Recent Proposed Treasury Regulations on Electronic Benefit Communications Reflect Influence of E-SIGN

On July 14, 2005, proposed Treasury regulations were issued relating to the use of electronic media for providing notices to benefit plan participants and beneficiaries, and transmitting benefit elections and consents. The proposed regulations are specifically intended to coordinate existing Treasury requirements on the use of technology in communicating benefit notices or elections with the requirements of the Electronic Signatures Global and National Commerce Act (E-SIGN), without expanding the requirements of either. The preamble to the proposed regulations announces that they are the exclusive rules governing the use of electronic media for certain benefit communications to or from a participant which are required by the Internal Revenue Code (the “Code”) to be in written form.

The proposed regulations are the latest in a string of legislative and regulatory developments concerning the use of electronic technology in benefit plan administration and communication. In Section 1510 of the Taxpayer Relief Act of 1997, Congress first called upon Treasury to issue guidance on how new technology could be used to satisfy the Code’s retirement plan communication and recordkeeping requirements. As a result, Treasury released proposed regulations in 1998 relating to the use of electronic media for transmission of benefit notices and consents under Code sections 402(f), 411(a)(11), and 3405(e)(10).

In 1999, the IRS issued Notice 99-1 authorizing the use of electronic media in circumstances where the Code does not specifically require that a benefit communication be in writing. In 2000, final Treasury regulations were released, continuing to authorize the electronic benefit notices and consents, but only in limited circumstances. Later that year, E-SIGN was enacted, effectively mandating the equal legal treatment of written and electronic documents and signatures by providing that “a signature, contract or other record may not be denied legal effect, validity or enforceability solely because it is in electronic form.” In order to implement this mandate, federal or state agencies responsible for rulemaking under statute were authorized to issue interpretive guidance with respect to E-SIGN’s applicability to those other statutes. The proposed regulations released this July are a clear consequence of this grant of authority, and the need for specific guidance on how Treasury intends to interpret the Code’s requirements for written benefit communications in the context of E-SIGN’s requirements.

Scope of the Proposed Regulations
The proposed regulations apply to certain written communications provided to or made by a participant or beneficiary under a(n):

  • qualified plan under IRC Section 401(a);
  • annuity contract under Section 403(a) or Section 403(b);
  • simplified Employee Pension (SEP) under Section 408(k);
  • SIMPLE IRA plan under Section 408(p);
  • eligible governmental plan under Section 457(b);
  • accident or health plan or an arrangement under Section 104(a)(3) or Section 105;
  • cafeteria plan under Section 125;
  • educational assistance plan under Section 127;
  • qualified transportation fringe program under Section 132;
  • Archer medical savings account under Section 220; or
  • health savings account under Section 223.

Benefit arrangements absent from this list include traditional IRAs, ROTH IRAs, ineligible 457(f) plans, life insurance plans, employee stock purchase plans, and stock option plans, meaning that communications thereunder are not subject to the proposed regulations. The types of written communications covered by the proposed regulations are notices, elections, consents, or other communications required to be “written” or “in writing” under the Code. The proposed regulations are still relevant for communications not required to be in writing, as they constitute a safe harbor method for their electronic delivery or transmission. The regulations are expressly inapplicable to any benefit communication required under the Code for which the DOL or the PBGC have interpretive or regulatory authority (such as a suspension of benefit notice under Code section 411(a)(3)(B) or a COBRA communication), as well as any other Code-required communication which does not relate to a plan participant’s right under an employee benefit arrangement (such as a tax reporting notice).

If provided under one of the subject benefit plan types, the following non-exhaustive list of benefits communications are governed by the proposed regulations (per the preamble thereto):

  • Safe harbor notices under Section 401(k);
  • Rollover notices under Section 402(f);
  • Participant consent to a cashout prior to normal retirement age if vested benefits exceed $5,000 under Section 411(a)(11);
  • Qualified joint and survivor notices under Section 417;
  • Qualified joint and survivor waivers under Section 417(a)(2);
  • Notices to elect not to have federal tax withheld from a periodic payment under Section 3405(e)(10)(B); and
  • Notice of cutback in benefits under Section 4980F.

Requirements for Use of Electronic Media
The requirements for use of electronic media (i.e., any technology having electrical, digital, magnetic, wireless, optical, electromagnetic, voice recording systems or other electronic capabilities) vary depending on whether the benefit communication is a notice, or an election or consent. It is important to note that, in addition to the specific requirements for use of electronic media, a notice, election or consent must still meet all other applicable requirements, for instance requirements relating to the timing and content of the communication.

To electronically deliver a notice, either a consent requirement must be met, or the communication must qualify for an exemption from the consent requirement. The alternatives reflect the intermeshing of E-SIGN with existing Treasury guidance, as the first option reflects the consumer consent requirement of E-SIGN and the second tracks Treasury’s 2000 final regulations. To satisfy the consent requirement, the following must occur:

  • the recipient must affirmatively consent (and not withdraw such consent) prior to the delivery of the electronic notice;
  • the consent itself (or confirmation of a paper consent) must be given electronically in a manner that reasonably demonstrates that the recipient can access the electronic notice; and
  • prior to consenting, the recipient must be provided with a clear and conspicuous statement of:
    • his/her right to receive a paper notice;
    • his/her right to request a paper copy of the notice after consenting to the electronic notice and whether any fee will be charged for such copy;
    • his/her right to withdraw consent (including any procedures and any conditions, consequences or fees for doing so);
    • the scope of the consent (e.g.,, whether it applies to all future communications or only a single communication);
    • the procedures to update his/her electronic contact information; and
    • any hardware and software requirements (if the hardware or software requirements change postconsent, a new statement must be provided and new consent must be obtained).

To be exempt from the consent requirement, the recipient must:

  • have the effective ability to access the electronic medium used to deliver the notice; and
  • be advised that a paper copy of the notice is available at no charge and such paper copy must, in fact, be provided if requested.

Regardless of whether the consent requirement or the exemption thereto is satisfied, the transmission must also apprise the recipient of its significance and provide readily understandable instructions needed to access the notice. In addition, the system of delivery must be reasonably designed to provide the notice in a manner no less understandable than a written paper document. To illustrate this last requirement, the preamble indicates that a Section 402(f) rollover notice provided prior to a distribution cannot be provided through a voice response system since, due to its length and complexity, it would not be as understandable as a written paper document. However, the proposed regulations indicate that a Section 402(f) notice emailed to a participant who has consented to its electronic transmission would satisfy this requirement.

Benefit Elections and Consents
With respect to benefit elections and consents, the proposed regulations follow the 2000 final regulations with one exception discussed later. For electronic media to be used to transmit benefit elections or consents, the following must occur:

  • the person must have the effective ability to access the electronic system used to make elections or give consent;
  • the electronic system must be reasonably designed to prevent any person other than the appropriate person from making an election or giving consent (e.g.,, requiring an account number and a personal identification number);
  • the electronic system must give the person the opportunity to review, confirm, modify or rescind an election or consent before it becomes effective;
  • the person must receive a written confirmation (either electronic or on paper) of the election or consent; and
  • for elections and consents that must be witnessed by a plan representative or notary public (such as spousal consent under a qualified joint and survivor annuity), an electronic acknowledgement or notarization is valid if the notary or plan representative physically witnessed the acknowledged signature.

This last requirement reflects the influence of ESIGN which, unlike the 2000 final regulations, permits electronic acknowledgments or notarization so long as the witness is physically present. An example in the proposed regulations aids in understanding how electronic notarization works. In the example, a married participant applying for a plan loan via the plan’s website is required to submit a notarized spousal consent form to the plan administrator. In order to do so, the participant and her spouse must have a notary witness the spouse’s signing of the spousal consent form. After so witnessing, the notary sends an email with an electronic acknowledgment that is “attached to or logically associated with” the spouse’s signature to the plan administrator. Assuming that the participant then has an opportunity to review and confirm (or revise, if necessary) the loan application, and an opportunity to request and receive a written paper copy of the application, this process satisfies the proposed regulations’ requirements for electronic transmission of an election and consent.

Given that this is the first instance where electronic acknowledgment and notarization has been permitted in the context of benefit plan elections and consents, and that its practical application is unclear, Treasury specifically requests comments on this requirement and on whether there should be any exceptions thereto. These comments, as well as comments on the balance of the proposed regulations, are welcomed and are due by October 12, 2005. A public hearing on the proposed regulations is scheduled for November 2, 2005.

Effect of Proposed Regulations
Since the regulations are in proposed form, they have limited effect and cannot be relied upon prior to the issuance of final regulations Study of the proposed regulations leaves one with a clearer sense of how Treasury intends to interpret and incorporate the ESIGN mandate in the context of benefit plan communications. Electronic technology, in all of its rapidly changing forms, is a constant in today’s world. While arguably long overdue, the proposed regulations demonstrate Treasury’s commitment to the use of developing technology in benefit plan administration, provided that all protections inherent in written benefits communications are preserved.