[Federal Register Volume 70, Number 134 (Thursday, July 14, 2005)]
[Proposed Rules]
[Pages 40675-40684]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-13911]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 35, and 54
[REG-138362-04]
RIN 1545-BD68
Use of Electronic Technologies for Providing Employee Benefit
Notices and Transmitting Employee Benefit Elections and Consents
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations that would provide
guidance on the use of electronic media to provide certain notices to
recipients or to transmit participant and beneficiary elections or
consents with respect to employee benefit arrangements. In general,
these proposed regulations would affect sponsors of, and participants
and beneficiaries in, certain employee benefit arrangements. This
document also provides a notice of public hearing on these proposed
regulations.
DATES: Written or electronic comments must be received by October 12,
2005. Requests to speak (with outlines of oral comments to be
discussed) at the public hearing scheduled for November 2, 2005, must
be received by October 12, 2005.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-138362-04), room
5203, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington DC 20044. Submissions may be hand delivered Monday through
Friday, between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
138362-04), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically via the IRS Internet site at http://www.irs.gov/regs or via the Federal eRulemaking Portal at http://www.regulations.gov (IRS-REG-138362-04). The public hearing will be
held in the Auditorium, Internal Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Pamela R. Kinard at (202) 622-6060; concerning submissions of comments,
the hearing, and/or to be placed on the building access list to attend
the hearing, Richard Hurst, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information referenced in this notice of
proposed rulemaking were previously reviewed and approved by the Office
of Management and Budget in accordance with the Paperwork Reduction Act
of 1995 (44 U.S.C. 3507(d)) under control number 1545-1632, in
conjunction with the Treasury Decision (TD 8873), relating to New
Technologies in Retirement Plans, published on February 8, 2000, in the
Federal Register (65 FR 6001), and control number 1545-1780, in
conjunction with the Treasury Decision (TD 9052), relating to Notice of
Significant Reduction in the Rate of Future Benefit Accrual, published
on April 9, 2003, in the Federal Register (68 FR 17277). No substantive
changes to these collections of information are being proposed.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any Internal Revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
[[Page 40676]]
Background
This document contains proposed amendments to the regulations under
section 401 of the Internal Revenue Code (Code) and to other sections
of the Code relating to employee benefit arrangements. These proposed
amendments, when finalized, will set forth rules regarding the use of
electronic media to provide notices to plan participants and
beneficiaries or to transmit elections or consents relating to employee
benefit arrangements. These regulations also reflect the provisions of
the Electronic Signatures in Global and National Commerce Act, Public
Law 106-229 (114 Stat. 464 (2000)) (E-SIGN).
The Code and regulations thereunder, and the parallel provisions of
the Employee Retirement Income Security Act of 1974 (ERISA), include a
number of rules that require certain retirement plan notices,
elections, or consents to be written or in writing.\1\ Examples of
these rules include the following:
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\1\ Pursuant to section 101(a) of the Reorganization Plan No. 4
of 1978, 29 U.S.C. 1001nt, the Secretary of the Treasury has
authority to issue regulations under parts 2 and 3 of subtitle B of
title I of ERISA with certain exceptions. Under section 104 of the
Reorganization Plan No. 4, the Secretary of Labor retains
enforcement authority with respects to parts 2 and 3 of subtitle B
of title 1 of ERISA, but, in exercising that authority, is bound by
the regulations issued by the Secretary of Treasury.
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Under sections 401(k)(12)(D) and 401(m)(11), a written
notice is required to be given to each employee eligible to participate
in a cash or deferred arrangement under section 401(k) in order for the
plan to be permitted to use a safe harbor in lieu of the actual
deferral percentage test or actual contribution percentage test to
ensure that the plan satisfies certain nondiscrimination requirements.
Under section 402(f), a plan is required to provide a
distributee, within a reasonable period of time before an eligible
rollover distribution is made, a written explanation of the
distributee's rollover rights and the tax and other potential
consequences of the distribution or rollover.
Under section 411(a)(11) (and the parallel provision in
section 203(e) of ERISA) and Sec. 1.411(a)-11(f)(2), a participant
cannot be cashed out of a plan before the later of normal retirement
age or age 62 without the participant's written consent if the value of
the participant's nonforfeitable accrued benefit exceeds $5,000.
Under section 417 (and the parallel provision in section
205 of ERISA) and the regulations thereunder, a plan must provide to
each participant a written explanation of the terms and conditions of a
qualified joint and survivor annuity, the participant's right to make
an election to waive the qualified joint and survivor annuity, the
right to revoke such an election, and the rights of the participant's
spouse. Under section 417(a)(2), an election to waive a qualified joint
and survivor annuity can generally go into effect only if the
participant's spouse consents to the election in writing and that
consent is witnessed by either a plan representative or a notary
public.
Under section 3405(e)(10)(B) and Sec. 34.3405-1, A-d-35,
a payor is required to provide written notice to a payee regarding the
payee's right to elect not to have Federal income tax withheld from a
periodic payment (as defined in section 3405(e)(2)).
Under section 4980F (and the parallel provision in section
204(h) of ERISA) and Sec. 54.4980F-1, A-13, a plan must provide
written notice (section 204(h) notice) of an amendment to an applicable
pension plan that either provides for a significant reduction in the
rate of future benefit accrual or that eliminates or significantly
reduces an early retirement benefit or retirement-type subsidy.
Section 1510 of the Taxpayer Relief Act of 1997, Public Law 105-34
(111 Stat. 788, 1068) (TRA '97), provides for the Secretary of the
Treasury to issue guidance designed to interpret the notice, election,
consent, disclosure, and timing requirements (include related
recordkeeping requirements) under the Code and ERISA relating to
retirement plans as applied to the use of new technologies by plan
sponsors and administrators. Section 1510 of TRA '97 further provides
that the guidance should maintain the protection of the rights of
participants and beneficiaries. Pursuant to the mandate of section 1510
of TRA '97, final regulations (TD 8873) relating to the use of
electronic media for transmissions of notices and consents under
sections 402(f), 411(a)(11), and 3405(e)(10)(B) were published in the
Federal Register (65 FR 6001) on February 8, 2000 (the 2000
regulations). These regulations are discussed in this preamble under
the heading Prior Guidance Related to New Technologies.
E-SIGN, signed into law on June 30, 2000, generally provides that
electronic documents and signatures are given the same legal effect as
their paper counterparts. Section 101(a) of E-SIGN provides that,
notwithstanding any statute, regulation, or rule of law relating to a
transaction in or affecting interstate or foreign commerce, a
signature, contract, or other record may not be denied legal effect,
validity, or enforceability solely because it is in electronic form.
Section 101(b)(1) provides that E-SIGN does not limit, alter, or
otherwise affect any requirement imposed by a statute, regulation, or
rule of law relating to a person's rights or obligations under any
statute, regulation, or rule of law except with respect to a
requirement that contracts be written, signed, or in non-electronic
form. Section 101(b)(2) provides that E-SIGN does not require any
person to agree to use or accept electronic signatures or records,
other than a governmental agency with respect to a record other than a
contract to which it is a party.
Section 101(c) of E-SIGN sets forth special protections for
consumers that apply when a statute, regulation, or other rule of law
requires that consumer information relating to a transaction be
provided or made available in writing.\2\ Under those protections,
before information can be transmitted electronically, a consumer must
first affirmatively consent to receiving the information electronically
and the consent must be made in a manner that reasonably demonstrates
the consumer's ability to access the information in electronic form (or
if the consent is not provided in such a manner, that confirmation of
the consent be made electronically in a manner that reasonably
demonstrates the consumer's ability to access the information in
electronic form). Prior to consent, the consumer must receive certain
specified disclosures. The disclosures must include, among other items,
the hardware or software requirements for access to and retention of
the electronic records, the consumer's right to withdraw his or her
consent to receive the information electronically (and the consequences
that follow the withdrawal of consent), the procedures for requesting a
paper copy of the electronic record, and the cost, if any, of obtaining
a paper copy. Section 106(1) of E-SIGN generally defines a consumer as
an individual who obtains products or services used primarily for
personal, family, or household purposes.
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\2\ The rules of section 101 of E-SIGN do not apply to certain
consumer notices. These include consumer notices that are necessary
for the protection of a consumer's health, safety, or shelter (e.g.,
cancellation of health benefits or life insurance and foreclosure on
a credit agreement secured by an individual's primary residence).
See section 103(b)(2)(B) and (C) of E-SIGN.
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Section 104(b)(1) of E-SIGN generally provides that a Federal or
state agency that is responsible for rulemaking under a statute has
interpretative authority to issue guidance interpreting section 101
[[Page 40677]]
of E-SIGN with respect to that other statute. However, as a limitation
on that authority, section 104(b)(2) of E-SIGN prohibits the issuance
of any regulation that is not consistent with section 101 or that adds
to the requirements of that section. Section 104(b)(2) of E-SIGN also
requires that any agency issuing the regulations find that the rules
selected to carry out the purpose of the relevant statute are
substantially equivalent to the requirements imposed on records that
are not electronic, do not impose unreasonable cost on the acceptance
and use of electronic records, and do not require or give greater legal
status to a specific technology.
Section 104(d)(1) of E-SIGN authorizes a Federal regulatory agency
to exempt, without condition, a specified category or type of record
from the consent requirements in section 101(c). The exemption may be
issued only if the exemption is necessary to eliminate a substantial
burden on electronic commerce and will not increase the material risk
of harm to consumers.
Subsequent to the enactment of E-SIGN, Congress amended section
204(h) of ERISA and enacted a corresponding provision in section 4980F
of the Code. Under ERISA section 204(h)(7) and Code section 4980F(g),
the Secretary of the Treasury may, by regulations, allow any section
204(h) notice to be provided by using new technologies.
Prior Guidance Relating to New Technologies
Following the enactment of section 1510 of TRA '97, the Treasury
Department and IRS issued several items of guidance relating to the use
of electronic media with respect to employee benefit arrangements.
Notice 99-1 (1999-1 C.B. 269) provides guidance relating to qualified
retirement plans permitting the use of electronic media for plan
participants or beneficiaries conducting certain account transactions
for which there is no specific writing requirement, such as plan
enrollments, direct rollover elections, beneficiary designations,
investment change allocations, elective and after-tax contribution
designations, and general plan or specific account inquiries.\3\
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\3\ The Treasury Department and IRS have also issued guidance
regarding the use of electronic media with respect to tax reporting
and other tax requirements with respect to employee benefit plans.
For example, Announcement 99-6 (1999-1 C.B. 352) authorizes payers
of pensions, annuities, and other employee benefits to establish a
system for payees to submit electronically Forms W-4P, ``Withholding
Certificate for Pension or Annuity Payments,'' W-4S, ``Request for
Federal Income Tax Withholding from Sick Pay,'' and W-4V,
``Voluntary Withholding Request,'' if certain requirements,
including signature and recordkeeping requirements, are satisfied.
In addition, Notice 2004-10 (2004-6 I.R.B. 433) authorizes the
electronic delivery of certain forms relating to the reporting of
contributions and distributions of pensions, simplified employee
pensions, traditional IRAs, Roth IRAs, qualified tuition programs,
Coverdell education savings accounts, and Archer Medical Savings
Accounts. See also Sec. Sec. 31.6051-1(j) and 1.6039-1(f).
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The 2000 regulations relating to the use of electronic media for
transmissions of notices and consents required to be in writing under
sections 402(f), 411(a)(11), and 3405(e)(10)(B) set forth standards for
the electronic transmission of certain notices and consents required in
connection with distributions from retirement plans. These regulations
provide that a plan may provide a notice required under section 402(f),
411(a)(11), or 3405(e)(10)(B) either on a written paper document or
through an electronic medium that is reasonably accessible to the
participant. The system must be reasonably designed to provide the
notice in a manner no less understandable to the participant than a
written paper document. In addition, the participant must be advised of
the right to request and receive a paper copy of the written paper
document at no charge, and, upon request, the document must be provided
to the participant without charge.
The 2000 regulations permit an electronic system to satisfy the
requirement that a participant provide written consent to a
distribution if certain requirements are satisfied. First, the
electronic medium must be reasonably accessible to the participant.
Second, the electronic system must be reasonably designed to preclude
anyone other than the participant from giving the consent. Third, the
system must provide the participant with a reasonable opportunity to
review and to confirm, modify, or rescind the terms of the consent
before it becomes effective. Fourth, the system must provide the
participant, within a reasonable time after the consent is given, a
confirmation of the terms (including the form) of the distribution
through either a written paper document or in an electronic format that
satisfies the requirements for providing applicable notices. Thus, the
participant must be advised of the right to request and to receive a
confirmation copy of the consent on a written paper document without
charge.
Subsequent to the issuance of the 2000 regulations, the Treasury
Department and IRS have applied the standards set forth in those
regulations in other situations. For example, Sec. 1.7476-2(c)(2)
provides that a notice to an interested party \4\ is deemed to be
provided in a manner that satisfies the delivery requirements of Sec.
1.7476-2(c)(1) if the notice is delivered using an electronic medium
under a system that satisfies the requirements of Sec. 1.402(f)-1,
Q&A-5. Q&A-7 of Notice 2000-3 (2000-1 C.B. 413) provides that, until
the issuance of further guidance, a plan is permitted to use electronic
media to provide notices required under sections 401(k)(12) and
401(m)(11) if the employee receives the notice through an electronic
medium that is reasonably accessible, the system is designed to provide
the notice in a manner no less understandable to the employee than a
written paper document, and, at the time the notice is provided, the
employee is advised that the employee may request and receive the
notice on a written paper document at no charge. Similarly, regulations
at Sec. 1.72(p)-1, Q&A-3(b), require a loan from a plan to a
participant to be set forth in a written paper document, in an
electronic medium that satisfies standards that are the same as the
standards in the 2000 regulations, or in such other form as may be
approved by the Commissioner.
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\4\ Under section 7476, in order to receive a determination
letter on the qualified status of a retirement plan, the applicant
must provide evidence that individuals who qualify as interested
parties received notification of the determination letter
application.
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In 2003, final regulations (TD 9052) under section 4980F were
published in the Federal Register (68 FR 17277). Q&A-13 of Sec.
54.4980F-1 provides the rules for the manner of delivering a section
204(h) notice. For a plan to deliver electronically a section 204(h)
notice, the following requirements must be satisfied. First, the
section 204(h) notice must actually be received by the applicable
individual or the plan administrator must take appropriate and
necessary measures reasonably calculated to ensure that the method for
providing the section 204(h) notice results in actual receipt. Second,
the plan administrator must provide the applicable individual with a
clear and conspicuous statement that the individual has a right to
receive a paper version of the section 204(h) notice without the
imposition of fees and, if the individual requests a paper copy of the
section 204(h) notice, the paper copy must be provided without charge.
In addition, the regulations under section 4980F provide a safe
harbor method for delivering a section 204(h) notice electronically.
Under the safe harbor, which is substantially the same as the consumer
consent rules of E-SIGN, consent must be made
[[Page 40678]]
electronically in a manner that reasonably demonstrates the
individual's ability to access the information in electronic form. The
applicable individual must also provide an address for the delivery of
the electronic section 204(h) notice and the plan administrator must
provide the applicable individual with certain disclosures regarding
the section 204(h) notice, including the right to withdraw consent.
The Department of Labor (DOL) and the Pension Benefit Guaranty
Corporation (PBGC) have also issued regulations relating to the use of
electronic media to furnish notices, reports, statements, disclosures,
and other documents to participants, beneficiaries, and other
individuals under titles I and IV of ERISA. See 29 CFR 2520.104b-1 and
29 CFR 4000.14.
Explanation of Provisions
Overview
The proposed regulations would coordinate the existing notice and
election rules under the Code and regulations relating to certain
employee benefit arrangements with the requirements of E-SIGN and set
forth 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 arrangement be in writing or in written form. The
standards set forth in the proposed regulations would also function as
a safe harbor when an electronic medium is used for any communication
that is not required to be in writing or in written form.
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, an annuity contract described in
section 403(a) or 403(b), a simplified employee pension (SEP) under
section 408(k), a simple retirement plan under section 408(p), or an
eligible governmental plan under section 457(b). Thus, for example, the
proposed regulations would apply to a section 402(f) notice, a section
411(a)(11) notice, and a section 204(h) notice.
In addition, the proposed regulations would apply to any notice,
election, or similar communication provided to or made by a participant
or beneficiary under an accident and health plan or an arrangement
under section 104(a)(3) or 105, a cafeteria plan under section 125, an
educational assistance program under section 127, a qualified
transportation fringe program under section 132, an Archer Medical
Savings Account under section 220, or a health savings account under
section 223.
However, the proposed regulations would not apply to any notice,
election, consent, or disclosure required under the provisions of title
I or IV of ERISA over which the DOL or the PBGC has interpretative and
regulatory authority. For example, the rules in Sec. 2520.104b-1 of
the Labor Regulations apply with respect to an employee benefit plan
furnishing disclosure documents, such as a summary plan description or
a summary annual report. The proposed regulations would also not apply
to Code section 411(a)(3)(B) (relating to suspension of benefits), Code
section 4980B(f)(6) (relating to an individual's COBRA rights), or any
other Code provision over which DOL and the PBGC have similar
interpretative authority. In addition, the rules in these proposed
regulations apply only with respect to notices and elections relating
to a participant's rights under an employee benefit arrangement; thus
they do not apply with respect to other requirements under the Code,
such as requirements relating to tax reporting, tax records,\5\ or
substantiation of expenses.
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\5\ See section 6001 of the Code and the regulations thereunder,
and Rev. Proc. 98-25 (1998-1 C.B. 689) (setting forth the basic
requirements that the IRS treats as essential for satisfying the
recordkeeping requirements of section 6001 in cases where a
taxpayer's records are maintained in electronic form).
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Requirements for the Use of Electronic Media
These proposed regulations would require that any communication
that is provided using an electronic medium satisfy all the otherwise
applicable requirements (including the applicable timing and content
rules) relating to that communication. In addition, these regulations
would require that the content of the notice and the medium through
which it is delivered 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) notice would not satisfy this requirement if
the plan chose to provide the notice through a pre-recorded message on
an automated phone system.\6\ The regulations would also require that,
at the time the applicable notice is provided, the electronic
transmission 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.
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\6\ Note that a section 204(h) notice cannot be provided using
oral communication or a recording of an oral communication. See
Sec. 54.4980F-1, A-13(c)(1).
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The view of the Treasury Department and IRS is that a participant
under an employee benefit arrangement is generally a consumer within
the meaning of section 106(1) of E-SIGN when receiving a notice in
order to make a decision about the participant's benefits or other
rights under an employee benefit arrangement.\7\ Accordingly, Sec.
1.401(a)-21(b) of these proposed regulations would provide rules,
reflecting the consumer consent requirements of section 101(c) of E-
SIGN, under which an employee benefit arrangement may provide an
applicable notice through an electronic medium. However, the Treasury
Department and IRS also believe that, if an employee benefit
arrangement could provide these notices only by complying with the
rules in Sec. 1.401(a)-21(b) of these proposed regulations, it would
impose a substantial burden on electronic commerce. Furthermore, there
is an alternative that is less burdensome and that would not increase
the material risk of harm to plan participants. Accordingly, Sec.
1.401(a)-21(c) of these proposed regulations provides an alternative
means of providing notices electronically.
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\7\ See also 12 CFR 202.16, 205.17, 213.6, and 2226.36, treating
electronic disclosures in connection with certain credit
transactions as consumer information for purposes of E-SIGN.
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Section 1.401(a)-21(b) of these proposed regulations would
generally require that before a plan may provide an applicable notice
using an electronic medium, the participant must consent to receive the
communication electronically. The consent generally must be made in a
manner that reasonably demonstrates that the participant can access the
notice in the electronic form that will be used to provide the notice.
Alternatively, the consent may be made using a written paper document
or through some other nonelectronic means, but only if the participant
confirms the consent in a manner that reasonably demonstrates that the
participant can access the notice in the electronic form to be
provided. Prior to consenting, the participant must receive a
disclosure statement that outlines the scope of the consent, the
participant's right to withdraw his or her consent to receive the
communication electronically (including any conditions,
[[Page 40679]]
consequences, or fees in the event of the withdrawal), and the right to
receive the communication using paper. The disclosure must also specify
the hardware and software requirements for accessing the electronic
media and the procedures for updating information to contact the
participant electronically. In the event the hardware or software
requirements change, new consent must be obtained from the participant,
generally following the rules of section 101(c) of E-SIGN.
Section 1.401(a)-21(c) of these proposed regulations provides
alternate conditions for providing notices electronically. The proposed
regulations would exempt applicable notices from the consumer consent
requirements of E-SIGN and would provide an alternative method of
complying with the requirement that a participant notice be in writing
or in written form if the plan complies with those conditions. This
alternative method of compliance is based on the 2000 regulations
previously issued under section 1510 of TRA '97 (which provides that
any guidance issued should maintain the protection of the rights of
participants and beneficiaries). This alternative method of compliance
satisfies the requirements of section 104(d)(1) of E-SIGN, including
the requirement that any exemption from the consumer consent
requirements not increase the material risk of harm to consumers.
The alternative method of compliance provides rules that are
intended generally to replicate the requirements in the 2000
regulations that apply to notices required under sections 402(f),
411(a)(11), and 3405 and thereby allow plans to continue to provide
these notices electronically using the rules in those 2000 regulations.
As under the 2000 regulations, the proposed regulations would retain
the requirement that, at the time the applicable notice is provided,
the participant must be advised that he or she may request and must
receive the applicable notice in writing on paper at no charge.
However, the requirement that the electronic medium be reasonably
accessible under the 2000 regulations would be changed to require that
the recipient of the notice be effectively able to access the
electronic medium. This is not intended to reflect a substantive change
in the rules, but rather to avoid confusion with Labor Regulations
interpreting the words reasonably accessible as used in section
101(i)(2)(D) of ERISA, as added by section 306 of the Sarbanes Oxley
Act of 2002, Public Law 107-204 (116 Stat. 745).\8\
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\8\ Section 101(i) of ERISA sets forth a requirement for a plan
administrator to notify plan participants and beneficiaries of a
blackout period with respect to an individual account plan. Section
101(i)(2)(D) provides that the required blackout notice ``shall be
in writing, except that such notice may be in electronic or other
form to the extent that such form is reasonably accessible to the
recipient.'' Section 2520.101-3(b)(3) of the Labor Regulations
interpreting this requirement provides for this notice to be in
writing and furnished in any manner consistent with the requirements
of section 2520.104b-1 of the Labor Regulations, including the
provisions in that section relating to the use of electronic media.
Those regulations also deem a notice requirement to be satisfied if
certain measures are taken. Section 1.401(a)-21 of these proposed
regulations only provides rules for satisfying, through the use of
electronic media, a requirement that a notice or election be in
writing.
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Proposed Sec. 1.401(a)-21(d) would set forth the requirements that
apply if a consent, election, request, agreement, or similar
communication is made by or from a participant, beneficiary, or
alternate payee using an electronic medium. (For simplicity, the
proposed regulations refer to all of these types of actions as
participant elections.) The rules in proposed Sec. 1.401(a)-21(d),
which are also based on the standards in the 2000 regulations, would
require that (1) the participant be effectively able to access the
electronic system in order to transmit the participant election, (2)
the electronic system be reasonably designed to preclude any person
other than the participant from making the participant election (for
example, through the use of a personal identification number (PIN)),
(3) the electronic system provide the participant making the
participant election with a reasonable opportunity to review, confirm,
modify, or rescind the terms of the election before it becomes
effective, and (4) the participant making the participant election,
within a reasonable time period, receive a confirmation of the election
through either a written paper document or an electronic medium under a
system that satisfies the applicable notice requirements of proposed
Sec. 1.401(a)-21(b) or (c).
These regulations require that a participant be effectively able to
access the electronic system that the plan provides for participant
elections, but, like the 2000 regulations, do not require that a plan
also permit the election to be transmitted by paper as an alternative
to using the electronic system available to the participant. If a plan
were to require participant elections to be provided electronically,
such as requiring that any consent to a distribution under section
411(a)(11) be transmitted electronically through a particular medium
(without an option to make the election on paper), then these
regulations would not apply with respect to a participant who is not
effectively able to access to the electronic medium. In addition, such
a participant would be effectively unable to provide consent and would
generally not be paid until the later of age 62 or normal retirement
age. Moreover, no form of distribution would be available to the former
employee and such a plan may have difficulties demonstrating compliance
with the qualification requirements. For example, the plan may not be
able to demonstrate that it satisfies the requirements of Sec.
1.401(a)(4)-4 under which benefits, rights, and features, such as a
right to early distribution, must be made available in a
nondiscriminatory manner.\9\
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\9\ Similar problems would arise under section 411(d)(6),
assuming the plan previously permitted election of early
distribution to be made on paper.
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Unlike the 2000 regulations, the rules in these proposed
regulations would extend the use of electronic media to the notice and
election rules applicable to plans subject to the QJSA requirements of
section 417. Section 417 requires the consent of a spouse to be
witnessed by a plan representative or a notary public. In accordance
with section 101(g) of E-SIGN, the proposed regulations would permit
the use of an electronic acknowledgment or notarization of a signature
(if the standards of section 101(g) of E-SIGN and State law applicable
to notary publics are satisfied). However, the proposed regulations
would require that the signature of the individual be witnessed in the
physical presence of the plan representative or notary public,
regardless of whether the signature is provided on paper or through an
electronic medium.
As discussed above, these proposed regulations, which are
consistent with section 101 of E-SIGN and do not add to the
requirements of that section, are issued to set forth rules that
coordinate section 101 of E-SIGN with the sections of the Code relating
to employee benefit arrangements. In accordance with section
104(b)(2)(C) of E-SIGN, the Treasury Department and IRS find that there
is substantial justification for these proposed regulations, that the
requirements imposed on the use of electronic media under these
regulations are substantially equivalent to those imposed on non-
electronic records, that the requirements will not impose unreasonable
costs on the acceptance and use of electronic records, and that these
regulations do not require (or accord greater legal
[[Page 40680]]
status or effect to) the use of any specific technology.
Conforming Amendments to Other Rules in Law
The proposed regulations would modify a number of existing
regulations (including the 2000 regulations and the other regulations
described above) that have previously provided rules relating to the
use of new technology in providing applicable notices that are required
to be in writing or in written form. These modifications, which merely
add the consumer consent requirements of E-SIGN, are not expected to
adversely affect existing administrative practices of plan sponsors
designed to comply with the 2000 regulations.
As noted above, these proposed regulations would apply to
categories of applicable notices that were not previously addressed in
the 2000 regulations and subsequent regulations. As such, these
regulations apply whenever there is a requirement that an applicable
notice under one of the covered sections be provided in written form or
in writing, without regard to whether that other requirement
specifically cross-references these regulations. Thus, safe harbor
notices under sections 401(k)(12)(D) and 401(m)(11), which are required
to be in writing, can be provided electronically if the requirements of
Sec. 1.401(a)-21 of this chapter are satisfied.
Proposed Effective Date
These regulations are proposed to apply prospectively. Thus, these
rules will apply no earlier than the date of the publication of the
Treasury decision adopting these rules as final regulations in the
Federal Register. These regulations cannot be relied upon prior to
their issuance as final regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
these regulations do not propose any new collection of information, the
provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do
not apply. These regulations only provide guidance on how to satisfy
existing collection of information requirements through the use of
electronic media. Pursuant to section 7805(f) of the Code, these
proposed regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) or electronic comments that are submitted timely
to the IRS. The Treasury Department and IRS specifically request
comments on the clarity of the proposed rules and how they can be made
easier to understand. All comments will be available for public
inspection and copying.
The proposed regulations have reserved the issue of whether there
should be any exceptions to the rule generally requiring the physical
presence of the spouse for a notarization of the spouse's consent.
Comments are requested on whether the reservation should be: (i)
Deleted in favor of a broad prohibition that has no exception; (ii)
filled in based on a general standard under which electronic
notarization of an electronic signature (without the spouse's presence)
would be permitted if the technology provides the same protections and
assurance as the requirement that a person's signature be executed in
the presence of a notary (e.g., that the spouse is actually the person
signing); or (iii) filled in with a grant of discretion to the
Commissioner to determine in the future, after advance notice and an
opportunity for comment, that a particular form of electronic
notarization of an electronic signature (without the spouse's presence)
provides the same protections and assurance as the requirement that a
person's signature be executed in the presence of a notary.
A public hearing has been scheduled for November 2, 2005, beginning
at 10 a.m. in the Auditorium, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the main entrance, located at 1111
Constitution Avenue, NW. In addition, all visitors must present photo
identification to enter the building. Because of access restrictions,
visitors will not be admitted beyond the immediate entrance area more
than 30 minutes before the hearing starts. For information about having
your name placed on the building access list to attend the hearing, see
the FOR FURTHER INFORMATION CONTACT portion of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments must submit written or electronic
comments and an outline of the topics to be discussed and time to be
devoted to each topic (a signed original and eight (8) copies) by
October 12, 2005. A period of 10 minutes will be allotted to each
person for making comments. An agenda showing the scheduling of the
speakers will be prepared after the deadline for receiving comments has
passed. Copies of the agenda will be available free of charge at the
hearing.
Drafting Information
The principal author of these proposed regulations is Pamela R.
Kinard, Office of Division Counsel/Associate Chief Counsel (Tax Exempt
and Government Entities), Internal Revenue Service. However, personnel
from other offices of the IRS and Treasury Department participated in
their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 35
Employment taxes, Income taxes, Reporting and recordkeeping
requirements.
26 CFR Part 54
Excise taxes, Pensions, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1, 35, and 54 are proposed to be amended
as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *.
Section 1.401(a)-21 also issued under 26 U.S.C. 401 and section
104(b)(1) and (2) of the Electronic Signatures in Global and
National Commerce Act, Public Law 106-229 (114 Stat. 464). * * *
Par. 2. Section 1.72(p)-1, Q&A-3, is amended by revising the text
of paragraph (b) to read as follows:
Sec. 1.72(p)-1 Loans treated as distributions.
* * * * *
A-3. * * *
(b) * * * A loan does not satisfy the requirements of this
paragraph unless the loan is evidenced by a legally enforceable
agreement (which may include more than one document) and the terms of
the agreement demonstrate compliance with the requirements of
[[Page 40681]]
section 72(p)(2) and this section. Thus, the agreement must specify the
amount and date of the loan and the repayment schedule. The agreement
does not have to be signed if the agreement is enforceable under
applicable law without being signed. The agreement must be set forth
either--
(1) In a written paper document; or
(2) In an electronic medium under a system that satisfies the
participant election requirements of Sec. 1.401(a)-21(d) of this
chapter.
* * * * *
Par. 3. Section 1.401(a)-21 is added to read as follows:
Sec. 1.401(a)-21 Rules relating to the use of electronic media to
provide applicable notices and to transmit participant elections.
(a) Introduction--(1) In general--(i) Permission to use electronic
media. This section provides rules relating to the use of electronic
media to provide applicable notices and to transmit participant
elections as defined in paragraphs (e)(1) and (2) of this section with
respect to certain employee benefit arrangements referenced in this
section. The rules in this section reflect the provisions of the
Electronic Signatures in Global and National Commerce Act, Public Law
106-229 (114 Stat. 464 (2000) (E-SIGN)).
(ii) Notices and elections required to be in writing or in written
form--(A) In general. The rules of this section must be satisfied in
order to use electronic media to provide an applicable notice or to
transmit a participant election if the notice or election is required
under the Internal Revenue Code or Department of Treasury regulations
to be in writing or in written form.
(B) Rules relating to applicable notices. An applicable notice that
is provided using electronic media is treated as being provided in
writing or in written form if and only if the consumer consent
requirements of paragraph (b) of this section are satisfied or the
requirements for exemption from the consumer consent requirements under
paragraph (c) of this section are satisfied. For example, in order to
provide a section 402(f) notice electronically, a qualified plan must
satisfy either the consumer consent requirements of paragraph (b) of
this section or the requirements for exemption under paragraph (c) of
this section. If a plan fails to satisfy either of these requirements,
the plan must provide the section 402(f) notice using a written paper
document in order to satisfy the requirements of section 402(f).
(C) Rules relating to participant elections. A participant election
that is transmitted using electronic media is treated as being provided
in writing or in written form if and only if the requirements of
paragraph (d) of this section are satisfied.
(iii) Safe harbor method for applicable notices and participant
elections that are not required to be in writing or written form. For
an applicable notice or a participant election that is not required to
be in writing or in written form, the rules of this section provide a
safe harbor method for using electronic media to provide the applicable
notice or to transmit the participant election.
(2) Application of rules--(i) Notices, elections, or consents under
retirement plans. The rules of this section apply to any applicable
notice or any participant election relating to a qualified retirement
plan under section 401(a) or 403(a). In addition, the rules of this
section apply to any applicable notice and any participant election
relating to an annuity contract under section 403(b), a simplified
employee pension (SEP) under section 408(k), a simple retirement plan
under section 408(p), and an eligible governmental plan under section
457(b).
(ii) Notices, elections, or consents under other employee benefit
arrangements. The rules of this section also apply to any applicable
notice or any participant election relating to accident and health
plans or arrangements under sections 104(a)(3) and 105, cafeteria plans
under section 125, qualified education assistance programs under
section 127, qualified transportation fringe programs under section
132, Archer medical savings accounts under section 220, and health
savings accounts under section 223.
(3) Limitation on application of rules--(i) In general. The rules
of this section do not apply to any notice, election, consent, or
disclosure required under the provisions of title I or IV of the
Employee Retirement Income Security Act of 1974, as amended (ERISA),
over which the Department of Labor or the Pension Benefit Guaranty
Corporation has interpretative and regulatory authority. For example,
the rules in 29 CFR 2520.104b-1 of the Labor Regulations apply with
respect to an employee benefit plan providing disclosure documents,
such as a summary plan description or a summary annual report. The
rules in this section also do not apply to Internal Revenue Code
section 411(a)(3)(B) (relating to suspension of benefits), Internal
Revenue Code section 4980B(f)(6) (relating to an individual's COBRA
rights), or any other Internal Revenue Code provision over which
Department of Labor or the Pension Benefit Guaranty Corporation has
similar interpretative authority.
(ii) Other requirements under the Internal Revenue Code. Because
the rules in this section only apply with respect to applicable notices
and participant elections relating to a participant's rights under an
employee benefit arrangement; thus they do not apply with respect to
other requirements under the Internal Revenue Code, such as
requirements relating to tax reporting, tax records, or substantiation
of expenses.
(4) Additional requirements related to applicable notices and
participant elections. The rules of this section supplement the general
requirements related to each applicable notice and to each participant
election. Thus, in addition to satisfying the rules for delivery under
this section, the timing, content, and other general requirements
(including recordkeeping requirements in guidance issued by the
Commissioner under section 6001) relating to the applicable notice or
participant election must be satisfied. With respect to the content of
the notice, the system of delivery must be reasonably designed to
provide the applicable notice to a recipient in a manner no less
understandable to the recipient than a written paper document. In
addition, at the time the applicable notice is provided, the electronic
transmission must alert the recipient to the significance of the
transmittal (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 and accessible.
(b) Consumer consent requirements--(1) Requirements. The consumer
consent requirements of this paragraph (b) are satisfied if the
requirements in paragraphs (b)(2) through (5) of this section are
satisfied.
(2) Consent--(i) In general. The recipient must affirmatively
consent to the delivery of the applicable notice using electronic
media. This consent must be either--
(A) Made electronically in a manner that reasonably demonstrates
that the recipient can access the applicable notice in the electronic
form that will be used to provide the notice; or
(B) Made using a written paper document (or using another form not
described in paragraph (b)(2)(i)(A) of this section), but only if the
recipient confirms the consent electronically in a manner that
reasonably demonstrates that the recipient can access the
[[Page 40682]]
applicable notice in the electronic form that will be used to provide
the notice.
(ii) Withdrawal of consumer consent. The consent to receive
electronic delivery requirement of this paragraph (b)(2) is not
satisfied if the recipient withdraws his or her consent before the
applicable notice is delivered.
(3) Required disclosure statement. The recipient, prior to
consenting under paragraph (b)(2)(i) of this section, must be provided
with a clear and conspicuous statement containing the disclosures
described in paragraphs (b)(3)(i) through (v) of this section:
(i) Right to receive paper document--(A) In general. The statement
informs the recipient of any right to have the applicable notice be
provided using a written paper document or other nonelectronic form.
(B) Post-consent request for paper copy. The statement informs the
recipient how, after having provided consent to receive the applicable
notice electronically, the recipient may, upon request, obtain a paper
copy of the applicable notice and whether any fee will be charged for
such copy.
(ii) Right to withdraw consumer consent. The statement informs the
recipient of the right to withdraw consent to receive electronic
delivery of an applicable notice on a prospective basis at any time and
explains the procedures for withdrawing that consent and any
conditions, consequences, or fees in the event of the withdrawal.
(iii) Scope of the consumer consent. The statement informs the
recipient whether the consent to receive electronic delivery of an
applicable notice applies only to the particular transaction that gave
rise to the applicable notice or to other identified transactions that
may be provided or made available during the course of the parties'
relationship. For example, the statement may provide that a recipient's
consent to receive electronic delivery will apply to all future
applicable notices of the recipient relating to the employee benefit
arrangement until the recipient is no longer a participant in the
employee benefit arrangement (or withdraws the consent).
(iv) Description of the contact procedures. The statement describes
the procedures to update information needed to contact the recipient
electronically.
(v) Hardware or software requirements. The statement describes the
hardware and software requirements needed to access and retain the
applicable notice.
(4) Post-consent change in hardware or software requirements. If,
after a recipient provides consent to receive electronic delivery,
there is a change in the hardware or software requirements needed to
access or retain the applicable notice and such change creates a
material risk that the recipient will not be able to access or retain
the applicable notice in electronic format--
(i) The recipient must receive a statement of--
(A) The revised hardware or software requirements for access to and
retention of the applicable notice; and
(B) The right to withdraw consent to receive electronic delivery
without the imposition of any fees for the withdrawal and without the
imposition of any condition or consequence that was not previously
disclosed in paragraph (b)(3) of this section.
(ii) The recipient must reaffirm consent to receive electronic
delivery in accordance with the requirements of paragraph (b)(2) of
this section.
(5) Prohibition on oral communications. For purposes of this
paragraph (b), neither an oral communication nor a recording of an oral
communication is an electronic record.
(c) Exemption from consumer consent requirements--(1) In general.
This paragraph (c) is satisfied if the conditions in paragraphs (c)(2)
and (3) of this section are satisfied. This paragraph (c) constitutes
an exemption from the consumer consent requirements of section 101(c)
of E-SIGN pursuant to the authority granted in section 104(d)(1) of E-
SIGN.
(2) Effective ability to access. For purposes of this paragraph
(c), the electronic medium used to provide an applicable notice must be
a medium that the recipient has the effective ability to access.
(3) Free paper copy of applicable notice. At the time the
applicable notice is provided, the recipient must be advised that he or
she may request and receive the applicable notice in writing on paper
at no charge, and, upon request, that applicable notice must be
provided to the recipient at no charge.
(d) Special rules for participant elections--(1) In general. This
paragraph (d) is satisfied if the conditions described in paragraphs
(d)(2) through (6) of this section are satisfied.
(2) Effective ability to access. The electronic medium under a
system used to make a participant election must be a medium that the
individual who is eligible to make the election is effectively able to
access. If the individual is not effectively able to access the
electronic medium for making the participant election, the participant
election will not be treated as made available to that individual. For
example, the participant election will not be treated as made available
for purposes of the rules under section 401(a)(4).
(3) Authentication. The electronic system used in delivering a
participant election is reasonably designed to preclude any person
other than the appropriate individual from making the election. For
example, a system can require that an account number and a personal
identification number (PIN) be entered into the system before a
participant election can be transmitted.
(4) Opportunity to review. The electronic system provides the
individual making the participant election with a reasonable
opportunity to review, confirm, modify, or rescind the terms of the
election before the election becomes effective.
(5) Confirmation of action. The person making the participant
election, within a reasonable time, receives a confirmation of the
effect of the election under the terms of the plan through either a
written paper document or an electronic medium under a system that
satisfies the requirements of either paragraph (b) or (c) of this
section (as if the confirmation were an applicable notice).
(6) Participant elections, including spousal consents, that are
required to be witnessed by a plan representative or a notary public.
(i) Except as provided in paragraph (d)(6)(ii) of this section, in the
case of a participant election which is required to be witnessed by a
plan representative or a notary public (such as a spousal consent under
section 417), an electronic notarization acknowledging a signature (in
accordance with section 101(g) of E-SIGN and state law applicable to
notary publics) will not be denied legal effect so long as the
signature of the individual is witnessed in the physical presence of
the plan representative or notary public.
(ii) [Reserved].
(e) Definitions. The following definitions apply to this section:
(1) Applicable notice. The term applicable notice includes any
notice, report, statement, or other document required to be provided to
a recipient under an arrangement described in paragraph (a)(2) of this
section.
(2) Participant election. The term participant election includes
any consent, election, request, agreement, or similar communication
made by or from a participant, beneficiary, or alternate payee to which
this section applies under an arrangement described in paragraph (a)(2)
of this section.
[[Page 40683]]
(3) Recipient. The term recipient means a plan participant,
beneficiary, employee, alternate payee, or any other person to whom an
applicable notice is to be provided.
(4) Electronic. The term electronic means technology having
electrical, digital, magnetic, wireless, optical, electromagnetic,
voice-recording systems, or similar capabilities.
(5) Electronic media. The term electronic media means an electronic
method of communication (e.g., web sites, electronic mail, telephonic
systems, magnetic disks, and CD-ROMs).
(6) Electronic record. The term electronic record means an
applicable notice created, generated, sent, communicated, received, or
stored by electronic means.
(f) Examples. The following examples illustrate the rules of this
section. In all of these examples, with the exception of Example 4 and
Example 5, assume that the requirements of paragraph (a)(4) of this
section are satisfied. The examples read as follows:
Example 1. (i) Facts. Plan A, a qualified plan, permits
participants to request benefit distributions from the plan on Plan
A's Intranet web site. Under Plan A's system for such transactions,
a participant must enter his or her account number and personal
identification number (PIN), and this information must match the
information in Plan A's records in order for the transaction to
proceed. If a participant requests a distribution from Plan A on
Plan A's web site, then, at the time of the request for
distribution, a disclosure statement appears on the computer screen
that explains that the participant can consent to receive the
section 402(f) notice electronically. In the disclosure statement,
Plan A provides information relating to the consent, including how
to receive a paper copy of the notice, how to withdraw the consent,
the hardware and software requirements, and the procedures for
accessing the section 402(f) notice, which is in a file format from
a specific spreadsheet program. After reviewing the disclosure
statement, which satisfies the requirements of paragraph (b)(3) of
this section, the participant consents to receive the section 402(f)
notice via e-mail by selecting the consent button at the end of the
disclosure statement. As a part of the consent procedure, the
participant must demonstrate that the participant can access the
spreadsheet program by answering a question from the spreadsheet
program, which is in an attachment to an e-mail. Once the
participant correctly answers the question, the section 402(f)
notice is then delivered to the participant via e-mail.
(ii) Conclusion. In this Example 1, Plan A's delivery of the
section 402(f) notice satisfies the requirements of paragraph (b) of
this section.
Example 2. (i) Facts. Plan B, a qualified plan, permits
participants to request benefit distributions from the plan by e-
mail. Under Plan B's system for such transactions, a participant
must enter his or her account number and personal identification
number (PIN) and this information must match the information in Plan
B's records in order for the transaction to proceed. If a
participant requests a distribution from Plan B by e-mail, the plan
administrator provides the participant with a section 411(a)(11)
notice in an attachment to an e-mail. Plan B sends the e-mail with a
request for a computer generated notification that the message was
received and opened. The e-mail instructs the participant to read
the attachment for important information regarding the request for a
distribution. In addition, the e-mail also provides that the
participant 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. Plan B
receives notification indicating that the e-mail was received and
opened by the participant. The participant is effectively able to
access the e-mail system used to make a participant election and
consents to the distribution by e-mail. Within a reasonable period
of time after the participant's consent to the distribution by e-
mail, the plan administrator, by e-mail, sends confirmation of the
terms (including the form) of the distribution to the participant
and advises the participant that the participant may request the
confirmation on a written paper document that will be provided at no
charge.
(ii) Conclusion. In this Example 2, Plan B's delivery of the
section 411(a)(11) notice and the transmission of a participant's
consent to a distribution satisfy the requirements of paragraphs (c)
and (d) of this section.
Example 3. (i) Facts. Plan C, a qualified pension plan, permits
participants to request plan loans through the Plan C's web site on
the internet with the notarized consent of the spouse in accordance
with applicable State law. Under Plan C's system for such
transactions, a participant must enter his or her account number,
personal identification number (PIN), and his or her e-mail address.
The information entered by the participant must match the
information in Plan C's records in order for the transaction to
proceed. A participant may request a loan from Plan C by following
the applicable instructions on Plan C's web site. Participant M, a
married participant, is effectively able to access the web site
available to apply for a loan and completes the forms on the web
site for obtaining the loan. The forms include attachments setting
forth the terms of the loan agreement and all other required
information. Participant M is then instructed to submit to the plan
administrator a notarized spousal consent form. Participant M and
M's spouse go to a notary public and the notary witnesses
Participant M's spouse signing the spousal consent for the loan
agreement. After witnessing M's spouse signing the spousal consent,
the notary public sends an e-mail with an electronic acknowledgement
that is attached to or logically associated with the signature of
M's spouse to the plan administrator. The electronic acknowledgement
is in accordance with section 101(g) of E-SIGN and the relevant
state law applicable to notary publics. After the plan receives the
e-mail, Plan C sends an e-mail to the participant, giving the
participant a reasonable period to review and confirm the loan
application or to determine whether the application should be
modified or rescinded. In addition, the e-mail to the participant
also provides that the participant may request the plan loan
application on a written paper document and that, if the participant
requests the written paper document, it will be provided at no
charge.
(ii) Conclusion. In this Example 3, the transmissions of the
loan agreement and the spousal consent satisfy the requirements of
paragraph (d) of this section.
Example 4. (i) Facts. A qualified profit-sharing plan (Plan D)
permits participants to request distributions through an automated
telephone system. Under Plan D's system for such transactions, a
participant must enter his or her account number and personal
identification number (PIN); this information must match that in
Plan D's records in order for the transaction to proceed. Plan D
provides only the following distribution options: single-sum
payment; and annual installments over 5, 10, or 20 years. A
participant may request a distribution from Plan D by following the
applicable instructions on the automated telephone system. After the
participant has requested a distribution, the automated telephone
system recites the section 411(a)(11) notice to the participant. The
automated telephone system also advises the participant that he or
she may request the 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. The participants are effectively able
to access the automated telephone system used to make a participant
election. The automated telephone system requires a participant to
review and confirm the terms (including the form) of the
distribution before the transaction is completed. After the
participant has given consent, the automated telephone system
confirms the distribution to the participant and advises the
participant that he or she may request the confirmation on a written
paper document that will be provided at no charge.
(ii) Conclusion. In this Example 4, because Plan D has
relatively few and simple distribution options, the provision of the
section 411(a)(11) notice through the automated telephone system is
no less understandable to the participant than a written paper
notice for purposes of paragraph (a)(4) of this section. In
addition, the automated telephone procedures of Plan D satisfy the
requirements of paragraphs (c) and (d) of this section.
Example 5. (i) Facts. Same facts as Example 4, except that,
pursuant to Plan D's system for processing such transactions, a
participant who so requests is transferred to a customer service
representative whose conversation with the participant is recorded.
The customer service representative provides the section 411(a)(11)
notice from a prepared text and processes the participant's
distribution in accordance with the predetermined instructions from
the plan administrator.
[[Page 40684]]
(ii) Conclusion. Like in Example 4, because Plan D has
relatively few and simple distribution options, the provision of the
section 411(a)(11) notice through the automated telephone system is
no less understandable to the participant than a written paper
notice for purposes of paragraph (a)(4) of this section. Further, in
this Example 5, the customer service telephone procedures of Plan D
satisfy the requirements of paragraphs (c) and (d) of this section.
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 and personal identification number (PIN). 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 N requests a distribution
and receives the section 411(a)(11) notice from the plan
administrator by reply e-mail. However, before Participant N elects
a distribution, N terminates employment. Following termination of
employment, Participant N 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 N is not effectively able to access the
electronic medium used to make the participant election. Plan E must
provide Participant N with the opportunity to transmit the
participant election through another system that Participant N is
effectively able to access, such as the automated telephone systems
described in Example 4 and Example 5 of this paragraph (f).
Par. 4. Section 1.402(f)-1 is amended by:
(1) Revising A-5.
(2) Removing Q&A-6.
The revision reads as follows:
Sec. 1.402(f)-1 Required explanation of eligible rollover
distributions; questions and answers.
* * * * *
A-5. Yes. See Sec. 1.401(a)-21 of this chapter for rules
permitting the use of electronic media to provide applicable notices to
recipients with respect to employee benefit arrangements.
Par. 5. Section 1.411(a)-11 is amended by:
(1) Revising the text of paragraphs (f)(1) and (2).
(2) Removing paragraph (g).
The revisions read as follows:
Sec. 1.411(a)-11 Restriction and valuation of distributions.
* * * * *
(f) * * *
(1) * * * The notice of a participant's rights described in
paragraph (c)(2) of this section or the summary of that notice
described in paragraph (c)(2)(iii)(B)(2) of this section must be
provided on a written paper document. However, see Sec. 1.401(a)-21 of
this chapter for rules permitting the use of electronic media to
provide applicable notices to recipients with respect to employee
benefit arrangements.
(2) * * * The consent described in paragraphs (c)(2) and (3) of
this section must be given on a written paper document. However, see
Sec. 1.401(a)-21(d) of this chapter for rules permitting the use of
electronic media to transmit participant elections with respect to
employee benefit arrangements.
Par. 6. Section 1.417(a)(3)-1 is amended by revising the text of
paragraph (a)(3) to read as follows:
Sec. 1.417(a)(3)-1 Required explanation of qualified joint and
survivor annuity and qualified preretirement survivor annuity.
(a) * * *
(3) * * * A section 417(a)(3) explanation must be a written
explanation. First class mail to the last known address of the
participant is an acceptable delivery method for a section 417(a)(3)
explanation. Likewise, hand delivery is acceptable. However, posting of
the explanation is not considered provision of the section 417(a)(3)
explanation. But see Sec. 1.401(a)-21 of this chapter for rules
permitting the use of electronic media to provide applicable notices to
recipients with respect to employee benefit arrangements.
* * * * *
Par. 7. Section 1.7476-2 is amended by revising paragraph (c)(2) to
read as follows:
Sec. 1.7476-2 Notice to interested parties.
* * * * *
(c) * * *
(2) If the notice to interested parties is delivered using an
electronic medium under a system that satisfies the applicable notice
requirements of Sec. 1.401(a)-21 of this chapter, the notice is deemed
to be provided in a manner that satisfies the requirements of paragraph
(c)(1) of this section.
* * * * *
PART 35--EMPLOYMENT TAX AND COLLECTION OF INCOME TAX AT THE SOURCE
REGULATIONS UNDER THE TAX EQUITY AND FISCAL RESPONSIBILITY ACT OF
1982
Par. 8. The authority citation for part 35 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *.
Par. 9. Section 35.3405-1 is amended by:
(1) Revising d-35, A.
(2) Removing d-36, Q&A.
The revision reads as follows:
Sec. 35.3405-1 Questions and answers relating to withholding on
pensions, annuities, and certain other deferred income.
* * * * *
d-35. * * *
A. A payor may provide the notice required under section 3405
(including the abbreviated notice described in d-27 of Sec. 35.3405-1T
and the annual notice described in d-31 of Sec. 35.3405-1T) to a payee
on a written paper document. However, see Sec. 1.401(a)-21 of this
chapter for rules permitting the use of electronic media to provide
applicable notices to recipients with respect to employee benefit
arrangements.
PART 54--PENSION EXCISE TAXES
Par. 10. The authority citation for part 54 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *.
Par. 11. Section 54.4980F-1, Q&A-13, is amended as follows:
(1) Revising paragraph A-13 (c)(1)(ii).
(2) Removing paragraph A-13 (c)(1)(iii) and (c)(3).
The revision reads as follows:
Sec. 54.4980F-1 Notice requirements for certain pension plan
amendments significantly reducing the rate of future benefit accrual.
* * * * *
A-13. * * *
(c) * * *
(1) * * *
(ii) The section 204(h) notice is delivered using an electronic
medium under a system that satisfies the applicable notice requirements
of Sec. 1.401(a)-21.
* * * * *
Mark E. Mathews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-13911 Filed 7-13-05; 8:45 am]
BILLING CODE 4830-01-P