This alert summarizes the manner in which plan administrators may use electronic media for Qualified Plan administration and to comply with certain reporting and disclosure requirements under ERISA.
Previous IRS Action
In 1999, the IRS first addressed the use of electronic media in connection with administering Qualified Plans. IRS Notice 99-1 approved certain "paperless" administrative practices, which had already been adopted by many Qualified Plan administrators. The IRS approved the use of electronic means for enrolling participants in a Qualified Plan, allowing contribution elections, making and changing investment elections, and designating beneficiaries when spousal consent is not required. The Internal Revenue Code (the "Code") did not explicitly require use of "written paper documents" for these notices and did not prohibit the use of electronic media. At the same time, the IRS issued proposed regulations concerning other notices and consents required in connection with Qualified Plans for which the Code did require "written communication." These regulations have now been finalized.
Final IRS Regulations
The final IRS regulations, effective for plan years beginning after January 1, 2001, address notices required as part of the distribution of Qualified Plan benefits. The regulations permit the electronic delivery of three types of notices:
- notices of distribution choices available to a participant under a Qualified Plan and the participant's right to defer distributions prior to normal retirement age of an accrued vested benefit valued at more than $5,000 [Code Section 411(a)(11)];
- notices explaining a participant's right to elect a direct rollover to another retirement plan or an IRA and the tax effects of that form of distribution, as well as other tax rules applicable to available distribution forms [Code Section 402(f)]; and
- notices of a participant's right to waive income tax withholding on certain Qualified Plan distributions [Code Section 3405(e)(10)(B)].
If delivered electronically, all three forms of notice must meet the following general standards:
- the notice must be "reasonably accessible" to the participant;
- the electronic system must be reasonably designed to provide the notice in a manner that it is "no less understandable" to the recipient than a paper copy; and
- at the time the notice is provided electronically the distributee must be advised that a full copy of the notice, in a written document, is available without charge, even if there is an online capacity to print a copy of the notice.
- be reasonably designed to preclude any individual other than the participant from giving consent (such as though use of personal identification numbers);
- provide the participant a reasonable opportunity to review and confirm, modify or rescind the terms of the distribution before the consent becomes effective; and
- provide a confirmation of the terms (including the form) of the distribution either in writing or in an electronic notice which meets the general standards applicable to electronic notices.
Previous DOL Action
Under Title I of ERISA, the DOL has responsibility for enforcing the general requirements concerning reporting and disclosure obligations with respect to all employee benefit plans subject to ERISA. In 1997, the DOL issued regulations, governing the electronic delivery of certain ERISA-required communications for administration of group health plans. These regulations were intended to create an interim "safe harbor," and were not intended to indicate that other uses of electronic media were impermissible. The DOL noted that the statute does not require a particular form of delivery when other methods are reasonably calculated to ensure actual receipt and full distribution of the information.
Proposed Regulations Extend Use of Electronics
Good faith compliance with the proposed regulations issued by the DOL allow plan administrators to immediately use electronic forms of communication in meeting the reporting and disclosure requirements of Title I of ERISA addressed in the proposals. These regulations are based largely on the interim rules.
The proposed regulations govern distribution of a summary plan description, a summary of material modifications and a summary annual report. The interim rules for health plans addressed only the first two employee communications. Otherwise, the proposal's content mirrors that of the interim rule, requiring that:
- the administrator take steps to ensure delivery results in actual receipt of the transmitted information through use of a return-receipt feature or periodic reviews and surveys to confirm receipt;
- the electronically delivered documents meet the style, format and content requirements of the paper documents; and
- each participant is notified of the document being furnished, its significance, and the participant's right to request, free of charge, a paper copy of the document which is then delivered.
The DOL rules apply only to communications with participating employees who are expected to access the employer's electronic information system as an integral part of his or her duties at the worksite, and who have access to a printer at the worksite.
Despite expectations last year that the DOL would finalize these regulations, they are still in proposed form. Final rules are expected to be issued later this year.