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The Internal Revenue Service recently issued proposed regulations (Proposed Regulations) regarding the use of electronic technologies for providing employee benefit plan notices and the making of participant elections. While the rules will not be effective prior to the publication of final rules in the Federal Register, plan sponsors and administrators should review their existing systems for delivering notices and communicating with participants to ensure they will comply with these rules and to begin preparation for implementing any changes that may be required. PRIOR GUIDANCE The IRS has previously issued several pieces of guidance relating to the use of new technologies and electronic media in connection with employee benefit plans. [FOOTNOTE 1] In Notice 99-1, the IRS stated that a plan’s status under the qualification requirements of Internal Revenue Code (IRC) ��401(a) and 401(k) is not affected by a plan’s use of electronic media for participant enrollments, contribution elections, beneficiary designations (other than those requiring spousal consent), direct rollover transactions, making or changing investment allocations and certain other transactions not required to be effected in written or paper form. In 2000, the IRS issued regulations (2000 Regulations) regarding the use of new technologies in retirement plans. Under the 2000 Regulations, the IRS authorized the use of electronic media for the transmission of notices under IRC ��402(f) (regarding rollover notices), �411(a)(11) (regarding notice and consent to receive a distribution) and �3405(regarding withholding notices). Many of the principles contained in the 2000 Regulations relating to the use of electronic media are reflected in the Proposed Regulations. In 2000, Congress enacted the Electronic Signatures in Global and National Commerce Act (E-SIGN). [FOOTNOTE 2] E-SIGN was enacted to facilitate the use of electronic records and signatures in interstate and foreign commerce. One of the principal features of E-SIGN is the requirement that a consumer consent in advance to the receipt of any information electronically where a statute, rule or regulation requires that the information be provided to the consumer in writing. E-SIGN gives federal agencies having interpretative authority over any statute to issue guidance interpreting E-SIGN with respect to that statute. In issuing the Proposed Regulations, the IRS indicated that it has determined that a participant or beneficiary under an employee benefit plan is a consumer within the meaning of E-SIGN and, thus, the Proposed Regulations reflect the consumer consent provisions of E-SIGN. In 2003, the IRS issued regulations on the electronic delivery of notices under IRC �4980F(g) in connection with notices of reductions in benefit accruals. Under those regulations, electronically delivered notices must actually be received by the participant or the plan administrator must take appropriate measures reasonably calculated to ensure that the method used to deliver the notice results in actual delivery. However, that regulation also included a safe harbor which is substantially the same as the consumer consent rules of E-SIGN. THE PROPOSED REGULATIONS The Proposed Regulations are intended to coordinate the notice and election rules regarding employee benefit plans with the requirements of E-SIGN. When finalized, they will set forth the exclusive rules (the Electronic Delivery Rules) for the use of electronic media to satisfy the various notice and consent provisions under the code that require the notice or consent to be in written form. They will apply to “applicable notices” (defined as any notice, report, statement or other document required to be provided under a covered employee benefit arrangement) and “participant elections” (defined as any consent, request, agreement or similar communication made by or from a participant, beneficiary or alternate payee under a covered employee benefit plan). The rules will cover applicable notices and participant elections transmitted by any electronic media, including Web sites, electronic mail, telephonic systems, magnetic disks and CD-ROMS. The IRS also intends that the Electronic Delivery Rules will provide a safe harbor for communications that are not required to be in written form. The Electronic Delivery Rules will apply to any applicable notice or participant election provided to or made by a participant, beneficiary or alternate payee under tax-qualified retirement plans, simplified employee pension plans under IRC �408(k), simplified retirement plans under IRC �408(p) and eligible governmental plans under IRC �457(b). It would also cover notices and elections relating to accident and health plans under IRC �104(a)(3), cafeteria plans under IRC �125, educational assistance plans under IRC �127, transportation fringe programs under IRC �132, Archer medical savings accounts under IRC �220 and health savings accounts under IRC �223. However, as proposed, Electronic Delivery Rules will not apply to any notice, election, consent or disclosure under Employee Retirement Income Security Act (ERISA) over which the Department of Labor or the Pension Benefit Guaranty Corp. has interpretative or regulatory authority. For example, the rules will not apply to the participants of summary plan descriptions or summary annual reports, which are required to be provided under ERISA. The rules also will not apply to notices relating to suspension of benefits under IRC �411(a)(3)(B) or Consolidated Omnibus Reconciliation Act (COBRA) continuation benefits under IRC �4980B(f)(6). The Proposed Regulations make clear that, as a general matter, the rules supplement the other requirements applicable to a particular notice or participant consent. Thus, the timing, content and other requirements relating to the applicable notice or participant election must also be satisfied. The Electronic Delivery Rules require that the system used to deliver an applicable notice must be reasonably designed to deliver the content of any notice in a manner no less understandable to the recipient than a paper document. In addition, the electronic transmission must alert the recipient to the significance of the transmittal at the time it is provided, including identifying the subject matter of the notice, and providing any instructions needed to access the notice in a manner that is readily understandable and accessible. CONSENT REQUIREMENTS The Electronic Delivery Rules require that an applicable notice provided by means of electronic media comply with the “consumer consent requirements.” These provisions are designed to reflect the consumer consent provisions contained in E-SIGN. They require that a recipient of an applicable notice affirmatively consent to the delivery of it by electronic media. The consent must either (i) be made electronically in a manner that demonstrates that the recipient can access the notice in the electronic form that will be used to provide the notice or (ii) by a written paper document but only if the recipient confirms the consent electronically in the manner described above. If a recipient’s consent is withdrawn before the applicable notice is delivered, the consumer consent requirement will not be satisfied. Prior to consenting, a recipient must be provided with a clear and conspicuous statement containing a number of disclosures. First, the statement must inform the recipient of any right to receive the notice in a written or other non-electronic form, and how to obtain a paper copy of the notice (and whether any fee will be charged) after having provided consent to receiving a notice in electronic form. The statement must inform the recipient of any right to withdraw consent and describe the procedure and any fees imposed for withdrawing consent. The statement must indicate whether the consent applies only to the applicable notice giving rise to the consent or will apply to all subsequent applicable notices provided under the particular employee benefit plan. Finally, the statement must describe the procedure to update the recipient’s contact information and the hardware and software requirements to access and retain the applicable notice. The Proposed Regulations also describe the procedure that must be followed if, after a recipient has provided a consent, there is a change in the hardware or software requirements. The Proposed Regulations provide an alternative method of compliance with the consumer consent requirement. The IRS has concluded that the alternative method of compliance satisfies the conditions set forth in �104(d)(1) of E-SIGN that any exemption from the general consumer consent requirement is necessary to eliminate a substantial burden on electronic commerce and will not increase the material risk of harm to consumers. The alternative method of compliance is based on the electronic delivery provisions of the 2000 Regulations and requires that the electronic medium used to provide an applicable notice must be one that the recipient has the effective ability to access. It also requires that at the time the applicable notice is provided the recipient must be advised that he or she may receive the notice in a paper form at no charge. There appears to be no reason why an employer could not rely on the alternative method of compliance for some applicable notices while complying with the consumer consent requirement for others. PARTICIPANT ELECTIONS The proposed Electronic Delivery Rules include a number of special requirements applicable to participant elections. The first requirement is that the electronic medium used for a participant election must be one that the individual is effectively able to access. If the individual is not effectively able to access the electronic medium, the participant election will be deemed not to have been made available to the individual. This could have an effect on the plan’s satisfaction of any nondiscrimination requirements applicable to the plan. Although the Proposed Regulations do not define what constitutes effective access to an electronic medium, according to examples contained in the Proposed Regulations, a participant’s ability to make a election through the plan’s Web site or through an automated telephone system would be treated as providing effective access to the medium. The electronic system must be reasonably designed to preclude any person other than the appropriate individual from making a participant election. Use of an account number and a personal identification number (PIN) should satisfy this requirement. The system also must provide a participant making an election with an opportunity to review, confirm, modify or rescind the terms of the election before the election becomes effective. If this provision remains in the final regulations, it may require some systems to be modified to add a confirmation or rescission step in the process with respect to certain types of elections. Another requirement under the Proposed Regulations is that an individual making a participant election must receive a confirmation of the effect of the election within a reasonable time after it is made. The confirmation can either be made in a written paper document or through an electronic medium under a system that satisfies the notice requirements described earlier. For example, a follow-up e-mail or confirmation by an automated telephone system will satisfy this requirement. Presumably, this requires a separate confirmation and reflecting the effect of a participant’s election on the next regular statement will not be sufficient. Finally, in the case of a participant election that requires it to be witnessed by a plan representative or a notary (e.g., spousal consent to waive a joint and survivor annuity form of distribution), an electronic notarization acknowledging a signature will be permitted as long as the participant’s signature is witnessed in the physical presence of the plan representative or notary. The electronic notarization must be attached to or logically associated with the participant’s (or spouse’s) signature. See ��104(g) of E-SIGN. CONCLUSION The Proposed Regulations represent a sensible and workable approach to the use of electronic media in connection with the administration of employee benefit plans. No doubt the proposed rules will require changes to the systems already in use by some plan sponsors and administrators. However, it does not appear that these rules are likely to require major upgrades or revisions for the majority of existing systems that have been designed in accordance with existing guidance. Donald P. Carleen is a partner and chairs the executive compensation and employee benefits group at Fried, Frank, Harris, Shriver & Jacobson. Christopher Stanton, a summer associate with the firm, assisted in the preparation of this article. ::::FOOTNOTES:::: FN1 The Department of Labor and the Pension Benefit Guaranty Corp. have also issued regulations addressing the electronic delivery of documents. See 29 CFR 2520.104b-1 and 29 CFR 4000-14. FN2 Public Law 106-229; 15 USC 7001 et seq.

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