[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]


=======================================================================
-----------------------------------------------------------------------

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.

-----------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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