IRS Proposed Regulations on Electronic Notices, Elections, and Consent (September 6, 2005)

On July 13, 2005, the IRS issued proposed regulations regarding the use of electronic media to provide notices to employee benefit plan participants and beneficiaries, and to transmit elections or consents from participants and beneficiaries to employee benefit plans.

The proposed regulations reflect the provisions of the Electronic Signatures in Global and National Commerce Act (referred to as E-SIGN). E-SIGN provides protection for consumers when a statute, regulation, or other rule of law requires that consumer information relating to a transaction be provided or made available in writing. Generally, before such information may be transmitted electronically, (i) a consumer must affirmatively consent to receiving information electronically, (ii) the consumer’s ability to access information in electronic form must be reasonably demonstrated, and (iii) the consumer must receive certain disclosures prior to consent.

The proposed regulations would apply to any notice, election, or similar communication provided to or made by a participant or beneficiary under a qualified plan, 403(a) or 403(b) plan, simplified employee pension (SEP), SIMPLE retirement plan, 457 plan, accident or health plan, cafeteria plan, educational assistance program, qualified transportation fringe program, medical savings account, or health savings account. For example, such communications would include a 401(k) safe harbor notice, section 402(f) rollover notice, section 411(a)(11) cash-out distribution notice, qualified joint and survivor annuity explanation, and section 204(h) reduction of benefits notice.

These proposed regulations would not apply to any notice, election, consent, or disclosure required under Title I or IV of ERISA over which the Department of Labor or Pension Benefit Guaranty Corporation has interpretative and regulatory authority (e.g. summary plan description, summary annual report, suspension of benefits notice, COBRA notice).

The content of the notice and the medium through which it is delivered must be reasonably designed to provide the information to a recipient in a manner "no less understandable to the recipient than if provided on a written paper document." For example, a plan delivering a lengthy section 402(f) rollover notice would not be able to provide the notice through a pre-recorded message on an automated phone system.

At the time the notice is provided, the electronic transmission must alert the recipient to the significance of the transmittal (including the identification of the subject matter of the notice) and provide any instructions needed to access the notice, in a manner that is readily understandable and accessible.

Before a plan may provide a notice using an electronic medium, the participant must affirmatively consent to receive the communication electronically in a manner that reasonably demonstrates that the participant can access the notice. Prior to consenting, the participant must receive a disclosure statement that outlines (i) the scope of the consent, (ii) the participant’s right to withdraw his or her consent (including any conditions, consequences or fees in the event of withdrawal), (iii) the right to receive the communication using paper, (iv) any hardware or software requirements for accessing the electronic media, and (v) the procedures for updating information to contact the participant electronically. In the event that the hardware or software requirements change, new consent must be obtained.

As an alternative to complying with the consent requirements set forth above, the plan may provide an electronic notice so long as (i) the recipient of the notice is effectively able to access the electronic medium and (ii) the recipient is advised that he or she may request and must receive the applicable notice in writing on paper at no charge.

With respect to participant elections made electronically, an electronic system must be "reasonably designed to preclude any person other than the participant from making the participant election" (for example, through use of a personal identification number (PIN)). The participant must be "effectively able to access" such electronic system. The participant must also be provided with a reasonable opportunity to review, confirm, modify, or rescind the election before it becomes effective. Finally, the participant making the election must, within a reasonable period, receive a confirmation of the election through either a written document or through an electronic medium that satisfies the electronic notice requirements discussed above.

The proposed regulations would apply to the use of electronic media to satisfy the notice and election rules for plans subject to the qualified joint and survivor annuity requirements of the Internal Revenue Code (e.g. defined benefit plans and money purchase plans). In particular, the Internal Revenue Code requires that the consent of a spouse be witnessed by a plan representative or notary public. The proposed regulations would permit the use of an electronic acknowledgment or notarization of a signature, so long as the individual’s signature is witnessed in the physical presence of the plan representative or notary public, regardless of whether such signature is provided on paper or through an electronic medium.

The proposed regulations are intended to apply prospectively. Plans may not rely on such regulations until they are issued in final form.

The proposed regulations are useful and answer many questions regarding the use of electronic media to satisfy a plan’s notice and election requirements under the Internal Revenue Code. On the ERISA side of employee benefits, the Department of Labor has already issued its own regulations regarding electronic communications. Employers and plan administrators should consult with employee benefits counsel regarding the application of these proposed regulations and the use of electronic communications generally for communication with participants.

If you have any questions regarding this alert or other Employee Benefits Law related issues, please contact Tom Asmar at 704.342.5342 or tasmar@poynerspruill.com or one of our other Employee Benefits attorneys.