[Federal Register Volume 65, Number 26 (Tuesday, February 8, 2000)]
[Rules and Regulations]
[Pages 6001-6008]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1897]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 35, and 602

[TD 8873]
RIN 1545-AW78


New Technologies in Retirement Plans

AGENCY:  Internal Revenue Service (IRS), Treasury.

ACTION:  Final regulations.

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SUMMARY:  This document contains amendments to the regulations 
governing certain notices and consents required in connection with 
distributions from retirement plans. Specifically, these regulations 
set forth applicable standards for the transmission of those notices 
and consents through electronic media and modify the timing 
requirements for providing certain distribution-related notices. The 
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 regulations affect 
retirement plan sponsors, administrators, and participants.

DATES:  Effective Date: These regulations are effective January 1, 
2001.
    Applicability Date: These regulations apply to plan years beginning 
on or after January 1, 2001.

FOR FURTHER INFORMATION CONTACT:  Catherine Livingston Fernandez, (202) 
622-6030 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under 
control number 1545-1632. Responses to this collection of information 
are mandatory.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    The estimated annual burden per respondent and/or recordkeeper is 
76 minutes.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, 
Washington, DC 20224, and 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.
    Books or records relating to this 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

    This document contains amendments to the Income Tax Regulations (26 
CFR parts 1 and 35) under sections 402(f), 411(a)(11) and 
3405(e)(10)(B). The regulations under section 3405(e)(10)(B) (new Q/A 
d-35 and d-36 of section 35.3405-1), like the regulations under 
sections 402(f) and 411(a)(11) are final regulations. These regulations 
finalize proposed regulations that were published as a notice of 
proposed rulemaking (REG-118662-98) in the Federal Register (63 FR 
70071) on December 18, 1998. A public hearing was held on the proposed 
regulations on April 15, 1999.
    In addition to the proposed regulations, the IRS and Treasury 
issued Notice 99-1 (1999-2 I.R.B. 8), and Announcement 99-6 (1999-4 
I.R.B. 24), concerning the use of electronic media under retirement 
plans. Notice 99-1 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 do 
not cause a 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)). Announcement 99-6 authorizes the 
electronic transmission of Form W-4P.
    The proposed regulations, Notice 99-1, and Announcement 99-6 were 
issued pursuant to section 1510 of the Taxpayer Relief Act of 1997. 
That section 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.

Explanation of Provisions

General

    Commentators generally praised the approach taken in the proposed 
regulations of providing broad, flexible standards for the transmission 
of certain notices and consent required for distributions through 
electronic media. Commentators stated that the guidelines set forth in 
the proposed regulations facilitate the expanded use of new 
technologies and recognize the likelihood of future technological 
advances in plan administration. Accordingly, the final regulations 
retain this approach and:
     Permit electronic delivery of the notice of distribution 
options and the right to defer distribution under section 411(a)(11), 
the rollover notice under section 402(f), and the withholding notice 
under section 3405(e)(10)(B);

[[Page 6002]]

     Permit electronic transmission of participant consent to a 
distribution under section 411(a)(11); 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 
furnish 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 require that any electronic 
notice 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 and that the participant be advised of the right 
to request and to receive a copy of the notice on a written paper 
document without charge. The final regulations adopt these rules 
without change.
    One commentator noted that the proposed regulations do not define 
the term reasonably accessible and suggested that the final regulations 
require that participants have effective access at their place of work 
to any electronic medium used to deliver the notices under sections 
402(f), 411(a)(11), and 3405(e)(10)(B). The IRS and Treasury, after 
further consideration, believe that the reasonably accessible standard 
protects the interests of plan participants and, therefore, have 
retained the proposed terminology.
    The same commentator raised more general concerns with the use of 
electronic media to transmit notices. This commentator argued that an 
electronic notice should be ``actually received (not just sent or 
available) and read by the participant, be permanently accessible, and 
easily converted to a printed document, by using an available printer 
and/or through a request for a paper writing.'' In response to these 
concerns, the IRS and Treasury reiterate the view, expressed in the 
preamble to the proposed regulations, that the legal standards for the 
delivery of distribution-related notices under sections 402(f), 
411(a)(11), and 3405(e)(10)(B) should be the same regardless of the 
medium of delivery. Additionally, the IRS and Treasury note that many 
of the concerns raised by this commentator about electronic media are 
adequately addressed by the requirement in the regulations that 
participants always have the right to request and to receive a written 
paper notice without charge.
    Several commentators objected to the requirement that participants 
be able to receive the notice on a written paper document upon request. 
These commentators argued that simply making written paper notices 
available through an electronic medium (such as a printing option on an 
e-mail system or a plan web site) protects the interests of 
participants in having access to written paper notices without placing 
the burden of providing written paper notices on plan sponsors and 
administrators. However, the IRS and Treasury believe that the right to 
request and to receive a written paper notice is an important fail-safe 
for paperless plan administration. The requirement ensures that no 
participant is denied ready access to a usable copy of a required 
distribution notice, and it limits the need for the IRS and Treasury to 
regulate the manner in which written paper notices are made available 
through electronic media. The IRS and Treasury believe that the burden 
for plan sponsors and administrators to maintain a process that will 
generate written paper notices upon request is outweighed by the 
important safeguards provided by the requirement. In addition, as 
indicated in the preamble to the proposed regulations, the written 
paper notice provided on request need not be identical to the 
electronic notice. Therefore, the written paper notice can be either a 
printed version of the electronic notice or a separate notice prepared 
for distribution on paper. In light of these considerations, the 
requirement is retained in the final regulations.
    One commentator requested clarification that the proposed 
regulations under section 3405 would permit the electronic delivery of 
the annual notice described in section 3405(e)(10)(B)(i)(III) (which is 
provided to recipients of periodic payments). The proposed regulations, 
as written, apply to that annual notice; however, the final regulations 
make this point expressly. One commentator asked that the proposed 
regulations be amended to provide for electronic withholding elections 
under section 3405 in addition to electronic transmission of notices 
under section 3405. It is unclear what, if any, utility such a change 
in the regulations would have in light of the ability to use electronic 
media for transmission of Form W-4P, as set out in Announcement 99-6. 
Therefore, no change has been made to the regulations on this point.
2. Flexibility for Timing Requirement in Providing Notices
    Commentators favored the provision in the proposed regulations that 
provided flexibility with respect to the 90-day period under sections 
402(f) and 411(a)(11) by providing an alternative timing rule. 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 under those sections. The full notice is not 
required to be provided on a regular periodic basis and may 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 given. The proposed 
regulations provide that the summary notice must set out the principal 
provisions of the full notice, must refer the participant to the most 
recent occasion on which the full notice was provided, and must advise 
the participant of the right to request and to receive a copy of the 
full notice without charge.
    Several commentators interpreted the requirement in the proposed 
regulations that the summary refer the participant to the most recent 
occasion on which the full notice was provided as requiring an 
indication of the precise date on which the participant was given the 
full notice and the precise location of the full notice if it was 
provided in a document containing other information (such as the 
summary plan description). These commentators argued that this 
information may vary on a participant-by-participant basis and so 
imposes a considerable administrative burden on plan sponsors and 
administrators.\1\
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    \1\ For example, many plan sponsors provide a copy of the 
summary plan description to each employee when the employee is first 
hired. If the full notice is provided through the summary plan 
description, the precise date on which the full notice was last 
provided could differ for each participant.
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    The IRS and Treasury did not intend for the proposed regulations to 
be construed as requiring individualized information about the full 
notice. Therefore, the final regulations clarify, first, that the 
summary must refer participants to the most recent version of the full 
notice. The purpose of this rule is to minimize confusion among 
participants if more than one version of a full notice has been 
provided in the

[[Page 6003]]

past. In many of those cases, this reference could reasonably be made 
by calendar year (for example, by referring to the 1999 version of the 
section 402(f) notice). If more than one version of a distribution 
notice was provided in a single calendar year, more precise reference 
should be made (for example, by referring to the May 1999 version of 
the section 402(f) notice). Reference to the notice by month or year 
would not be necessary if only one version of the notice had been 
provided in the past. If the full notice were constantly available (for 
example, a notice that is available on a plan web site and is kept up-
to-date), it would be adequate to state that fact.
    Additionally, the regulations have been modified to provide that, 
in the case of a full notice provided in a document containing other 
information, the summary must identify that document and must provide a 
reasonable indication of where the notice may be found in the document. 
This requirement could be satisfied through a number of means, 
including identification of page number, section heading, an index 
reference, the title of the notice, or any other reference that would 
reasonably direct the participant to the notice.
    One commentator objected to the alternative timing rule set out in 
the proposed regulations. This commentator argued that distribution-
related notices should be tied to a specific event (such as a 
participant request for a distribu- tion) and that ``it is 
inappropriate to provide a notice of the notice when using electronic 
or other new technologies when it is just as easy to provide the actual 
notice itself.'' The IRS and Treasury agree that the information 
contained in the section 402(f) and section 411(a)(11) notices should 
be provided to a participant in connection with the participant's 
contemplation of a distribution, but the IRS and Treasury believe that 
providing a summary of a previously provided notice and informing the 
participant of the right to request and to receive the full notice 
adequately protect the interests of participants in this regard.
    The preamble to the proposed regulations includes an example of a 
summary section 402(f) notice provided through an automated telephone 
system. Many commentators raised questions about this example. Several 
commentators argued that the sample summary is too long and complex to 
be of use in plan administration; others argued that it does not 
include reference to every potentially applicable rule concerning the 
taxation of plan distributions (for example, it does not refer to the 
taxation of net unrealized appreciation on the distribution of employer 
securities). Commentators also inquired about the legal status of the 
example because of its placement in the preamble. The example was 
intended merely to illustrate a summary notice that, in the view of the 
IRS and Treasury, satisfies the requirements of the proposed 
regulations. It was not intended as a model summary or as the exclusive 
form for such a summary. Although the example is not restated in these 
final regulations, the IRS and Treasury are considering whether to 
issue additional guidance providing additional examples of summary 
notices. In this regard, the IRS and Treasury will solicit comments 
from interested parties regarding the development of those examples and 
will invite interested parties to submit draft summary notices to 
assist in the development of that guidance.

Consent Under Section 411(a)(11)

    Consistent with the proposed regulations, the final 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 regulations generally do not categorize particular 
electronic media as either permissible or impermissible for this 
purpose and do not prescribe detailed, media-specific rules. 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. 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. Comments on 
this portion of the proposed regulations were generally favorable, and 
no change has been made in the final regulations.
    One commentator, however, objected outright to the use of 
electronic media for the transmission of participant consent and argued 
that, at a minimum, such consent ``should not be effective until after 
a written confirmation is received and the participant has a specified 
amount of time to revoke it.'' This commentator also argued that the 
final regulations should prohibit the use of automated telephone 
systems to provide distribution-related notices and to receive 
participant consent unless an automatic, mandatory written confirmation 
of the participant's election of a distribution option is required 
along with a seven-day right of revocation. The IRS and Treasury 
concluded that it is not advisable to impose new revocation rules based 
on the medium through which a participant consents to a distribution. 
Both the proposed regulations and the final regulations require that 
the terms of any consent made through an electronic medium be confirmed 
to the participant. Additionally, the IRS and Treasury do not believe 
that a right of revocation for a defined period after consent is given 
is more necessary or appropriate in the case of consent made through an 
electronic medium than it is in the case of consent made through a 
written paper document. More generally, the IRS and Treasury do not 
believe that the use of electronic media is improper or inappropriate 
for the transmission of a participant's consent under section 
411(a)(11). If the requirements of the regulations are satisfied, 
consent provided in that manner should reflect the considered wishes of 
the participant as reliably as a consent provided through a written 
paper document.

Changes to the Examples in the Regulations

    Several commentators expressed concern about details in the 
examples illustrating the proposed regulations for distribution notices 
and consent. One of the concerns involved the statement in the examples 
that a participant who wished to change a PIN electronically would be 
unable to proceed with a distribution transaction until the plan sent a 
confirmation of the change to the participant. Commentators stated that 
the electronic systems maintained by plan sponsors and administrators 
use an array of security features to ensure participant identity, some 
of which might permit an electronic transaction to proceed after a PIN 
change. Although the prohibition on proceeding with an electronic 
transaction after a PIN change was intended only to illustrate a 
commonly used system and not as a substantive requirement, the final 
regulations omit the statement from the examples for the sake of 
clarity. Of course, the examples in the final regulations presuppose 
that plan sponsors and administrators maintain adequate measures to 
ensure participant identity when a PIN is changed.

[[Page 6004]]

Notice 99-1 and Announcement 99-6

    Commentators expressed support for Notice 99-1, which indicates 
that a qualified plan will not fail to meet the requirements of section 
401(a) (and that a qualified cash-or-deferred arrangement will not fail 
to meet the requirements of section 401(k)) merely because it permits a 
participant or beneficiary to use electronic media to effect a 
transaction for which no specific provision of the Code, the 
regulations, or other guidance of general applicability sets forth 
rules or standards regarding the media through which it may be 
conducted. Announcement 99-6 permits the electronic transmission of 
Form W-4P.
    Commentators asked for clarification whether Form W-4P may be 
transmitted through a telephone system. The underlying standards for 
the electronic transmission of Form W-4P are intended to be the same as 
those for the electronic transmission of Form W-4, as set out in 
Sec. 31.3402(f)(5)-1(c). The preamble to the proposed regulations for 
the electronic transmission of Form W-4 indicates that ``[i]f an 
employer chooses to establish an electronic system, the employer will 
be free to determine the type of system (such as telephone or computer) 
or systems available to its employees.'' (59 FR 18508 (Apr. 15, 1994)). 
Therefore, the use of a telephone system for electronic transmission of 
Form W-4P, if otherwise consistent with Announcement 99-6 and 
Sec. 31.3402(f)(5)-1(c), is permissible.
    Commentators also asked the IRS and Treasury to reconsider the 
requirement, stated in Announcement 99-6, that the electronic signature 
on Form W-4P be the final entry in the submission of the form. These 
commentators argue that this effectively requires the participant in 
most cases to enter a PIN at both the beginning and the end of a 
transaction that involves the use of an electronic Form W-4P. The IRS 
and Treasury are considering this issue and anticipate issuing 
additional guidance on this question.

Scope of These Regulations

    These regulations do not address the application of Title I of 
ERISA (except for section 203(e)) to the use of electronic media for 
any plan communication or transaction. Several commentators requested 
that the regulations be expanded to include matters not covered by the 
proposed regulations. Most notably, commentators asked that the IRS and 
Treasury provide guidance on the use of electronic media for plan loans 
under section 72(p), nondiscrimination safe-harbor notices under 
sections 401(k)(12) and 401(m)(11), notices under section 204(h) of 
ERISA, and distribution notices, elections, and spousal consents 
governed by sections 401(a)(11) and section 417.
    The IRS and Treasury are actively considering comments submitted on 
regulations proposed under section 72(p) and expect to issue additional 
guidance under that section. It is anticipated that any guidance on the 
use of electronic media in connection with plan loans would be issued 
in connection with that additional guidance. As the IRS and Treasury 
have noted in the past, notices under sections 401(k)(12) and 
401(m)(11) and ERISA section 204(h) present legal issues distinct from 
those presented by notices under sections 402(f), 411(a)(11), and 
3405(e)(10)(B). Notice 2000-3 (2000-4 I.R.B.____) provides that, 
pending further guidance, notices under sections 401(k)(12) and 
401(m)(11) may be issued through electronic media if standards set 
forth in Notice 2000-3 which are similar to those applicable to notices 
under these regulations, are satisfied. Because of the unique 
considerations applicable to notices under ERISA section 204(h), 
guidance with respect to the use of electronic media in connection with 
section 204(h) notices is not being issued at this time.
    Finally, regarding notices, elections, and spousal consents 
governed by sections 401(a)(11) and section 417, the IRS and Treasury 
note that the statutory requirement that spousal consent be witnessed 
either by a notary public or a plan representative appears to 
presuppose that a spouse be in the physical presence of the notary 
public or the plan representative at the time consent is given. This 
appears to place significant limitations on the utility of electronic 
media in effecting spousal consent.\2\ Thus, it is unclear what 
guidance the IRS and Treasury could issue that would meaningfully 
facilitate paperless distributions in the case of plans subject to 
sections 401(a)(11) and 417.
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    \2\ One commentator suggested that electronic transmission of 
spousal consent be permitted if the plan has ``reasonable certainty 
that the spouse has consented.'' That suggested standard appears to 
fall far short of the witnessing requirement specifically set forth 
in the statute.
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Reliance

    Plan sponsors and administrators may rely on these final 
regulations for guidance for distributions made prior to the effective 
date.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory impact analysis 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 
not add more than a minor increment to the cost of these 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, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal author of these regulations is Catherine Livingston 
Fernandez, Office of the Associate Chief Counsel (Employee Benefits and 
Exempt Organizations), IRS. 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.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 35, and 602 are amended as follows:

[[Page 6005]]

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) This paragraph (a) 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 no less than 30 
days before the date of a distribution (or the annuity starting date), 
subject to the rules for the distributee's waiver of that 30-day 
period. 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 version of the 
section 402(f) notice (and, in the case of a notice provided in any 
document containing information in addition to the notice, must 
identify that document and must provide a reasonable indication of 
where the notice may be found in that document, such as by index 
reference or by section heading), and must advise the distributee that, 
upon request, a copy of the section 402(f) notice will be provided 
without charge.
* * * * *
    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 at no charge, 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. (i) 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 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 requests the notice on a 
written paper document, it 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.
    (ii) In Example 1, 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. (i) 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. 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 by calling a telephone number indicated on 
the web page and that, if the participant requests the notice on a 
written paper document, it 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.
    (ii) In this Example 2, 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. (i) 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. 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 
version of the section 402(f) notice which was provided in the 
summary plan description, informs the participant where the section 
402(f) notice

[[Page 6006]]

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 requests the notice on a written paper document, it 
will be provided at no charge. Before proceeding with the 
distribution, the participant must acknowledge receipt, review, and 
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).
    (ii) In this Example 3, 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. (i) Same facts as 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.
    (ii) In this Example 4, 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. (i) Same facts as 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.
    (ii) In this Example 5, Plan C does not satisfy the notice 
requirement of section 402(f) because oral delivery alone of the 
section 402(f) notice through the automated telephone system is not 
sufficient.
    Example 6. (i) The facts are the same as in Example 1, except 
that Participant D requested a distribution by e-mail, then 
terminated employment, and, following the termination, no longer has 
reasonable access to Plan A e-mail.
    (ii) In this Example 6, Plan A does not satisfy the notice 
requirement of section 402(f) because the electronic medium through 
which the notice is provided is not reasonably accessible to 
Participant D. Plan A must provide the section 402(f) notice to 
Participant D in a written paper document or by an electronic means 
that is reasonably accessible to Participant D.


    Par. 3. Section 1.411(a)-11 is amended by:
    1. Revising paragraphs (c)(2)(i) and (iii).
    2. Removing the language ``Written consent'' in paragraph 
(c)(2)(ii) and (c)(3) and adding ``Consent'' in its place.
    3. Adding paragraphs (f) and (g).
    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 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 no less than 30 days 
before the date the distribution commences, subject to the rules for 
the participant's waiver of that 30-day period. 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 version of the notice 
(and, in the case of a notice provided in any document containing 
information in addition to the notice, must identify that document and 
must provide a reasonable indication of where the notice may be found 
in that document, such as by index reference or by section heading), 
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 at no charge, 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

[[Page 6007]]

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. (i) 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 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 by e-mail that he or she may request the section 
411(a)(11) notice on a written paper document and that, if the 
participant requests the notice on a written paper document, it 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 by e-mail, 
the plan administrator, by e-mail, sends confirmation of the terms 
(including the form) 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.
    (ii) In this Example 1, 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. (i) Same facts as 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.
    (ii) In this Example 2, 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. (i) 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. 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 by 
calling a telephone number indicated on the web page and that, if 
the participant requests the notice on a written paper document, it 
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). 
The web site requires the participant to review and confirm the 
terms (including the form) of the distribution before the 
transaction is completed. After the participant has given consent 
via e-mail, 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.
    (ii) In this Example 3, 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. (i) 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. 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 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 requests the notice on a 
written paper document, it will be provided at no charge. Before 
proceeding with the distribution transaction, 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). The automated telephone 
system requires the participant to review and confirm the terms 
(including the form) 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.
    (ii) In this Example 4, 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. (i) Same facts as 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.
    (ii) In this Example 5, 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 6. (i) Same facts as Example 1, except that Participant 
D requested a distribution by e-mail, then terminated employment 
and, following the termination, no longer has access to e-mail.
    (ii) In this Example 6, Plan A does not satisfy the notice or 
consent requirement of section 411(a)(11) because the electronic 
medium through which the notice is provided is not reasonably 
accessible to Participant D. Plan A must provide Participant D the 
section 411(a)(11) notice in a written paper document or by an 
electronic means that is reasonably accessible to Participant D.

    Par. 4. The heading for part 35 is revised to read as follows:

PART 35--EMPLOYMENT TAX AND COLLECTION OF INCOME TAX AT SOURCE 
REGULATIONS UNDER THE TAX EQUITY AND FISCAL RESPONSIBILITY ACT OF 
1982

    Par. 5. 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; Public Law 97-248 (96 Stat. 623).
    Section 35.3405-1 also issued under 26 U.S.C. 
3405(e)(10)(B)(iii).
    Section 35.3405-1T also issued under 26 U.S.C. 
3405(e)(10)(B)(iii).

    Par. 6. Redesignate Sec. 35.3405-1T and revise the heading to read 
as follows:


Sec. 35.3405-1T  Questions and answers relating to withholding on 
pensions, annuities, and certain other deferred income (temporary 
regulations).

* * * * *

    Par. 7. A new Sec. 35.3405-1 is added to read as follows:


Sec. 35.3405-1  Questions and answers relating to withholding on 
pensions, annuities, and certain other deferred income.

    The following questions and answers relate to withholding on 
pensions, annuities, and other deferred income under section 3405 of 
the Internal Revenue Code of 1986, as added by section 334 of the Tax 
Equity and Fiscal Responsibility Tax Act of 1982 (Public Law 97-248) 
(TEFRA).
    a-1 through d-34 [Reserved] For further guidance, see Sec. 35.3405-
1T.

[[Page 6008]]

    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 and the annual 
notice described in d-31) 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 at no charge, 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. (i) 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. 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 by e-mail that he or she may request the notice on a 
written paper document and that, if the participant requests the 
notice on a written paper document, it 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.
    (ii) In this Example 1, 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. (i) 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. 
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 requests the notice on a 
written paper document, it will be provided at no charge. To proceed 
with the distribution through the web site, the participant must 
acknowledge receipt, review, and comprehension of the notice.
    (ii) In this Example 2, 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. (i) 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. 
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 
requests the notice on a written paper document, it will be provided 
at no charge. Before proceeding with the distribution transaction, 
the participant must acknowledge receipt, review, and comprehension 
of the notice.
    (ii) In this Example 3, 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. (i) Same facts as 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.
    (ii) Conclusion. In this Example 4, 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 5. (I) Same facts as Example 1, except that Participant 
D requested a distribution by e-mail and then terminated employment. 
Participant D no longer has access to e-mail.
    (ii) In this Example 5, Plan A does not satisfy the notice 
requirement of section 3405 because the electronic medium through 
which the notice is provided is not reasonably accessible to 
Participant D. Plan A must provide the notice required by section 
3405 to Participant D in a written paper document or by an 
electronic medium that is reasonably accessible to Participant D.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 6. The authority citation for part 602 continues to read as 
follows:

    Authority:  26 U.S.C. 7805.

    Par. 7. In Sec. 602.101, paragraph (b) is amended by adding the 
following entry in the table in numerical order to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
 
                 *        *         *        *        *
1.402(f)-1.................................................    1545-1632
 
                 *        *         *        *        *
1.411(a)-11................................................    1545-1632
 
                 *        *         *        *        *
------------------------------------------------------------------------


Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: January 20, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00-1897 Filed 2-7-00; 8:45 am]
BILLING CODE 4830-01-U