

• 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.
  
• Explanation of the communication's significance: The transmittal must clearly identify the subject matter of the notice and its importance.
  
• Instructions to access the notice: The transmittal must provide readily understandable instructions to ensure accessibility.

Alternative Method of Satisfying the Electronic Disclosure Requirements

• Participant consent. Before electronic notice may be provided, the participant must consent to receive it electronically. The consent may be in writing on paper or electronic, however, if it is on paper the participant must demonstrate that as a recipient he or she can access the applicable notice in the electronic form that will be used to provide the notice.
  
• Participant access. The consent must be made in a way to demonstrate that a participant has electronic access to the notice. Or, the participant may consent by written means or non-electronic means but only if the participant confirms the consent in a manner that demonstrates ability to access the notice electronically.
  
• Disclosure prior to consent. Prior to the consent, the participant must receive a disclosure statement outlining the consent and the participant’s right to withdraw his or her consent.
  
  • This disclosure must include:
    
    • consequences, including any fees in the event of withdrawal, and the right to receive the communication using paper;
      
    • the hardware and software requirements;
      
    • if the hardware or software changes a new consent must be obtained from the participant (in accordance with E-SIGN section 101(c);
      
    • 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.

Written Copy Available
At the time the applicable notice is provided, the participant must be informed that a written paper copy may be obtained at no charge.

Effective Availability
Plan participants and beneficiaries must have effective access to the electronic medium used for participant elections. If a participant is not effectively able to access the electronic medium for making the elections, the participant election is not treated as being made available to the individual under the nondiscrimination rules of 401(a)(4).

Participant Elections
For simplicity, the term “participant elections” refers to consents, elections, requests or agreements. There are four basic requirements for the electronic system process to work:

1. Participant must be effectively able to access the electronic system in order to transmit the election.
   
2. The use of a safeguard so that the participant is the only one making the election, e.g. by use of a PIN.
   
3. . The participant must be provided reasonable opportunity to review, confirm modify or rescind the terms of the election before it becomes effective.
   
4. A confirmation must be sent to the participant within a reasonable time either by paper or electronically provided the electronic notice requirements are met.
   

QJSA Rules
To accommodate the requirement that a spouse's waiver of his or her QJSA rights be witnessed by either a plan representative or a notary public, the proposed regulations introduce the E-SIGN section 101(g) concept of electronic acknowledgement or notarization of a signature. However, the proposed regulations would still require the signature of the individual to be physically witnessed in the presence of the plan administrator or notary regardless of whether the signature is in writing or electronic medium.

Participant Loan Agreement
Under section 1.72(p)-1, the participant loan agreement would also be able to be signed electronically. If spousal consent is required, the QJSA witnessing procedure would the same as under the QJSA Rules section above.
This guidance is helpful in providing a safe harbor for employer’s who wish to provide electronic distributions, loans, participant elections and notices.

Electronic Communications-Part Two

Bill Grossman, QPA