[Federal Register Volume 63, Number 243 (Friday, December 18, 1998)]
[Proposed Rules]
[Pages 70071-70079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32939]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 35
[REG-118662-98]
RIN 1545-AW78
New Technologies in Retirement Plans
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 amendments to the regulations
governing certain notices and consent required in connection with
distributions from retirement plans. Specifically, these proposed
regulations set forth applicable standards for the transmission of
those notices and consent through electronic media and modify the
timing requirements for providing certain distribution-related notices.
The proposed regulations provide guidance to plan sponsors and
administrators by interpreting the notice and consent requirements in
the context of the electronic administration of retirement plans. The
proposed regulations affect retirement plan sponsors, administrators,
and participants. This document also provides notice of a public
hearing on these proposed regulations.
DATES: Written comments must be received by March 18, 1999. Outlines of
topics to be discussed at the public hearing scheduled for April 15,
1999, at 10 a.m. must be received by March 25, 1999.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-118662-98), Room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC. 20044. Submissions
[[Page 70072]]
may be hand delivered Monday through Friday between the hours of 8 a.m.
and 5 p.m. to: CC:DOM:CORP:R (REG-118662-98), Courier's Desk, Internal
Revenue Service, 1111 Constitution Avenue, NW., Washington, DC.
Alternatively, taxpayers may submit comments electronically via the
Internet by selecting the ``Tax Regs'' option on the IRS Home Page, or
by submitting comments directly to the IRS Internet site at http://
www.irs.ustreas.gov/prod/tax__regs/comments.html. The public hearing
will be held in room 2615, Internal Revenue Service Building, 1111
Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Catherine Livingston Fernandez (202) 622-6030; concerning submissions
of comments and the hearing, and/or to be placed on the building access
list to attend the hearing Michael L. Slaughter (202) 622-7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC
20224. Comments on the collection of information should be received by
February 16, 1999. Comments are specifically requested concerning:
Whether the proposed collections of information are necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced; How the burden of complying with the
proposed collections of information may be minimized, including through
the application of automated collection techniques or other forms of
information technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
The collections of information in this proposed regulation are in
26 CFR 1.402(f)-1, 1.411(a)-11, and 35.3405-1. This information is
required for notices to recipients of distributions from retirement
plans, individual retirement accounts, and annuities. This information
will be used to help recipients make informed decisions regarding these
distributions. The collections of information are mandatory. The likely
respondents are individuals, business or other for-profit institutions,
and nonprofit institutions.
Estimated total annual reporting and/or recordkeeping burden:
477,563 hours.
Estimated average annual burden hours per respondent and/or
recordkeeper: 76 minutes.
Estimated number of respondents and/or recordkeepers: 375,000.
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.
Background
Section 411(a)(11) of the Internal Revenue Code generally provides
that if the value of a participant's accrued benefit exceeds $5,000,
the benefit may not be immediately distributed without the
participant's consent. Section 1.411(a)-11(c) of the Income Tax
Regulations states that this requirement applies until the later of
normal retirement age or age 62 and requires that the consent be in
writing. Section 1.411(a)-11(c)(2) of the regulations provides that the
participant's consent is not valid unless, prior to the distribution,
the participant is given an explanation of the plan distribution
options (e.g., lump sum, annual installments, annuity, etc.) and is
advised of the right to defer the distribution in a manner that would
satisfy the notice requirement of section 417(a)(3).
Section 402(f) requires that the plan administrator of a qualified
retirement plan provide the recipient of an eligible rollover
distribution with a written explanation of the direct rollover,
mandatory 20-percent income tax withholding, and other relevant tax
information. Section 1.402(f)-1 Q&A-2 requires that notices under
section 402(f) be provided no less than 30 and no more than 90 days
before the date of a distribution, although a participant may waive the
30-day period.
Section 3405(e)(10)(B) of the Code requires the payor of any
designated distribution (other than an eligible rollover distribution)
to transmit to the payee a notice of the right not to have income tax
withheld from the payment.
Section 1510 of the Taxpayer Relief Act of 1997 provides for the
Secretary of the Treasury to issue guidance designed to interpret the
notice, election, consent, disclosure, time, and related recordkeeping
requirements under the Code and the Employee Retirement Income Security
Act of 1974 (ERISA) regarding the use of new technologies by sponsors
and administrators of retirement plans and to clarify the extent to
which writing requirements under the Code relating to retirement plans
permit ``paperless'' transactions. Section 1510 provides that the
guidance must protect participant and beneficiary rights. Any final
regulations applicable to this guidance may not be effective until the
first plan year beginning at least six months after issuance as final
regulations.
The IRS and Treasury issued Announcement 98-62, 1998-29 I.R.B.13,
to request comments from interested members of the public concerning
the development of the guidance described in section 1510. Announcement
98-62 solicited information on the kinds of electronic or ``paperless''
technologies used by sponsors and administrators in plan
administration, identified a number of specific legal and practical
issues for comment, and requested that commentators identify the issues
most in need of administrative guidance. Commentators generally
encouraged the IRS and Treasury to issue guidance facilitating the use
of new technologies in plan administration, particularly the use of
electronic technologies for transmission of the notices and consent
required for plan distributions. These proposed regulations respond to
the comments by providing the guidance most frequently requested by
commentators.
Additionally, in response to many of the comments submitted under
Announcement 98-62, the IRS and Treasury are issuing a notice
concerning the use of electronic media for general plan transactions.
The notice confirms that the ``paperless'' administration of
participant enrollments, contribution elections, investment elections,
beneficiary designations (other than designations requiring spousal
consent), direct rollover elections, and certain other transactions
will not cause a
[[Page 70073]]
qualified plan to fail to satisfy the requirements of section 401(a)
(or the requirements for a qualified cash or deferred arrangement under
section 401(k)). The notice is intended to apply to a broad range of
general plan transactions and electronic media, but it does not apply
to transactions for which the Code, the regulations, or other guidance
of general applicability prescribes requirements for the media through
which such transactions may be conducted (for example, it does not
apply to providing the section 402(f) notice). Additionally, the notice
does not address the application of Title I of ERISA to the use of
electronic media for any plan transactions.
Explanation of Provisions
General
These proposed regulations permit the use of electronic media for
the transmission of certain notices and consent required for
distributions from qualified plans. Using flexible standards--rather
than detailed requirements--the proposed regulations:
Permit electronic delivery of the notice of distribution
options and the right to defer under section 411(a)(11), the rollover
notice under section 402(f), and the voluntary tax withholding notice
under section 3405(e)(10)(B);
Permit participant consent to a distribution under section
411(a)(11) to be given electronically; and
Permit a plan to provide the section 411(a)(11) and
section 402(f) notices more than 90 days before a distribution, if the
plan provides a summary of the notices within 90 days before the
distribution.
Notices Under Sections 402(f), 411(a)(11), and 3405(e)(10)(B)
1. Use of Electronic Media for Delivery of Notices
The proposed regulations provide that, in general, 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 reasonably accessible to the participant to whom the
notice is given. The proposed regulations generally do not categorize
particular electronic media as either permissible or impermissible for
this purpose and do not prescribe detailed, media-specific rules.
Instead, the proposed regulations set forth generally applicable
standards that are intended to parallel the key attributes of notices
provided on written paper documents without imposing more stringent
requirements on electronic notices. The use of generally applicable
standards rather than detailed rules is consistent with the comments
received under Announcement 98-62.
Under the proposed regulations, an electronic notice must be
provided under a system reasonably designed to give the notice in a
manner no less understandable to the participant than a written paper
document. The no-less-understandable requirement is to be applied
taking into account the method of delivery and the format and content
of the electronic notice; however, the standard is not intended to
require that the electronic notice be identical in form or content to a
corresponding notice provided on a written paper document (although an
electronic notice must contain all the information that would be
required if the notice were provided on a written paper document).
The IRS and Treasury would expect that provision of notices through
e-mail or a plan web site would in most cases satisfy the no-less-
understandable requirement under well designed systems. However, the
IRS and Treasury expect that the amount and nature of the information
that must be provided in the section 402(f) notice would preclude oral
delivery of the full section 402(f) notice through a telephone system.
By contrast, the amount and nature of the information required in the
notice under section 3405(e)(10)(B) is such that the no-less-
understandable standard may be met by a notice provided through a
telephone system.\1\ Whether a section 411(a)(11) notice may be
provided through a telephone system will depend on the complexity of
the plan distribution options. A plan with a few simple distribution
options could provide, through a well designed telephone system, a
section 411(a)(11) notice that is just as understandable as a notice
provided on a written paper document; a plan with more numerous or more
complex distribution options may not be able to satisfy the no-less-
understandable standard in that manner.
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\1\ The permissibility under the proposed regulations of
providing the section 3405 notice through an electronic medium is
not limited to qualified plans described in section 401(a); rather,
it applies with respect to any payor under section 3405.
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The IRS and Treasury believe that participants should be able to
receive a written paper notice from the plan on request and that the
right to receive a written paper notice is an important safeguard for
participants. Many of the comments submitted under Announcement 98-62
strongly supported this proposition. Certain participants may be unable
to use paperless technologies in an effective manner, particularly as
these new technologies emerge and change rapidly. In such cases, the
right to receive a notice on a written paper document may be necessary
to ensure that the participant has an adequate opportunity to
deliberate about his or her rights and options (and to seek advice from
third parties, if desired). In accordance with these considerations,
the proposed regulations provide that a participant who is given a
legally required notice through an electronic medium be advised at the
time the notice is given that he or she may request and receive the
notice on a written paper document at no charge.
Because of its potential significance to individuals, this written
paper notice must be a copy that participants can retain for their own
records (thus, a posted copy is not adequate). Merely making paper
notices available through the electronic medium used to deliver the
notice or another electronic medium (for example, by including a
``print'' option on an e-mail system or a web site) is not adequate
because of the uncertainty in determining whether a participant will in
fact be able to generate the paper version of the notice. A written
paper notice furnished on request need not contain precisely the same
information or be presented in the same format as the notice delivered
through an electronic medium. Rather, the written paper notice (like
the electronic notice) need only satisfy the applicable legal
requirements regarding that notice.
These generally applicable standards for electronic notices are
illustrated by several examples. The examples illustrate whether
certain uses of electronic technologies satisfy the proposed
regulations, but they are not intended to constitute an exhaustive list
of permissible uses, systems, or media. Other uses, systems, or media
(whether extant, such as CD-ROM or touch-screen kiosk, or not yet
developed) that satisfy the applicable standards would be permitted.
To conform the rules for providing the section 411(a)(11) notice to
the standards described above, the proposed regulations remove from the
existing regulations the requirement that the section 411(a)(11) notice
be received ``in a manner that would satisfy the notice requirements of
section 417(a)(3).'' Also, while they do not remove references in the
existing regulations to the ``written'' section 402(f) notice (because
the statutory provisions of section 402(f) specifically refer to a
``written'' notice), the proposed regulations provide for the
electronic transmission of the section
[[Page 70074]]
402(f) notice and modify the timing requirement for providing that
notice.
2. Flexibility for Timing Requirement in Providing Notices
The proposed regulations modify the timing requirement for
providing the section 402(f) and section 411(a)(11) notices. Under
existing regulations, those notices must be provided no less than 30
days and no more than 90 days before the date of a distribution,
although a participant is permitted to waive the 30-day period.\2\ As
discussed above, the proposed regulations permit plans with
comparatively few and simple distribution options to provide the
section 411(a)(11) notice through a variety of electronic media,
including (in many cases) automated telephone systems. This will make
it easier for those plans to provide the notice within the 90/30-day
period (for example, by providing the notice when a participant
requests a distribution through the automated telephone system).
Similarly, plans with more numerous or more complex distribution
options that use an e-mail system or a web site may provide the notice
when a participant requests a distribution through the e-mail system or
the web site.
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\2\ The timing requirements and waiver provisions for purposes
of the section 411(a)(11) notice are provided in Treasury
Regulations Secs. 1.411(a)-11(c)(2)(ii) and (iii), which are part of
final regulations published elsewhere in this issue of the Federal
Register.
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The proposed regulations also provide flexibility with respect to
the 90-day period by providing an alternative timing rule under
sections 402(f) and 411(a)(11). Under this alternative timing rule, a
plan may give the full section 402(f) and section 411(a)(11) notices
more than 90 days before the distribution and provide the participant a
summary of the notice during the 90/30-day period. The full notice is
not required to be provided on a regular periodic basis and could be
provided in connection with other materials (for example, in the
summary plan description or in a brochure describing plan distribution
features), but it must be updated (and provided to the participant) as
necessary to ensure accuracy as of the time the summary is provided.
The summary of the notice must set forth the material provisions of
the notice, must refer the participant to the most recent occasion on
which the full notice was provided (and, in the case of a notice
provided in a document--such as the summary plan description--that
contains other information, must identify that document and must
indicate where the notice may be found in that document), and must
advise the participant of the right to request and receive a full
notice without charge. The plan could make this full notice available
through an electronic medium under a system that satisfies the
standards discussed above if it also offers the participant the option
to request the full notice on a written paper document. Whether written
or electronic, the full notice, if requested, must be provided without
charge no fewer than 30 days prior to the date of the distribution
(although the participant may waive this 30-day period).
In the case of the section 411(a)(11) notice, the summary will
consist of a statement that the participant has a right to defer
receipt of the distribution (if applicable) and a summary of the plan
distribution options. In the case of the section 402(f) notice, the
summary must summarize the principal provisions of the section 402(f)
notice. The use of electronic media to provide these summaries is
subject to the same generally applicable standards that apply to the
electronic transmission of the full section 411(a)(11) and section
402(f) notices, as described above. In contrast to the full section
402(f) notice, however, the IRS and Treasury believe that the summary
of the section 402(f) notice can be provided orally through a well
designed telephone system in a manner no less understandable than a
written paper summary. The following summary, based on the summary set
forth in Notice 92-48, 1992-2 C.B. 377, is an example of a section
402(f) summary that may be provided through an automated telephone
system:
Summary of Notice Regarding Important Tax Information
The following is a brief explanation of an important decision
you must make about any distribution you request from the Plan.
Please listen to it carefully. You can find a more complete written
explanation of these rules in the Summary Plan Description for the
Plan, beginning on page x. You can obtain a free copy of the
complete explanation from the Personnel Office, or you will have an
opportunity at the end of this message to request to have a copy
mailed to you.
A payment from the Plan may be eligible for ``rollover''
treatment. A payment that is eligible for ``rollover'' can be taken
in two ways. You can have ALL OR ANY PORTION of your payment either
(1) PAID IN A ``DIRECT ROLLOVER'' or (2) PAID TO YOU.
A rollover is a payment of your Plan benefits to your individual
retirement arrangement (IRA) or to another employer plan. This
choice will affect the tax you owe.
If you choose a DIRECT ROLLOVER
1. Your payment will not be taxed in the current year and no
income tax will be withheld.
2. Your payment will be made directly to your IRA or, if you
choose, to another employer plan that accepts your rollover.
3. Your payment will be taxed later when you take it out of the
IRA or the employer plan.
If you choose to have your Plan benefits PAID TO YOU
1. You will receive only 80% of the payment, because the plan
administrator is required to withhold 20% of the payment and send it
to the IRS as income tax withholding to be credited against your
taxes.
2. Your payment will be taxed in the current year unless you
roll it over. You may be able to use special tax rules that could
reduce the tax you owe. However, if you receive the payment before
age 59\1/2\, you also may have to pay an additional 10% tax.
3. You can roll over the payment by paying it to your IRA or to
another employer plan that accepts your rollover within 60 days of
receiving the payment. The amount rolled over will not be taxed
until you take it out of the IRA or employer plan.
4. If you choose to have your Plan benefits paid to you and you
want to roll over 100% of the payment to an IRA or an employer plan,
YOU MUST FIND OTHER MONEY TO REPLACE THE 20% THAT WAS WITHHELD. If
you roll over only the 80% that you received, you will be taxed on
the 20% that was withheld and that is not rolled over.
You can find a complete explanation of these rules, as well as
additional rules that may apply in special circumstances, beginning
on page x of your Summary Plan Description. You can also obtain a
free copy of the complete explanation from the Personnel Office.
If you wish to have a free copy of the complete explanation
mailed to you, press 1.
If you wish to hear this explanation again, press 2.
If you wish to end this transaction now, without requesting any
distribution, press 3.
If you wish to continue with this transaction, press 4.
Consent Under Section 411(a)(11)
The proposed regulations provide that, in general, a plan may
receive a participant's consent either on a written paper document or
through an electronic medium reasonably accessible to the participant.
As in the case of participant notices, the proposed regulations
generally do not categorize particular electronic media as either
permissible or impermissible for this purpose and do not prescribe
detailed, media-specific rules. Instead, the proposed regulations set
forth generally applicable standards for transmitting consent through
electronic media. The standards are intended to parallel the key
attributes of participant consent provided on written paper documents
without imposing more stringent requirements on electronic consents. To
conform the existing regulations to this change, the proposed
regulations
[[Page 70075]]
remove the requirement that a participant's consent be ``written.''
The proposed regulations provide that participant consent
transmitted through an electronic medium must be given under a system
that is reasonably designed to preclude an individual other than the
participant from giving the consent and that provides the participant a
reasonable opportunity to review and to confirm, modify, or rescind the
terms of the distribution before the consent to the distribution
becomes effective. The proposed regulations do not set out specific
rules regarding adequate identification or authentication of
participants; the IRS and Treasury note, however, that many comments
submitted under Announcement 98-62 confirmed that ``paperless'' systems
ordinarily use passwords and personal identification numbers to ensure
participant identity in plan transactions.
The requirement that a participant be given a reasonable
opportunity to review and to confirm, modify, or rescind the terms of a
distribution before his or her consent becomes effective is not
intended to require a mandatory rescission period after a transaction
has been completed; it is sufficient for the plan to provide this
opportunity immediately before the participant completes the session in
which the consent is given (for example, before exiting the plan web
site or at the end of an automated telephone transaction). The
opportunity to review and to confirm, modify, or rescind the terms of
the distribution may be compared to a participant's opportunity to
review the terms of a distribution on a written paper distribution
election form prior to submitting that written paper form to the plan.
Many comments submitted under Announcement 98-62 indicated that it
is a very common practice in electronic plan administration to provide
participants with confirmations (usually written confirmations) of plan
transactions. The receipt of a confirmation is, for the participant,
analogous to the opportunity to retain a photocopy of a written paper
distribution election form. Consistent with these comments, the
proposed regulations provide for the plan to give the participant a
confirmation of the terms of the distribution within a reasonable time
after the participant has given consent through an electronic medium.
However, the confirmation of the participant's consent to the
distribution generally need not be given through a written paper
document; it may be given through any electronic medium that would
satisfy the provisions of the proposed regulations for delivery of the
section 411(a)(11) notice. (Thus, if the confirmation is given through
an electronic medium, the participant must be given the right to
request and to receive the confirmation on a written paper document.)
Additionally, the confirmation need not be given as a separate
transaction. For example, the confirmation could be given immediately
before completion of a session conducted on a plan web site.
Alternatively, a plan could provide the confirmation by reflecting the
transaction in a participant's periodic account statement (provided
that the confirmation is given within a reasonable time after the
consent).\3\
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\3\ Several commentators requested that guidance on electronic
plan administration clarify that participants need not receive
written paper confirmation of every plan transaction conducted
through an electronic medium (such as an inquiry regarding a
participant's account value). The IRS and Treasury note that (apart
from the provision of the proposed regulations described above)
neither the Code or the regulations impose a requirement to provide
confirmation (written or otherwise) of plan transactions conducted
through an electronic medium.
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As with notices, the general standards for the section 411(a)(11)
consent are illustrated by several examples intended to describe in
broad terms certain uses of electronic technologies that would satisfy
the proposed regulations. The examples illustrate consent given through
e-mail, web sites (Internet or intranet), and automated telephone
systems and clarify that a participant may consent to a distribution
orally through an automated telephone system. The examples are not
intended to constitute an exhaustive list of permissible uses, systems,
or electronic media or to imply that other uses, systems, or electronic
media (whether extant or not yet developed) would fail to satisfy the
proposed regulations.
Other Transactions and Recordkeeping
A few comments submitted under Announcement 98-62 requested
guidance on the use of electronic media for waivers of the qualified
joint and survivor annuity and the qualified preretirement survivor
annuity, spousal consent, and related explanations under section 417.
Guidance on those issues has not been issued at this time because any
use of electronic media for those purposes--as well as for the notice
requirements of sections 401(k)(12) and 401(m)(11) (pertaining to the
safe harbor methods of satisfying the nondiscrimination requirements of
sections 401(k) and (m)) and the notice requirements of section 204(h)
of ERISA--would raise substantial issues distinct from those raised by
the use of electronic media for the notice and consent requirements of
sections 402(f), 411(a)(11), and 3405(e)(10)(B). The IRS and Treasury
will be reviewing those issues and will consider whether guidance
should be issued in the future.
Several comments also requested guidance regarding the use of
electronic media for withholding elections under section 3405. The IRS
and Treasury are issuing guidance permitting payors to establish
systems to receive Form W-4P (Withholding Certificate for Pension or
Annuity Payments) electronically. Interested parties are invited to
submit comments concerning what, if any, additional guidance is needed
concerning the use of electronic media for withholding elections under
section 3405.
Several comments submitted under Announcement 98-62 addressed
recordkeeping under section 6001 for electronic plan administration.
Revenue Procedure 98-25, 1998-11 I.R.B. 7, specifies the basic
requirements that the IRS considers to be essential in cases where a
taxpayer's records are maintained within an Automatic Data Processing
system. Under section 3.01 of Revenue Procedure 98-25, these
requirements apply to employee plans. Additionally, Revenue Procedure
97-22, 1997-1 C.B. 652, provides guidance to taxpayers maintaining
books and records by using an electronic storage system that either
images their hardcopy (paper) books and records, or transfers their
computerized books and records, to an electronic storage medium, such
as an optical disk. Under section 3.02 of Revenue Procedure 97-22, the
requirements of that revenue procedure apply employee plans. The IRS
and Treasury invite interested parties to submit comments on what
specific guidance is needed concerning recordkeeping requirements for
electronic plan administration in addition to that provided in Revenue
Procedures 98-25 and 97-22.
Reliance
Plan sponsors and administrators may rely on these proposed
regulations for guidance pending the issuance of final regulations. If,
and to the extent, future guidance is more restrictive than the
guidance in these proposed regulations, the future guidance will be
applied without retroactive effect.
Proposed Effective Date
These regulations are proposed to be effective the first day of the
first plan year beginning on or after the date that is six months after
they are published in the Federal Register as final regulations.
[[Page 70076]]
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It is hereby certified that
these regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that the regulations provide paperless alternatives to notices
that otherwise must be sent as written paper documents. It is
anticipated that most small businesses affected by these regulations
will be sponsors of retirement plans. Since these notices are provided
only upon distributions and since, in the case of a small plan, there
will be relatively few distributions per year, small plans that
implement a paperless system for delivering these notices will likely
contract for them as part of a paperless system for distributions
offered by outside vendors. The paperless delivery of the notices will
only add a minor increment to the cost of these paperless distribution
systems or the plan sponsor will continue to use a paper-based system.
Accordingly, a Regulatory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking 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 electronic and written comments (a
signed original and eight (8) copies) that are submitted timely to the
IRS. The IRS and Treasury specifically request comments on the clarity
of the proposed regulations and how it may be made easier to
understand. All comments will be available for public inspection and
copying.
A public hearing has been scheduled for April 15, 1999, at 10 a.m.
in room 2615, Internal Revenue Service Building, 1111 Constitution
Avenue, NW., Washington, DC. Due to security procedures, visitors must
enter at the 10th Street entrance, located between Constitution and
Pennsylvania Avenues, NW. In addition, all visitors must present a
photo identification to enter the building. Because of access
restrictions, visitors will not be admitted beyond the immediate
entrance area more than 15 minutes before the hearing starts. For
information about having your name placed on the building access list,
see the FOR FURTHER INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons that wish to present oral comments at the hearing must
submit written comments and an outline of topics to be discussed and
the time to be devoted to each topic (signed original and eight (8)
copies) by March 25, 1999.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of speakers will be prepared after
the deadline for receiving outlines has passed. Copies of the agenda
will be available free of charge at the hearing.
Drafting Information
The principal author of these regulations is Catherine Livingston
Fernandez, Office of the Associate Chief Counsel (Employee Benefits and
Exempt Organizations), 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.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 35 are proposed to be amended as
follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read,
in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.402(f)-1 is amended by:
1. Revising Q&A-2.
2. Adding Q&A-5 and Q&A-6.
The revision and additions read as follows:
Sec. 1.402(f)-1 Required explanation of eligible rollover
distributions; questions and answers.
* * * * *
Q-2: When must the plan administrator provide the section 402(f)
notice to a distributee?
A-2: The plan administrator must provide the section 402(f) notice
to a distributee at a time that satisfies either paragraph (a) or (b)
of this Q&A-2.
(a) Paragraph (a) of this Q&A-2 is satisfied if the plan
administrator provides a distributee with the section 402(f) notice no
less than 30 days and no more than 90 days before the date of a
distribution. However, if the distributee, after having received the
section 402(f) notice, affirmatively elects a distribution, a plan will
not fail to satisfy section 402(f) merely because the distribution is
made less than 30 days after the section 402(f) notice was provided to
the distributee, provided the plan administrator clearly indicates to
the distributee that the distributee has a right to consider the
decision of whether or not to elect a direct rollover for at least 30
days after the notice is provided. The plan administrator may use any
method to inform the distributee of the relevant time period, provided
that the method is reasonably designed to attract the attention of the
distributee. For example, this information could be either provided in
the section 402(f) notice or stated in a separate document (e.g.,
attached to the election form) that is provided at the same time as the
notice. For purposes of satisfying the requirement in the first
sentence of paragraph (a) of this Q&A-2, the plan administrator may
substitute the annuity starting date, within the meaning of
Sec. 1.401(a)-20, Q&A-10, for the date of the distribution.
(b) This paragraph (b) is satisfied if the plan administrator--
(1) Provides a distributee with the section 402(f) notice;
(2) Provides the distributee with a summary of the section 402(f)
notice within the time period described in paragraph (a) of this Q&A-2;
and
(3) If the distributee so requests after receiving the summary
described in paragraph (b)(2) of this Q&A-2, provides the section
402(f) notice to the distributee without charge and within the period
specified in paragraph (a) of this Q&A-2 (disregarding the 90-day
period described in paragraph (a) of this Q&A-2). The summary described
in paragraph (b)(2) of this Q&A-2 must set forth a summary of the
principal provisions of the section 402(f) notice, must refer the
distributee to the most recent occasion on which the section 402(f)
notice was provided (and, in the case of a notice provided in any
document containing information in addition to the notice, must
identify that document and must indicate where the notice may be found
in that document), and must advise the distributee that, upon request,
a copy of the section 402(f) notice will be provided without charge.
* * * * *
[[Page 70077]]
Q-5: Will the requirements of section 402(f) be satisfied if a plan
administrator provides a distributee with the section 402(f) notice or
the summary of the notice described in paragraph (b)(2) of Q&A-2 of
this section other than through a written paper document?
A-5: A plan administrator may provide a distributee with the
section 402(f) notice or the summary of that notice described in
paragraph (b)(2) of Q&A-2 of this section either on a written paper
document or through an electronic medium reasonably accessible to the
distributee. A notice or summary provided through an electronic medium
must be provided under a system that satisfies the following
requirements:
(a) The system must be reasonably designed to provide the notice or
summary in a manner no less understandable to the distributee than a
written paper document.
(b) At the time the notice or summary is provided, the distributee
must be advised that the distributee may request and receive the notice
on a written paper document, and, upon request, that document must be
provided to the distributee at no charge.
Q-6: Are there examples that illustrate the provisions of Q&A-2 and
Q&A-5 of this section?
A-6: The following examples illustrate the provisions of Q&A-2 and
Q&A-5 of this section:
Example 1. A qualified plan (Plan A) permits participants to
request distributions by e-mail. Under Plan A'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 A's records in order for the transaction to proceed. If
a participant changes his or her PIN, the participant may not
proceed with a transaction until Plan A has sent confirmation of the
change to the participant. If a participant requests a distribution
from Plan A by e-mail and the distribution is an eligible rollover
distribution, the plan administrator provides the participant with a
section 402(f) notice by e-mail. The plan administrator also advises
the participant that he or she may request the section 402(f) notice
on a written paper document and that, if the participant so
requests, the written paper document will be provided at no charge.
To proceed with the distribution by e-mail, the participant must
acknowledge receipt, review, and comprehension of the section 402(f)
notice. Plan A does not fail to satisfy the notice requirement of
section 402(f) merely because the notice is provided to the
participant other than through a written paper document.
Example 2. A qualified plan (Plan B) permits participants to
request distributions through the Plan B web site (Internet or
intranet). Under Plan B'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 B's records in order for the transaction to proceed. If a
participant changes his or her PIN, the participant may not proceed
with a transaction until Plan B has sent confirmation of the change
to the participant. A participant may request a distribution from
Plan B by following the applicable instructions on the Plan B web
site. After the participant has requested a distribution that is an
eligible rollover distribution, the participant is automatically
shown a page on the web site containing a section 402(f) notice.
Although this page of the web site may be printed, the page also
advises the participant that he or she may request the section
402(f) notice on a written paper document and that, if the
participant so requests, the written paper document will be provided
at no charge. To proceed with the distribution through the web site,
the participant must acknowledge review and comprehension of the
section 402(f) notice. Plan B does not fail to satisfy the notice
requirement of section 402(f) merely because the notice is provided
to the participant other than through a written paper document.
Example 3. A qualified plan (Plan C) permits participants to
request distributions through Plan C's automated telephone system.
Under Plan C'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 C's records in order
for the transaction to proceed. If a participant changes his or her
PIN, the participant may not proceed with a transaction until Plan C
has sent confirmation of the change to the participant. Plan C
provides the section 402(f) notice in the summary plan description,
the most recent version of which was distributed to participants in
1997. A participant may request a distribution from Plan C by
following the applicable instructions on the automated telephone
system. In 1999, a participant, using Plan C's automated telephone
system, requests a distribution that is an eligible rollover
distribution. The automated telephone system refers the participant
to the most recent occasion on which the section 402(f) notice was
provided in the summary plan description, informs the participant
where the section 402(f) notice may be located in the summary plan
description, and provides an oral summary of the material provisions
of the section 402(f) notice. The system also advises the
participant that the participant may request the section 402(f)
notice on a written paper document and that, if the participant so
requests, the written paper document will be provided at no charge.
Before proceeding with the distribution, the participant must
acknowledge comprehension of the summary. Under Plan C's system for
processing such transactions, the participant's distribution will be
made no more than 90 days and no fewer than 30 days after the
participant requests the distribution and receives the summary of
the section 402(f) notice (unless the participant waives the 30-day
period). Plan C does not fail to satisfy the notice requirement of
section 402(f) merely because Plan C provides a summary of the
section 402(f) notice or merely because the summary is provided to
the participant other than through a written paper document.
Example 4. The facts are the same as in Example 3, except that,
pursuant to Plan C'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 summary of the
section 402(f) notice by reading from a prepared text. Plan C does
not fail to satisfy the notice requirement of section 402(f) merely
because Plan C provides a summary of the section 402(f) notice or
merely because the summary of the section 402(f) notice is provided
to the participant other than through a written paper document.
Example 5. The facts are the same as in Example 3, except that
Plan C does not provide the section 402(f) notice in the summary
plan description. Instead, the automated telephone system reads the
section 402(f) notice to the participant. Plan C does not satisfy
the notice requirement of section 402(f) by oral delivery of the
section 402(f) notice through the automated telephone system.
Par. 3. Section 1.411(a)-11 is amended by:
1. Revising paragraphs (c)(2)(i) and (iii).
2. Adding paragraphs (f) and (g).
3. Removing the language ``Written consent'' in paragraph
(c)(2)(ii) and (c)(3) and adding the language ``Consent'' in its place.
The revisions and additions read as follows:
Sec. 1.411(a)-11 Restriction and valuation of distributions.
* * * * *
(c) * * *
(2) Consent. (i) No consent is valid unless the participant has
received a general description of the material features of the optional
forms of benefit available under the plan. In addition, so long as a
benefit is immediately distributable, a participant must be informed of
the right, if any, to defer receipt of the distribution. Furthermore,
consent is not valid if a significant detriment is imposed under the
plan on any participant who does not consent to a distribution. Whether
or not a significant detriment is imposed shall be determined by the
Commissioner by examining the particular facts and circumstances.
* * * * *
(iii) A plan must provide a participant with notice of the rights
specified in this paragraph (c)(2) at a time that satisfies either
paragraph (c)(2)(iii)(A) or (B) of this section:
(A) This paragraph (c)(2)(iii)(A) is satisfied if the plan provides
a participant with notice of the rights
[[Page 70078]]
specified in this paragraph (c)(2) no less than 30 days and no more
than 90 days before the date the distribution commences. However, if
the participant, after having received this notice, affirmatively
elects a distribution, a plan will not fail to satisfy the consent
requirement of section 411(a)(11) merely because the distribution
commences less than 30 days after the notice was provided to the
participant, provided the plan administrator clearly indicates to the
participant that the participant has a right to at least 30 days to
consider whether to consent to the distribution.
(B) This paragraph (c)(2)(iii)(B) is satisfied if the plan--
(1) Provides the participant with notice of the rights specified in
this paragraph (c)(2);
(2) Provides the participant with a summary of the notice within
the time period described in paragraph (c)(2)(iii)(A) of this section;
and
(3) If the participant so requests after receiving the summary
described in paragraph (c)(2)(iii)(B)(2) of this section, provides the
notice to the participant without charge and within the period
specified in paragraph (c)(2)(iii)(A) of this section (disregarding the
90-day period described in paragraph (c)(2)(iii)(A) of this section).
The summary described in paragraph (c)(2)(iii)(B)(2) of this section
must advise the participant of the right, if any, to defer receipt of
the distribution, must set forth a summary of the distribution options
under the plan, must refer the participant to the most recent occasion
on which the notice was provided (and, in the case of a notice provided
in any document containing information in addition to the notice, must
identify that document and must indicate where the notice may be found
in that document), and must advise the participant that, upon request,
a copy of the notice will be provided without charge.
* * * * *
(f) Medium for notice and consent--(1) Notice. 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 may be provided either on a written paper document or
through an electronic medium reasonably accessible to the participant.
A notice or summary provided through an electronic medium must be
provided under a system that satisfies the following requirements:
(i) The system must be reasonably designed to provide the notice or
summary in a manner no less understandable to the participant than a
written paper document.
(ii) At the time the notice or summary is provided, the participant
must be advised that he or she may request and receive the notice on a
written paper document, and, upon request, that document must be
provided to the participant at no charge.
(2) Consent. The consent described in paragraphs (c)(2) and (3) of
this section may be given either on a written paper document or through
an electronic medium reasonably accessible to the participant. A
consent given through an electronic medium must be given under a system
that satisfies the following requirements:
(i) The system must be reasonably designed to preclude any
individual other than the participant from giving the consent.
(ii) The system must provide the participant with a reasonable
opportunity to review and to confirm, modify, or rescind the terms of
the distribution before the consent to the distribution becomes
effective.
(iii) 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 either on a written paper document or
through an electronic medium under a system that satisfies the
requirements of paragraph (f)(1) of this section.
(g) Examples. The provisions of paragraph (f) of this section are
illustrated by the following examples:
Example 1. A qualified plan (Plan A) permits participants to
request distributions by e-mail. Under Plan A'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 A's records in order for the transaction to proceed. If
a participant changes his or her PIN, the participant may not
proceed with a transaction until Plan A has sent confirmation of the
change to the participant. If a participant requests a distribution
from Plan A 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 that he or she may
request the section 411(a)(11) notice on a written paper document
and that, if the participant so requests, the written paper document
will be provided at no charge. To proceed with the distribution by
e-mail, the participant must acknowledge receipt, review, and
comprehension of the section 411(a)(11) notice and must consent to
the distribution within the time required under section 411(a)(11).
Within a reasonable time after the participant's consent, the plan
administrator, by e-mail, sends confirmation of 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. Plan A does not fail to satisfy the notice or
consent requirement of section 411(a)(11) merely because the notice
and consent are provided other than through written paper documents.
Example 2. The facts are the same as in Example 1, except that,
instead of sending a confirmation of the distribution by e-mail, the
plan administrator, within a reasonable time after the participant's
consent, sends the participant an account statement for the period
that includes information reflecting the terms of the distribution.
Plan A does not fail to satisfy the consent requirement of section
411(a)(11) merely because the consent is provided other than through
a written paper document.
Example 3. A qualified plan (Plan B) permits participants to
request distributions through the Plan B web site (Internet or
intranet). Under Plan B'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 B's records in order for the transaction to proceed. If a
participant changes his or her PIN, the participant may not proceed
with a transaction until Plan B has sent confirmation of the change
to the participant. A participant may request a distribution from
Plan B by following the applicable instructions on the Plan B web
site. After the participant has requested a distribution, the
participant is automatically shown a page on the web site containing
a section 411(a)(11) notice. Although this page of the web site may
be printed, the page also advises the participant that he or she may
request the section 411(a)(11) notice on a written paper document
and that, if the participant so requests, the written paper document
will be provided at no charge. To proceed with the distribution
through the web site, the participant must acknowledge review and
comprehension of the section 411(a)(11) notice and must consent to
the distribution within the time required under section 411(a)(11).
The web site requires the participant to review and confirm the
terms of the distribution before the transaction is completed. After
the participant has given consent, the Plan B web site 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. Plan B does not fail to satisfy the
notice or consent requirement of section 411(a)(11) merely because
the notice and consent are provided other than through written paper
documents.
Example 4. A qualified plan (Plan C) permits participants to
request distributions through Plan C's automated telephone system.
Under Plan C'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 C's records in order
for the transaction to proceed. If a participant changes his or her
PIN, the participant may not proceed with a transaction until Plan C
has sent confirmation of the change to the participant. Plan C
provides only the following distribution options: a lump sum and
annual installments over 5, 10, or 20 years. A participant may
request a distribution from Plan C by following the applicable
instructions on the automated
[[Page 70079]]
telephone system. After the participant has requested a
distribution, the automated telephone system reads 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 so
requests, the written paper document will be provided at no charge.
Before proceeding with the distribution transaction, the participant
must acknowledge comprehension of the section 411(a)(11) notice and
must consent to the distribution within the time required under
section 411(a)(11). The automated telephone system requires the
participant to review and confirm the terms 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. Because Plan C has relatively few and simple
distribution options, the provision of the section 411(a)(11) notice
over the automated telephone system is no less understandable to the
participant than a written paper notice. Plan C does not fail to
satisfy the notice or consent requirement of section 411(a)(11)
merely because the notice and consent are provided other than
through written paper documents.
Example 5. The facts are the same as in Example 4, except that,
pursuant to Plan C'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 predetermined instructions of the
plan administrator. Plan C does not fail to satisfy the notice or
consent requirement of section 411(a)(11) merely because the notice
and consent are provided other than through written paper documents.
PART 35--TEMPORARY EMPLOYMENT TAX AND COLLECTION OF INCOME TAX AT
SOURCE REGULATIONS UNDER THE TAX EQUITY AND FISCAL RESPONSIBILITY
ACT OF 1982
Par. 4. The authority citation for part 35 is revised to read as
follows:
Authority: 26 U.S.C. 6047(e), 7805; 68A Stat. 917; 96 Stat. 625;
Pub. L. 97-248 (96 Stat. 623).
Section 35.3405-1 also issued under 26 U.S.C.
3405(e)(10)(B)(iii).
Par. 5. Section 35.3405-1 is amended by adding d-35 and d-36 to
read as follows:
Sec. 35.3405-1. Questions and answers relating to withholding on
pensions, annuities, and certain other deferred income.
* * * * *
d-35. Q. Through what medium may a payor provide the notice
required under section 3405 to a payee?
A. A payor may provide the notice required under section 3405
(including the abbreviated notice described in d-27) to a payee either
on a written paper document or through an electronic medium reasonably
accessible to the payee. A notice provided through an electronic medium
must be provided under a system that satisfies the following
requirements:
(a) The system must be reasonably designed to provide the notice in
a manner no less understandable to the payee than a written paper
document.
(b) At the time the notice is provided, the payee must be advised
that the payee may request and receive the notice on a written paper
document, and, upon request, that document must be provided to the
payee at no charge.
d-36. Q. Are there examples that illustrate the provisions of d-35
of this section?
A. The provisions of d-35 of this section are illustrated by the
following examples:
Example 1. An employer deferred compensation plan (Plan A)
permits participants to request distributions by e-mail. Under Plan
A'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 A's records in order for the
transaction to proceed. If a participant changes his or her PIN, the
participant may not proceed with a transaction until Plan A has sent
confirmation of the change to the participant. The plan
administrator is the payor. If a participant requests a distribution
from Plan A by e-mail, the plan administrator provides the
participant with the notice required under section 3405 by e-mail.
The plan administrator also advises the participant that he or she
may request the notice on a written paper document and that, if the
participant so requests, the written paper document will be provided
at no charge. To proceed with the distribution by e-mail, the
participant must acknowledge receipt, review, and comprehension of
the notice. The plan administrator does not fail to satisfy the
notice requirement of section 3405 merely because the notice is
provided to the participant other than through a written paper
document.
Example 2. An employer deferred compensation plan (Plan B)
permits participants to request distributions through the Plan B web
site (Internet or intranet). Under Plan B'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 B's records in order for the transaction to proceed. If
a participant changes his or her PIN, the participant may not
proceed with a transaction until Plan B has sent confirmation of the
change to the participant. The plan administrator is the payor. A
participant may request a distribution from Plan B by following the
applicable instructions on the Plan B web site. After the
participant has requested a distribution, the participant is
automatically shown a page on the web site containing the notice
required by section 3405. Although this page of the web site may be
printed, the page also advises the participant that he or she may
request the notice on a written paper document and that, if the
participant so requests, the written paper document will be provided
at no charge. To proceed with the distribution through the web site,
the participant must acknowledge review and comprehension of the
notice. The plan administrator does not fail to satisfy the notice
requirement of section 3405 merely because the notice is provided to
the participant other than through a written paper document.
Example 3. An employer deferred compensation plan (Plan C)
permits participants to request distributions through Plan C's
automated telephone system. Under Plan C'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 C's records in order for the transaction to proceed. If
a participant changes his or her PIN, the participant may not
proceed with a transaction until Plan C has sent confirmation of the
change to the participant. The plan administrator is the payor. A
participant may request a distribution from Plan C by following the
applicable instructions on the automated telephone system. After the
participant has requested a distribution, the automated telephone
system reads the notice required by section 3405 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 so requests, the written paper document will be
provided at no charge. Before proceeding with the distribution
transaction, the participant must acknowledge comprehension of the
notice. The plan administrator does not fail to satisfy the notice
requirement of section 3405 merely because the notice is provided to
the participant other than through a written paper document.
Example 4. The facts are the same as in Example 3, except that,
pursuant to the 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 notice required by
section 3405 by reading from a prepared text. The plan administrator
does not fail to satisfy the notice requirement of section 3405
merely because the notice is provided to the participant other than
through a written paper document.
* * * * *
John M. Dalrymple,
Acting Deputy Commissioner of Internal Revenue.
[FR Doc. 98-32939 Filed 12-17-98; 8:45 am]
BILLING CODE 4830-01-U