November, 2006
IRS Issues Final Regulations on the Use of Electronic Media
WHAT IS IT?: – In October 2006, the IRS issued final regulations regarding the use of electronic media for providing employee benefit notices and making employee benefit elections and consents. The final regulations reflect the applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-SIGN) as it relates to the electronic delivery of notices.
WHY IS IT IMPORTANT? – The standards set forth in the regulations are generally the exclusive rules for providing employee benefit notices or elections that must be “in writing” through the use of an electronic medium. (e.g., §402 (f) rollover notices, §417 J&S notices and elections, 401(k) safe harbor notices). These regulations generally apply to applicable notices provided, and participant elections made on or after January 1, 2007.
It is also important to note that these final regulations also apply to an accident or health plan under §104(a)(3) or §105; a cafeteria plan under §125; an educational assistance plan under §127, qualified transportation benefits under §132 among others.
For any employee benefit notice or election that is not required to be in writing or in written form, the standards set forth in the regulations function as a safe harbor.
Note: These regulations do not apply to any Code provision over which the DOL or PBGC has interpretative authority, e.g., summary plan descriptions, summary annual reports, COBRA notices and suspension of benefits notices. See Compliance Cue Cards which contains information on the DOL electronic media rules.
HIGHLIGHTS OF THE REGULATIONS:
The regulations address electronic systems and using electronic media to provide “applicable notices” and make participant elections.
Electronic systems
The electronic system must be designed to
- provide information in the notice in a manner that is no less understandable to the recipient than a written paper document
- alert the recipient, at the time an applicable notice is provided, to the significance of the information in the notice, including identification of the subject matter of the notice, and provide any instructions needed to access the notice, in a manner that is as readily understandable and accessible as a an applicable notice provided using paper
- maintain an electronic record of the notice in a manner that is capable of being accurately reproduced for later reference; if not, the validity and enforceability of the record may be denied.
Providing Applicable Notices
The regulations describe two permissible methods to provide applicable notices – the consumer consent method and the alternative method. The consumer consent method reflects the E-SIGN consumer consent requirements.
Consumer consent requirements
Under the consumer consent method, the recipient must affirmatively consent to receive the applicable notice 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. Before consenting, the recipient must be provided with a clear and conspicuous statement providing the:
- scope of the consent, the participant’s right to withdraw consent and the right to receive paper communication and any related fees
- procedures to update information needed to contact the recipient electronically.
- hardware and software requirements needed to access and retain the applicable notice. If the hardware or software changes, a new consent must be obtained from the participant.
The applicable notice cannot be provided through the use of oral communication or a recording of an oral communication.
Alternative method for providing applicable notices
The alternative method provides an alternative to the E-SIGN consumer consent requirements if:
- at the time the applicable notice is provided, the recipient is advised that he or she may request and receive the applicable notice in writing on paper at no charge, and, upon request the applicable notice must be provided to the recipient at no charge and
- the electronic medium used to provide an applicable notice is a medium that the recipient has the effective ability to access.
Participant Elections
The regulations contain the following requirements that apply if an election made by a person using an electronic system:
- the person who is eligible to make the election is effectively able to access the electronic medium
- the system must be reasonably designed to preclude any person other than the appropriate individual from making the election
- the system provides the person making the election with a reasonable opportunity to review, confirm, modify, or rescind the terms of the election before the election becomes effective
- the person making the election receives, within a reasonable time, a confirmation of the effect of the election under the terms of the plan or arrangement through either a written paper document or an electronic medium under a system that satisfies the requirements of the consumer consent delivery or the alternative delivery method
- if a participant election must be witnessed, the election must be witnessed in the physical presence of a plan representative or notary public. The regulations provide that an electronic notarization acknowledging a signature (in accordance with E-SIGN and applicable state law) will not be denied legal effect if the signature is witnessed in the physical presence of a notary public.
It is important to note that the regulations do not require a plan to permit that an election be made by paper as an alternative to using an electronic system that is available to the participant. However, these regulations do not apply to a participant is not effectively able to access the electronic medium; the plan must offer the participant the right to make an election in another medium that is accessible to the participant, e.g., paper.
WHAT SHOULD YOU DO NOW?
You should review your procedures regarding electronic communication of any notice or elections required to be “in writing” to ensure they comply with the new regulations.
It is important to note that these regulations provide a safe harbor for electronic communication of employee benefit matters that are not required to be “in writing”. If your systems environment and employee demographics are conducive to electronic communication, you may wish to review your entire electronic communication program.
Note: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plans. For more information on this ErisaALERT, contact us by phone at 610-524-5351 and ask for Mary Andersen or 973-994-7539 and ask for Theresa Borzelli.
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ErisaALERT 2006-7
