[Federal Register Volume 71, Number 203 (Friday, October 20, 2006)]
[Rules and Regulations]
[Pages 61877-61888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-17528]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 35, and 54

[TD 9294]
RIN 1545-BD68


Use of Electronic Media for Providing Employee Benefit Notices 
and Making Employee Benefit Elections and Consents

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final regulations setting forth 
standards for electronic systems that make use of an electronic medium 
to provide a notice to a recipient, or to make a participant election 
or consent, with respect to a retirement plan, an employee benefit 
arrangement, or an individual retirement plan. These regulations 
reflect the provisions of the Electronic Signatures in Global and 
National Commerce Act (E-SIGN). These final regulations generally 
affect sponsors of, and individuals entitled to benefits under, certain 
retirement plans, employee benefit arrangements, and individual 
retirement plans.

DATES: Effective date: These regulations are effective on October 20, 
2006.
    Applicability date: These regulations generally apply to applicable 
notices provided, and participant elections made, on or after January 
1, 2007. See Sec.  1.401(a)-21(g).

FOR FURTHER INFORMATION CONTACT: Pamela R. Kinard at (202) 622-6060 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information referenced in these final 
regulations were previously reviewed and approved by the Office of 
Management and Budget in accordance with the Paperwork Reduction Act of 
1995 (44 U.S.C. 3507(d)) under control number 1545-1632, in conjunction 
with the Treasury Decision (TD 8873), relating to New Technologies in 
Retirement Plans, published on February 8, 2000 in the Federal Register 
(65 FR 6001), and control number 1545-1780, in conjunction with the 
Treasury Decision (TD 9052), relating to Notice of Significant 
Reduction in the Rate of Future Benefit Accrual, published on April 9, 
2003 in the Federal Register (68 FR 17277). Responses to these 
collections 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 it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to these collections 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 26 CFR parts 1, 35, and 54 
under section 401 of the Internal Revenue Code (Code) and other 
sections of the Code relating to retirement plans, employee benefit 
arrangements, and individual retirement plans. This Treasury Decision 
adds Sec.  1.401(a)-21 to the Treasury regulations, which sets forth 
standards for the use of an electronic medium to provide applicable 
notices to recipients, or to make participant elections, with respect 
to a retirement plan, an employee benefit arrangement, or an individual 
retirement plan. These final regulations reflect the applicable 
provisions of the Electronic Signatures in Global and National Commerce 
Act, Public Law 106-229 (114 Stat. 464 (2000)) (E-SIGN) as it relates 
to the electronic delivery of notices.
    The Code and regulations thereunder, and the parallel provisions of 
the Employee Retirement Income Security Act of 1974 (ERISA), include a 
number of rules that require certain notices, elections, or consents to 
be written or in writing. Examples of notices, elections, or consents 
required to be written or in writing include a section 402(f) notice 
(describing rollover rights), a section 411(a)(11) notice (describing a 
participant's benefit commencement rights), a spousal consent under 
section 417(a)(2), and a section 204(h) notice (notice to participants 
of significant reduction in rate of future benefit accrual). For a more 
in-depth description of retirement plan notices, elections, or consents 
that are required to be written or in writing, see the background 
section to the preamble of

[[Page 61878]]

the 2005 proposed regulations (70 FR 40675).

E-SIGN

    E-SIGN, signed into law on June 30, 2000, generally provides that 
electronic records and signatures are given the same legal effect as 
their paper counterparts. Section 101(a) of E-SIGN provides that, with 
respect to a transaction in or affecting interstate or foreign 
commerce, notwithstanding any statute, regulation, or rule of law, a 
signature, contract, or other record may not be denied legal effect, 
validity, or enforceability solely because it is in electronic form and 
a contract relating to such transaction may not be denied legal effect, 
validity, or enforceability solely because an electronic signature or 
electronic record was used in its formation.\1\
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    \1\ The rules of section 101 of E-SIGN do not apply to 
certainconsumer notices. These include consumer notices that are 
necessary for the protection of a consumer's health, safety, or 
shelter (e.g., cancellation of health benefits or life insurance and 
foreclosure on a credit agreement secured by an individual's primary 
residence). See section 103(b)(2)(B) and (C) of E-SIGN.
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    Section 101(b) of E-SIGN provides that E-SIGN does not limit, 
alter, or otherwise affect any requirement imposed by a statute, 
regulation, or rule of law relating to a person's rights or obligations 
under any statute, regulation, or rule of law except with respect to a 
requirement that contracts or other records be written, signed, or in 
non-electronic form, and also provides that E-SIGN generally does not 
require any person to agree to use or accept electronic signatures or 
records.
    Section 101(c) of E-SIGN sets forth special protections that apply 
when a statute, regulation, or other rule of law requires that 
information relating to a transaction be provided or made available to 
a consumer \2\ in writing. Under section 101(c) of E-SIGN, before the 
required information can be provided or made available electronically, 
a consumer must first affirmatively consent to receive the information 
electronically and the consent must be made in a manner that reasonably 
demonstrates the consumer's ability to access the information in 
electronic form (or, if the consent is not provided in such a manner, 
confirmation of the consent must be made electronically in a manner 
that reasonably demonstrates the consumer's ability to access the 
information in electronic form). Prior to consent, the consumer must 
receive certain specified disclosures. The disclosures must include, 
among other items, the hardware or software requirements for access to, 
and retention of, the electronic records, the consumer's right to 
withdraw his or her consent to receive the information electronically 
(and the consequences that follow the withdrawal of consent), the 
procedures for requesting a paper copy of the electronic record, and 
the cost, if any, of obtaining a paper copy. Section 101(c)(6) of E-
SIGN generally provides that, for purposes of the consumer consent 
rules of section 101(c), an oral communication or a recording of an 
oral communication does not qualify as an electronic record.
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    \2\ Section 106(1) of E-SIGN generally defines a consumer as 
anindividual who obtains products or services used primarily for 
personal, family, or household purposes.
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    Section 101(e) of E-SIGN provides rules relating to the electronic 
retention of contracts and other records that are required to be 
written or in writing. Section 101(e) of E-SIGN provides that if a 
statute, regulation, or other rule of law requires that a contract or 
other record relating to a transaction in or affecting interstate or 
foreign commerce be in writing, the legal effect, validity, or 
enforceability of an electronic record of the contract or other record 
may be denied if the contract or other record is not in a form that is 
capable of being retained and accurately reproduced for later reference 
by all parties or persons who are entitled to retain the contract or 
other record.
    Section 104(b)(1) of E-SIGN generally provides that a Federal 
regulatory or State regulatory agency that is responsible for 
rulemaking under any other statute has interpretative authority to 
issue guidance interpreting section 101 of E-SIGN with respect to that 
other statute. However, as a limitation on that authority, section 
104(b)(2) of E-SIGN prohibits the issuance of any guidance that is not 
consistent with section 101 or that adds to the requirements of that 
section. Section 104(b)(2) of E-SIGN also requires that any agency 
issuing guidance interpreting E-SIGN find that there is a substantial 
justification for the guidance and that the methods selected to carry 
out the purpose of the guidance are substantially equivalent to the 
requirements imposed on records that are not electronic, do not impose 
unreasonable costs on the acceptance and use of electronic records, and 
do not require or accord greater legal status to a specific technology.
    Section 104(d)(1) of E-SIGN authorizes a Federal regulatory agency 
to exempt, without condition, a specified category or type of record 
from the consumer consent requirements in section 101(c). The exemption 
may be issued only if the exemption is necessary to eliminate a 
substantial burden on electronic commerce and will not increase the 
material risk of harm to consumers.
    In accordance with section 104(b)(2)(C) of E-SIGN, the Treasury 
Department and IRS find that there is substantial justification for 
these final regulations, that, for the reasons explained below, the 
requirements imposed on the use of electronic media under these 
regulations are substantially equivalent to those imposed on non-
electronic records, that the requirements will not impose unreasonable 
costs on the acceptance and use of electronic records, and that these 
regulations do not require (or accord greater legal status or effect 
to) the use of any specific technology.

Prior Guidance Relating to Electronic Communications

    The Treasury Department and IRS have issued several items of 
guidance relating to the use of electronic media with respect to 
retirement plans and individual retirement plans.\3\ Section 1510 of 
the Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat. 788, 
1068) (TRA '97), provides for the Secretary of Treasury to issue 
guidance designed to interpret the notice, election, consent, 
disclosure, and timing requirements (include related recordkeeping 
requirements) under the Code and ERISA relating to retirement plans as 
applied to the use of new technologies by plan sponsors and 
administrators. Section 1510 of TRA '97 further provides that the 
guidance should maintain the protection of the rights of participants 
and beneficiaries.
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    \3\ The Treasury Department and IRS have also issued guidance 
regardingthe use of electronic media with respect to tax reporting 
and other tax requirements with respect to employee benefit plans. 
For example, Announcement 99-6 (1999-1 C.B. 352) authorizes payers 
of pensions, annuities, and other employee benefits to establish a 
system for payees to submit electronically Forms W-4P, Withholding 
Certificate for Pension or Annuity Payments, W-4S, Request for 
Federal Income Tax Withholding from Sick Pay, and W-4V, Voluntary 
Withholding Request, if certain requirements, including signature 
and recordkeeping requirements, are satisfied. In addition, Notice 
2004-10 (2004-1 C.B. 433) authorizes the electronic delivery of 
certain forms relating to the reporting of contributions and 
distributions of pensions, simplified employee pensions, traditional 
IRAs, Roth IRAs, qualified tuition programs, Coverdell education 
savings accounts, and Archer Medical Savings Accounts. See also 
Sec. Sec.  31.6051-1(j) and 1.6039-1(f).
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    Final regulations (TD 8873) relating to the use of electronic media 
for transmissions of participant notices and consents under sections 
402(f), 411(a)(11), and 3405(e)(10)(B) were published in the Federal 
Register (65 FR 6001) on February 8, 2000 (the 2000 regulations). The 
2000 regulations set

[[Page 61879]]

forth standards for the electronic transmission of certain notices and 
consents that are required in connection with distributions from 
retirement plans.
    Those regulations provide that 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 that is reasonably 
accessible to the participant. In addition, the 2000 regulations 
provide that any electronic system must be reasonably designed to 
provide the notice in a manner no less understandable to the 
participant than a written paper document. Furthermore, the participant 
must be advised of the right to request and receive a paper copy of the 
written paper document at no charge, and, upon request, the document 
must be provided to the participant without charge.
    The 2000 regulations also permit an electronic system to satisfy 
the requirement of section 411(a)(11) that a participant provide 
written consent to a distribution if certain requirements are 
satisfied. First, the electronic medium must be reasonably accessible 
to the participant. Second, the electronic system must be reasonably 
designed to preclude anyone other than the participant from giving the 
consent. Third, the system must provide the participant with a 
reasonable opportunity to review and to confirm, modify, or rescind the 
terms of the consent before it becomes effective. Fourth, 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 through either a written paper document or in an 
electronic format that satisfies the requirements for providing 
applicable notices. Thus, the participant must be advised of the right 
to request and to receive a confirmation copy of the consent on a 
written paper document without charge. The 2000 regulations did not 
permit the use of electronic media for any notice or election required 
under section 417 with respect to a waiver of a qualified joint and 
survivor annuity (QJSA).
    The Treasury Department and IRS have issued other guidance applying 
the standards set forth in the 2000 regulations to other retirement 
plan notices and elections. For example, Sec.  1.7476-2(c)(2) provides 
that a notice to an interested party is deemed to be provided in a 
manner that satisfies the delivery requirements of Sec.  1.7476-2(c)(1) 
if the notice is delivered using an electronic medium under a system 
that satisfies the requirements of Sec.  1.402(f)-1, Q&A-5. Q&A-7 of 
Notice 2000-3 (2000-1 C.B. 413) provides that, until the issuance of 
further guidance, a plan is permitted to use electronic media to 
provide notices required under sections 401(k)(12) and 401(m)(11) 
(relating to safe harbors for section 401(k) and section 401(m) plans) 
if the employee receives the notice through an electronic medium that 
is reasonably accessible, the system is designed to provide the notice 
in a manner no less understandable to the employee than a written paper 
document, and, at the time the notice is provided, the employee is 
advised that the employee may request and receive the notice on a 
written paper document at no charge. Similarly, Sec.  1.72(p)-1, Q&A-
3(b), requires a loan from a plan to a participant to be set forth in a 
written paper document, in an electronic medium that satisfies 
standards that are the same as the standards in the 2000 regulations, 
or in such other form as may be approved by the Commissioner. In 
addition, Notice 99-1 (1999-1 C.B. 269) provides guidance relating to 
qualified retirement plans permitting the use of electronic media for 
plan participants or beneficiaries conducting account transactions for 
which there is no specific writing requirement, such as plan 
enrollments, direct rollover elections, beneficiary designations, 
investment change allocations, elective and after-tax contribution 
designations, and general plan or specific account inquiries.
    In 2003, final regulations (TD 9052) under section 4980F were 
published in the Federal Register (68 FR 17277). Under Q&A-13 of Sec.  
54.4980F-1, for a plan to provide a section 204(h) notice 
electronically, the section 204(h) notice must actually be received by 
the applicable individual or the plan administrator must take 
appropriate and necessary measures reasonably calculated to ensure that 
the method for providing the section 204(h) notice results in actual 
receipt. Further, the plan administrator must provide the applicable 
individual with a clear and conspicuous statement that the individual 
has a right to receive a paper version of the section 204(h) notice 
without the imposition of fees and, if the individual requests a paper 
copy of the section 204(h) notice, the paper copy must be provided 
without charge. The regulations under section 4980F also provide a safe 
harbor method for delivering a section 204(h) notice electronically, 
which is substantially the same as the consumer consent rules of E-
SIGN.
    The Department of Labor (DOL) and the Pension Benefit Guaranty 
Corporation (PBGC) have also issued regulations relating to the use of 
electronic media to furnish notices, reports, statements, disclosures, 
and other documents to participants, beneficiaries, and other 
individuals under titles I and IV of ERISA. See 29 CFR 2520.104b-1 and 
29 CFR 4000.14.
    On July 14, 2005, a notice of proposed rulemaking (REG-138362-04) 
under section 401 of the Code was published in the Federal Register (70 
FR 40675) (the 2005 proposed regulations). On November 2, 2005, the IRS 
held a public hearing on the proposed regulations. Written comments 
responding to the notice of proposed rulemaking were also received. 
Although commentators raised issues with respect to certain provisions 
in the 2005 proposed regulations, the comments were generally positive. 
After consideration of all the comments, the 2005 proposed regulations 
are adopted, as amended by this Treasury Decision. The significant 
revisions are discussed below.

Explanation of Provisions

I. Overview

A. In General
    This Treasury Decision adds Sec.  1.401(a)-21 and modifies a number 
of existing regulations (including the 2000 regulations and other 
regulations described above). These regulations set forth the standards 
by which a retirement plan, an employee benefit arrangement, or an 
individual retirement plan is permitted to use an electronic medium to 
provide applicable notices or for individuals in such a plan to make 
participant elections.
    For any requirement under the Code or regulations that an employee 
benefit notice or election be in writing or in written form, the 
standards set forth in these regulations are generally the exclusive 
rules for providing such communication through the use of an electronic 
medium. Thus, for example, a retirement plan providing a section 402(f) 
notice through the use of an electronic medium must satisfy the rules 
set forth in these regulations.
    For any employee benefit notice or election that is not required to 
be in writing or in written form, the standards set forth in these 
regulations function as a safe harbor. Thus, a retirement plan, an 
employee benefit arrangement, or individual retirement plan is 
permitted to satisfy either these regulations or any other applicable 
guidance issued by the IRS. For example, with respect to creating an 
electronic system to accept electronic transmissions of beneficiary 
designations, a retirement plan is

[[Page 61880]]

permitted to use the rules under these regulations or continue to 
follow the standards set forth in Notice 99-1, which is not affected by 
E-SIGN.
B. Application of Standards
    Like the 2005 proposed regulations, these regulations apply to any 
notice, election, or similar communication provided to or made by a 
participant or beneficiary in the following retirement plans: A section 
401(a) plan; a section 403(a) plan; a section 403(b) plan; a simplified 
employee pension (SEP) under section 408(k); a simple retirement plan 
under section 408(p); and an eligible governmental plan under section 
457(b). In response to a comment, these regulations also provide that 
they apply to any notice, election, or similar communication provided 
to or made by an individual entitled to benefits in an individual 
retirement plan, including a Roth IRA under section 408A or a deemed 
IRA under section 408(q).
    In addition, these final regulations apply to any notice, election, 
or similar communication provided to or made by a participant or 
beneficiary under the following employee benefit arrangements: an 
accident or health plan or arrangement under sections 104(a)(3) or 105; 
a cafeteria plan under section 125; an educational assistance program 
under section 127; a qualified transportation fringe program under 
section 132; an Archer MSA under section 220; and a health savings 
account under section 223.
    These regulations do not apply to any notice, election, consent, 
disclosure, or obligation required under the provisions of title I or 
IV of ERISA over which the DOL or the PBGC has interpretative and 
enforcement authority.\4\ For example, the rules in 29 CFR 2520.104b-1 
of the Labor Regulations apply with respect to an employee benefit plan 
furnishing disclosure documents, such as a summary plan description or 
a summary annual report. These regulations also do not apply to Code 
section 411(a)(3)(B) (relating to suspension of benefits), Code section 
4980B(f)(6) (relating to an individual's COBRA rights), or any other 
Code provision over which the DOL or the PBGC has similar 
interpretative authority.
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    \4\ See generally Reorganization Plan No. 4 of 1978 (43 FR 
47713). Pursuant to section 101(a) of the Reorganization Plan No. 4 
of 1978, 29 U.S.C. 1001nt, the Secretary of the Treasury has 
authority to issue regulations under parts 2 and 3 of subtitle B of 
title I of ERISA with certain exceptions. Under section 104 of the 
Reorganization Plan No. 4, the Secretary of Labor retains 
enforcement authority with respects to parts 2 and 3 of subtitle B 
of title 1 of ERISA, but, in exercising that authority, is bound by 
the regulations issued by the Secretary of Treasury.
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    In addition, the rules in these regulations apply only with respect 
to notices and elections relating to an individual's rights under a 
retirement plan, an employee benefit arrangement, or an individual 
retirement plan. Thus, these regulations do not apply with respect to 
other requirements under the Code, such as requirements relating to tax 
reporting, tax records, or substantiation of expenses.\5\
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    \5\ Code section 6001 provides rules relating to the maintenance 
of records, statements, and special returns. The IRS has issued 
guidance on electronic recordkeeping under section 6001. This 
guidance applies to retirement plans, employee benefits plans, and 
individual retirement plans. Rev. Proc. 98-25 (1998-1 C.B. 689) sets 
forth standards for a taxpayer maintaining records on an Automated 
Data Processing system. Under section 3.01 of Rev. Proc. 98-25, 
those standards apply to employee plans. Rev. Proc. 97-22 (1997-1 
C.B. 652) provides guidance to taxpayers using an electronic storage 
system to maintain books and records required under section 6001. 
Under section 3.02 of Rev. Proc. 97-22, those requirements apply to 
employee plans. See also footnote 3 above.
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C. Requirements for Using Electronic Media To Provide Notices and Make 
Elections
    These final regulations generally retain from the 2005 proposed 
regulations the requirement that any communication that is provided 
using an electronic medium satisfy all the otherwise applicable 
requirements (including the applicable timing and content rules) 
relating to that communication. Thus, for example, a section 204(h) 
notice provided using an electronic medium must be delivered on or 
before the time period required under Q&A-9 of Sec.  54.4980F-1, must 
satisfy the content requirements set forth in Q&A-11 of Sec.  54.4980F-
1, and must satisfy the delivery requirements under these regulations.
    These regulations provide that an electronic system used to provide 
a notice or to make an election must satisfy certain requirements. 
First, with respect to the content of an applicable notice, the 
electronic system must be reasonably designed to provide the 
information to a recipient in a manner no less understandable to the 
recipient than if provided on a written paper document. For example, a 
plan delivering a lengthy section 402(f) notice would not satisfy this 
requirement if the plan chose to provide the notice through a pre-
recorded message on an automated phone system.\6\ However, a plan with 
few distribution options is permitted to provide a section 411(a)(11) 
notice through the use of a pre-recorded message on an automated phone 
system. Second, the regulations require that the electronic system be 
reasonably designed to alert the recipient, at the time the applicable 
notice is provided, to the significance of the information in the 
notice (including the identification of the subject matter of the 
notice), and provide any instructions needed to access the notice, in a 
manner that is as readily understandable and accessible as an 
applicable notice provided using a written paper document. These 
requirements are necessary in order for the notice to fulfill their 
intended purpose, are substantially equivalent to the requirements 
imposed on nonelectronic notices, and do not impose unreasonable costs 
on the acceptance or use of electronic records. Moreover, they do not 
require or accord greater legal status to a particular technology since 
each technology must satisfy the same standards with respect to each 
notice. Third, the final regulations clarify that, pursuant to section 
101(e) of E-SIGN, if an electronic record of an applicable notice or a 
participant election is not maintained in a form that is capable of 
being retained and accurately reproduced for later reference, then the 
legal effect, validity, or enforceability of such electronic record may 
be denied.
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    \6\ Note that a section 204(h) notice cannot be provided using 
oralcommunication or a recording of an oral communication. See Sec.  
54.4980F-1, A-13(c)(1).
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II. Use of an Electronic Medium To Provide an Applicable Notice

A. Two Methods for Providing Applicable Notices
    These regulations provide two methods by which a retirement plan, 
employee benefit arrangement, or an individual retirement plan is 
permitted to provide an applicable notice to a recipient through the 
use of an electronic medium. Under the first method, an applicable 
notice is permitted to be provided to a recipient using an electronic 
medium after the recipient consents to the electronic delivery of the 
notice (the consumer consent method). The rules under the consumer 
consent method reflect the consumer consent requirements at section 
101(c) in E-SIGN. The Treasury Department and IRS continue to believe 
that an individual entitled to benefits under a retirement plan, an 
employee benefit arrangement, or an individual retirement plan is 
generally a consumer, within the meaning of section 106(1) of E-SIGN, 
when receiving a notice that could affect the individual's benefits or

[[Page 61881]]

other rights.\7\ The second method (the alternative method) provides 
rules that are intended generally to replicate the requirements in the 
2000 regulations that apply to notices required under sections 402(f), 
411(a)(11), and 3405, and thereby allow plans to continue to provide 
these notices electronically using electronic systems that satisfy the 
standards in the 2000 regulations.
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    \7\ See also 12 CFR 202.16, 205.17, 213.6, and 2226.36, 
treatingelectronic disclosures in connection with certain credit 
transactions as consumer information for purposes of E-SIGN.
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B. Consumer Consent Method for Providing Applicable Notices
    Under the consumer consent method, before an applicable notice is 
provided to a recipient using an electronic medium, the participant 
must consent to receive the communication electronically. The consent 
generally must be made in a manner that reasonably demonstrates that 
the participant can access the notice in the electronic form that will 
be used to provide the notice. Alternatively, the consent may be made 
using a written paper document, but only if the participant confirms 
the consent in a manner that reasonably demonstrates that the 
participant can access the notice in the electronic form to be 
provided. Prior to consenting, the participant must receive a 
disclosure statement that outlines the scope of the consent, the 
participant's right to withdraw his or her consent to receive the 
communication electronically (including any conditions, consequences, 
or fees in the event of the withdrawal), and the right to receive the 
communication using paper and any fees imposed for receiving paper. The 
disclosure must also specify the hardware and software requirements for 
accessing the electronic media and the procedures for updating 
information to contact the participant electronically. In the event the 
hardware or software requirements change, new consent must be obtained 
from the participant, generally following the rules of section 101(c) 
of E-SIGN. In addition, under the consumer consent method, the 
applicable notice cannot be provided through the use of oral 
communication or a recording of an oral communication.\8\
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    \8\ See section 101(c)(6) of E-SIGN.
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    Commentators requested several modifications to the rules under the 
consumer consent method in these regulations, including requiring plans 
to give recipients the opportunity to review their consumer consent 
elections every five years and permitting plans to use oral 
communications or recordings of oral communications when providing 
applicable notices under the consumer consent rules. Other commentators 
recommended that the regulations be revised to provide that, under the 
consumer consent method, if a participant does not have the effective 
ability to access the electronic medium used to provide an applicable 
notice or if the participant does not consent to receive the notice 
through the use of an electronic medium, such participant would have 
the right to a free paper copy of the notice.
    The consumer consent method under these regulations interprets the 
rules of section 101(c) of E-SIGN, and section 104(b)(2) of E-SIGN 
restricts an agency's ability to interpret E-SIGN in any manner that is 
inconsistent with section 101 of E-SIGN or that adds to the 
requirements of that section. Accordingly, the rules under the consumer 
consent method of these final regulations are retained without 
substantive change. However, many of the issues raised by the 
commentators are ameliorated by the availability of the alternative 
method for providing applicable notices, as discussed below in 
Alternative Method for Providing Applicable Notices.
C. Alternative Method for Providing Applicable Notices
    These regulations exempt applicable notices from the consumer 
consent requirements of E-SIGN and provide an alternative method of 
complying with the requirement that an applicable notice be in writing 
or in written form if certain conditions are satisfied. This 
alternative method of compliance, which is based on the 2000 
regulations previously issued under section 1510 of TRA '97, satisfies 
the requirements of section 104(d)(1) of E-SIGN, including the 
requirement that any exemption from the consumer consent requirements 
not increase the material risk of harm to consumers.
    This exemption is based on the judgment that, if the consumer 
consent method were the only method available to satisfy the 
requirements for providing an applicable notice through the use of an 
electronic medium, it would impose a substantial burden on electronic 
commerce with respect to retirement plans, employee benefit 
arrangements, and individual retirement plans, and that the 
requirements and safeguards in the 2000 regulations provide a less 
burdensome method without increasing the material risk of harm to 
recipients.
    Under the alternative method, at the time the applicable notice is 
provided, the recipient must be advised that he or she may request and 
receive the applicable notice in writing on paper at no charge. In 
addition, any recipient of the notice must be ``effectively able'' to 
access the electronic medium used to provide the notice. This is a 
change in wording from the 2000 regulations, which required that the 
electronic medium be ``reasonably accessible'' to the recipient. As 
explained in the preamble to the 2005 proposed regulations, this change 
is not intended to reflect a substantive change in the rules, but 
rather to avoid confusion with Department of Labor Regulations 
interpreting the words reasonably accessible as used in section 
101(i)(2)(D) of ERISA, as added by section 306 of the Sarbanes-Oxley 
Act of 2002, Public Law 107-204 (116 Stat. 745).\9\
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    \9\ Section 101(i) of ERISA sets forth a requirement for a 
planadministrator to notify plan participants and beneficiaries of a 
blackout period with respect to an individual account plan. Section 
101(i)(2)(D) provides that the required blackout notice ``shall be 
in writing, except that such notice may be in electronic or other 
form to the extent that such form is reasonably accessible to the 
recipient.'' Section 2520.101-3(b)(3) of the Labor Regulations 
interpreting this requirement provides for this notice to be in 
writing and furnished in any manner consistent with the requirements 
of section 2520.104b-1 of the Labor Regulations, including the 
provisions in that section relating to the use of electronic media. 
Those regulations also deem a notice requirement to be satisfied if 
certain measures are taken. Section 1.401(a)-21 of these final 
regulations only provides rules for satisfying, through the use of 
electronic media, a requirement that a notice or election be in 
writing.
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    One commentator requested that the regulations provide a rule under 
which an e-mail sent to the last known e-mail address would be deemed 
to have been successfully delivered. These regulations do not include 
such a rule.

III. Use of an Electronic Medium To Make a Participant Election

A. In General
    These regulations also set forth the requirements that apply if a 
consent or election is made by a person using an electronic system. The 
participant election rules, which are also based on the standards in 
the 2000 regulations, generally retain the requirements that (1) The 
participant be effectively able to access the electronic medium in 
order to make the participant election, (2) the electronic system be 
reasonably designed to preclude any person other than the appropriate 
individual from making a participant election, (3) the electronic 
system provide the participant making a participant election with a 
reasonable opportunity to review, confirm, modify, or rescind the terms 
of the election before it becomes effective, and (4) the individual 
making a participant election, within a reasonable time

[[Page 61882]]

period, receive a confirmation of the election through either a written 
paper document or an electronic medium under a system that satisfies 
the applicable notice requirements of either the consumer consent 
delivery method or the alternative delivery method. Section 101(c) of 
E-SIGN does not apply to participant elections.
    These regulations require that a participant be effectively able to 
access the electronic medium under an electronic system used to make a 
participant election, but, like the 2000 regulations, do not require 
that a plan also permit the election to be made by paper as an 
alternative to using an electronic system that is available to the 
participant. However, these regulations do not apply with respect to a 
participant who is not effectively able to access the electronic medium 
or media in order to make a participant election. Accordingly, the plan 
must offer each such participant the right to make an election in 
another medium that is accessible to the participant (such as a paper 
election). A plan that fails to offer paper or an electronic medium 
that a participant is effectively able to access will fail to comply 
with the participant election requirements and would likely violate 
other qualification requirements, such as the requirements that a plan 
to operate in accordance with its terms (by actually making available 
all distribution options provided by the plan) and the requirements of 
Sec.  1.401(a)(4)-4 under which benefits, rights, and features 
(including the right to early distribution) must be made available in a 
nondiscriminatory manner.
B. Use of Electronic Media for QJSA Notices and Elections
    The participant election rules in these regulations extend the use 
of electronic media to the notice and election rules applicable to 
plans that are subject to the QJSA requirements of section 417. 
Accordingly, a plan subject to the QJSA requirements is permitted to 
provide the notice required by section 417 to a participant through the 
use of electronic media as long as the plan complies with either of the 
two methods described above for providing electronic notices. 
Similarly, a participant's consent to a distribution is permitted to be 
provided through the use of electronic media if the plan complies with 
the standards described below, subject to obtaining a valid spousal 
consent.
    Section 417 requires any spousal consent to a waiver of a QJSA to 
be witnessed by a plan representative or a notary public. In accordance 
with section 101(g) of E-SIGN, these regulations authorize the use of 
an electronic acknowledgment or notarization if the standards of 
section 101(g) of E-SIGN and State law applicable to notary publics are 
satisfied. These regulations retain the requirement from the 2005 
proposed regulations that the signature of a spouse be witnessed in the 
physical presence of the plan representative or notary public. Several 
comments were received on the participant election rules, particularly 
as they relate to spousal consents. The comments generally fall into 
two categories: (1) Commentators who favored retaining the pen-and-ink 
signature and physical presence requirements for spousal consents; and 
(2) commentators who favored extending the use of electronic media to 
spousal consents, and eliminating the physical presence requirement.
    Commentators in the first category raised issues with rules in the 
2005 proposed regulations relating to the authentication requirement 
and the requirement that a spousal consent of a waiver of a QJSA be 
witnessed in the physical presence of a notary public or a plan 
representative. In general, these commentators recommended that the 
regulations be revised to provide additional safeguards for spousal 
consents because, unlike other participant elections, a spousal consent 
could involve a conflict of interest between the parties involved in 
the election. With respect to the authentication requirement, these 
commentators argued that the authentication requirement would be vague 
and not require an evidentiary record. According to the commentators, 
requiring a pen-and-ink signature and maintaining the physical presence 
requirement would provide necessary additional safeguards for spousal 
consents by creating an evidentiary record for later disputes regarding 
the validity of the consent and reducing the likelihood of fraud.
    Commentators who favored extending the use of electronic media for 
all participant elections, including spousal consents, generally 
recommended that the final regulations eliminate the physical presence 
requirement for spousal consents. These commentators argued that 
protections are already available to protect a spouse making a 
participant election using electronic media. For example, a retirement 
plan could require a separate PIN for the spouse to which the 
participant would not have access.
    In light of these comments, these regulations clarify that the 
determination of whether an electronic system used in making 
participant elections is reasonably designed to preclude any person 
other than the appropriate individual from making a participant 
election is based on facts and circumstances, and that a relevant 
factor is whether the participant election has the potential for a 
conflict of interest between the individuals involved in the election. 
See Example 3 in Sec.  1.401(a)-21(f) of these regulations for an 
illustration of the participant election rules when a spousal consent 
is required. These regulations also clarify that if an applicable 
notice or participant election is recorded electronically, the 
electronic record must be in a form that is capable of being reproduced 
for later reference (see discussion of the general rules under the 
heading Requirements for Using Electronic Media to Provide Notices and 
Make Elections).
    The requirement that the signature of a spouse to be witnessed in 
the physical presence of a plan representative or notary public 
coordinates with the authentication requirement because the physical 
presence requirement increases the likelihood that the electronic 
system is reasonably designed to preclude any person other than the 
appropriate individual from making the election. In contrast, an 
electronic system that permits the use of a spousal PIN to sign a 
spousal consent electronically creates greater risk that the spousal 
consent may be fraudulently signed. Because of the potential risk that 
two spouses could share information regarding PINs, the Treasury 
Department and IRS believe that any electronic system that relies 
solely on separate PINs would not provide the same level of safeguards 
as provided by the physical presence requirement and would not be 
reasonably designed to preclude any person other than the appropriate 
individual from making the election. Accordingly these regulations do 
not adopt the suggestion that spousal PINs be permitted in lieu of the 
physical presence requirement, and instead retain from the 2005 
proposed regulations the physical presence requirement for electronic 
notarization of spousal consents. The Treasury Department and IRS 
believe that permitting electronic notarization of spousal consents 
under the participant election rules, in conjunction with the physical 
presence requirement, reflects the appropriate interpretation of 
section 417 and properly balances minimizing the burden of plan 
administration with protecting the rights of spouses.
    Technology is constantly evolving and, at some point in the future, 
technology could exist that would

[[Page 61883]]

provide the same safeguards as the physical presence requirement. 
Therefore, in light of the comments received, these regulations add a 
delegation to the Commissioner. Under this delegation, the Commissioner 
may provide that the use of procedures under an electronic system with 
respect to an electronic medium is deemed to satisfy the physical 
presence requirement, but only if those procedures with respect to the 
electronic system provide the same safeguards for participant elections 
as provided through the physical presence requirement.
C. Conforming Amendments to Other Rules in Law
    These regulations modify a number of existing regulations 
(including the 2000 regulations) that have previously provided rules 
relating to the use of new technologies in providing applicable notices 
or making participant elections that are required to be in writing or 
in written form. These modifications, which merely add the consumer 
consent requirements of E-SIGN, are not expected to affect adversely 
the existing administrative practices of plan sponsors designed to 
comply with the 2000 regulations.
    In addition, these regulations apply to categories of applicable 
notices that were not previously addressed in the 2000 regulations or 
subsequent regulations. As such, these regulations apply whenever there 
is a requirement than an applicable notice under one of the covered 
sections be provided in written form or in writing, without regard to 
whether that other requirement specifically cross-references these 
regulations. Thus, safe harbor notices under sections 401(k)(12)(D) and 
401(m)(11), which are required to be in writing, can be provided 
electronically if the requirements of section 1.401(a)-21 of this 
chapter are satisfied.

Effective Date

    The rules provided in Sec.  1.401(a)-21 apply to applicable notices 
provided, and to participant elections made, on or after January 1, 
2007. However, a retirement plan, an employee benefit arrangement, or 
an individual retirement plan that provides an applicable notice or 
makes a participant election that complies with the requirements set 
forth in these regulations on or after October 1, 2000, and before 
January 1, 2007, will not be treated as failing to provide an 
applicable notice or to make a participant election merely because the 
notice or election was not in writing or written form.

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 assessment is not required. It has also been 
determined that the provisions of 5 U.S.C. 553(b) and (d) do not apply 
to this Treasury Decision. It is hereby certified that the collection 
of information in these regulations will not have a significant impact 
on a substantial number of small entities. This certification is based 
on the fact that these regulations only provide guidance on how to 
satisfy existing collection of information requirements through the use 
of electronic media. Accordingly, a Regulatory Flexibility Analysis is 
not required. Pursuant to section 7805(f) of the Code, the NPRM 
preceding this regulation 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 Pamela R. Kinard of 
the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and 
Government Entities), Internal Revenue Service. However, personnel from 
other offices of the Internal Revenue Service 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 54

    Excise taxes, Pensions, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1, 35, and 54 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.401(a)-21 also issued under 26 U.S.C. 401 and section 104 
of the Electronic Signatures in Global and National Commerce Act, 
Public Law 106-229 (114 Stat. 464). * * *


0
Par. 2. Section 1.72(p)-1, Q&A-3, is amended by revising the text of 
paragraph (b) to read as follows:


Sec.  1.72(p)-1  Loans treated as distributions.

* * * * *
    A-3. * * *
    (b) * * * A loan does not satisfy the requirements of this 
paragraph unless the loan is evidenced by a legally enforceable 
agreement (which may include more than one document) and the terms of 
the agreement demonstrate compliance with the requirements of section 
72(p)(2) and this section. Thus, the agreement must specify the amount 
and date of the loan and the repayment schedule. The agreement does not 
have to be signed if the agreement is enforceable under applicable law 
without being signed. The agreement must be set forth either--
    (1) In a written paper document; or
    (2) In a document that is delivered through an electronic medium 
under an electronic system that satisfies the requirements of Sec.  
1.401(a)-21 of this chapter.
* * * * *

0
Par. 3. Section 1.132-9(b), Q&A-12, is amended by adding a sentence to 
the end of the text in paragraph (b) to read as follows:


Sec.  1.132-9  Qualified transportation fringes.

* * * * *
    A-12. * * *
    (b) * * * See Sec.  1.401(a)-21 of this chapter for rules 
permitting the use of electronic media to make participant elections 
with respect to employee benefit arrangements.
* * * * *
0
Par. 4. Section 1.401(a)-21 is added to read as follows:


Sec.  1.401(a)-21  Rules relating to the use of an electronic medium to 
provide applicable notices and to make participant elections.

    (a) Introduction--(1) In general--(i) Permission to use an 
electronic medium. This section provides rules relating to the use of 
an electronic medium to provide applicable notices and to make 
participant elections as defined in paragraph (e)(1) and (6) of this 
section with respect to retirement plans, employee benefit 
arrangements, and individual retirement plans described in paragraph 
(a)(2) of this section. The rules in this section reflect the 
provisions of the Electronic Signatures in Global and National Commerce 
Act, Public Law 106-229 (114 Stat. 464 (2000) (E-SIGN)).

[[Page 61884]]

    (ii) Notices and elections required to be in writing or in written 
form--(A) In general. The rules of this section must be satisfied in 
order to use an electronic medium to provide an applicable notice or to 
make a participant election if the notice or election is required to be 
in writing or in written form under the Internal Revenue Code, 
Department of Treasury regulations, or other guidance issued by the 
Commissioner.
    (B) Rules relating to applicable notices. An applicable notice that 
is provided using an electronic medium is treated as being provided in 
writing or in written form if and only if the requirements of paragraph 
(a)(5) of this section are satisfied and either the consumer consent 
requirements of paragraph (b) of this section or the requirements for 
exemption from the consumer consent requirements under paragraph (c) of 
this section are satisfied. For example, in order to provide a section 
402(f) notice electronically, a qualified plan must satisfy either the 
consumer consent requirements of paragraph (b) of this section or the 
requirements for exemption under paragraph (c) of this section. If a 
plan fails to satisfy either of these requirements, the plan must 
provide the section 402(f) notice using a written paper document in 
order to satisfy the requirements of section 402(f).
    (C) Rules relating to participant elections. A participant election 
that is made using an electronic medium is treated as being provided in 
writing or in written form if and only if the requirements of 
paragraphs (a)(5) and (d) of this section are satisfied.
    (iii) Safe harbor method for applicable notices and participant 
elections that are not required to be in writing or written form. For 
an applicable notice or a participant election that is not required to 
be in writing or in written form, the rules of this section provide a 
safe harbor method for using an electronic medium to provide the 
applicable notice or to make the participant election.
    (2) Application of rules--(i) Notices, elections, or consents under 
retirement plans. The rules of this section apply to any applicable 
notice or any participant election relating to the following retirement 
plans: A qualified retirement plan under section 401(a) or 403(a); a 
section 403(b) plan; a simplified employee pension (SEP) under section 
408(k); a simple retirement plan under section 408(p); or an eligible 
governmental plan under section 457(b).
    (ii) Notices, elections, or consents under other employee benefit 
arrangements. The rules of this section also apply to any applicable 
notice or any participant election relating to the following employee 
benefit arrangements: An accident and health plan or arrangement under 
sections 104(a)(3) and 105; a cafeteria plan under section 125; an 
educational assistance program under section 127; a qualified 
transportation fringe program under section 132; an Archer MSA under 
section 220; or a health savings account under section 223.
    (iii) Notices, elections, or consents under individual retirement 
plans. The rules of this section also apply to any applicable notice or 
any participant election relating to individual retirement plans, 
including a Roth IRA under section 408A; or a deemed IRA under a 
qualified employer plan described in section 408(q).
    (3) Limitation on application of rules--(i) In general. The rules 
of this section do not apply to any notice, election, consent, 
disclosure, or obligation required under the provisions of title I or 
IV of the Employee Retirement Income Security Act of 1974, as amended 
(ERISA), over which the Department of Labor or the Pension Benefit 
Guaranty Corporation has interpretative and enforcement authority. For 
example, the rules in 29 CFR 2520.104b-1 of the Department of Labor 
Regulations apply with respect to an employee benefit plan providing 
disclosure documents, such as a summary plan description or a summary 
annual report. The rules in this section also do not apply to Internal 
Revenue Code section 411(a)(3)(B) (relating to suspension of benefits), 
Internal Revenue Code section 4980B(f)(6) (relating to an individual's 
COBRA rights), or any other Internal Revenue Code provision over which 
Department of Labor or the Pension Benefit Guaranty Corporation has 
similar interpretative authority.
    (ii) Recordkeeping and other requirements. The rules in this 
section only apply with respect to applicable notices and participant 
elections relating to an individual's rights under a retirement plan, 
an employee benefit arrangement, or an individual retirement plan. 
Thus, the rules in this section do not alter the otherwise applicable 
requirements under the Internal Revenue Code, such as the requirements 
relating to tax reporting, tax records, or substantiation of expenses. 
See section 6001 for rules relating to the maintenance of records, 
statements, and special returns. See also section 101(e) of E-SIGN, 
which provides that if an electronic record of an applicable notice or 
a participant election is not maintained in a form that is capable of 
being retained and accurately reproduced for later reference, then the 
legal effect, validity, or enforceability of such electronic record may 
be denied.
    (4) General requirements related to applicable notices and 
participant elections. The rules of this section supplement the general 
requirements related to each applicable notice and participant 
election. Thus, in addition to satisfying the rules for timing and 
content, the rules in this section must be satisfied.
    (5) Requirements related to the design of an electronic system used 
to deliver applicable notices and to make participant elections--(i) 
The electronic system must take into account the content of a notice. 
With respect to the content of an applicable notice, the electronic 
system must be reasonably designed to provide the information in the 
notice to a recipient in a manner that is no less understandable to the 
recipient than a written paper document.
    (ii) Identification of the significance of information in the 
notice. The electronic system must be designed to alert the recipient, 
at the time an applicable notice is provided, to the significance of 
the information in the notice (including identification of the subject 
matter of the notice), and provide any instructions needed to access 
the notice, in a manner that is readily understandable.
    (b) Consumer consent requirements--(1) Requirements. With respect 
to an applicable notice, the consumer consent requirements of this 
paragraph (b) are satisfied if--
    (i) The requirements in paragraphs (b)(2) through (4) of this 
section are satisfied; and
    (ii) In accordance with section 101(c)(6) of E-SIGN, the applicable 
notice is not provided through the use of oral communication or a 
recording of an oral communication.
    (2) Consent--(i) In general. The recipient must affirmatively 
consent to the delivery of the applicable notice using an electronic 
medium. This consent must be either--
    (A) Made electronically in a manner that reasonably demonstrates 
that the recipient can access the applicable notice in the electronic 
medium in the form that will be used to provide the notice; or
    (B) Made using a written paper document (or using another form not 
described in paragraph (b)(2)(i)(A) of this section), but only if the 
recipient confirms the consent electronically in a manner that 
reasonably demonstrates that the recipient can access the

[[Page 61885]]

applicable notice in the electronic medium in the form that will be 
used to provide the notice.
    (ii) Withdrawal of consumer consent. The consent to receive 
electronic delivery requirement of this paragraph (b)(2) is not 
satisfied if the recipient withdraws his or her consent before the 
applicable notice is delivered.
    (3) Required disclosure statement. The recipient, prior to 
consenting under paragraph (b)(2)(i) of this section, must be provided 
with a clear and conspicuous statement containing the disclosures 
described in paragraphs (b)(3)(i) through (v) of this section:
    (i) Right to receive paper document--(A) In general. The statement 
informs the recipient of any right to have the applicable notice be 
provided using a written paper document or other nonelectronic form.
    (B) Post-consent request for paper copy. The statement informs the 
recipient how, after having provided consent to receive the applicable 
notice electronically, the recipient may, upon request, obtain a paper 
copy of the applicable notice and whether any fee will be charged for 
such copy.
    (ii) Right to withdraw consumer consent. The statement informs the 
recipient of the right to withdraw consent to receive electronic 
delivery of an applicable notice on a prospective basis at any time and 
explains the procedures for withdrawing that consent and any 
conditions, consequences, or fees in the event of the withdrawal.
    (iii) Scope of the consumer consent. The statement informs the 
recipient whether the consent to receive electronic delivery of an 
applicable notice applies only to the particular transaction that gave 
rise to the applicable notice or to other identified transactions that 
may be provided or made available during the course of the parties' 
relationship. For example, the statement may provide that a recipient's 
consent to receive electronic delivery will apply to all future 
applicable notices of the recipient relating to the employee benefit 
arrangement until the recipient is no longer a participant in the 
employee benefit arrangement (or withdraws the consent).
    (iv) Description of the contact procedures. The statement describes 
the procedures to update information needed to contact the recipient 
electronically.
    (v) Hardware or software requirements. The statement describes the 
hardware and software requirements needed to access and retain the 
applicable notice.
    (4) Post-consent change in hardware or software requirements. If, 
after a recipient provides consent to receive electronic delivery, 
there is a change in the hardware or software requirements needed to 
access or retain the applicable notice and such change creates a 
material risk that the recipient will not be able to access or retain 
the applicable notice in electronic format--
    (i) The recipient must receive a statement of--
    (A) The revised hardware or software requirements for access to and 
retention of the applicable notice; and
    (B) The right to withdraw consent to receive electronic delivery 
without the imposition of any fees for the withdrawal and without the 
imposition of any condition or consequence that was not previously 
disclosed in paragraph (b)(3) of this section; and
    (ii) The recipient must reaffirm consent to receive electronic 
delivery in accordance with the requirements of paragraph (b)(2) of 
this section.
    (c) Exemption from consumer consent requirements--(1) In general. 
This paragraph (c) is satisfied if the conditions in paragraphs (c)(2) 
and (3) of this section are satisfied. This paragraph (c) constitutes 
an exemption from the consumer consent requirements of section 101(c) 
of E-SIGN pursuant to the authority granted in section 104(d)(1) of E-
SIGN.
    (2) Effective ability to access. For purposes of this paragraph 
(c), the electronic medium used to provide an applicable notice must be 
a medium that the recipient has the effective ability to access.
    (3) Free paper copy of applicable notice. At the time the 
applicable notice is provided, the recipient must be advised that he or 
she may request and receive the applicable notice in writing on paper 
at no charge, and, upon request, that applicable notice must be 
provided to the recipient at no charge.
    (d) Special rules for participant elections--(1) In general. This 
paragraph (d) is satisfied if the conditions described in the following 
paragraphs (d)(2) through (6) are satisfied:
    (2) Effective ability to access. The electronic medium under an 
electronic system used to make a participant election must be a medium 
that the person who is eligible to make the election is effectively 
able to access. If the appropriate individual is not effectively able 
to access the electronic medium for making the participant election, 
the participant election will not be treated as made available to that 
individual. Thus, for example, the participant election will not be 
treated as made available to that individual for purposes of the rules 
under section 401(a)(4).
    (3) Authentication. The electronic system used in making 
participant elections is reasonably designed to preclude any person 
other than the appropriate individual from making the election. Whether 
this condition is satisfied is based on facts and circumstances, 
including whether the participant election has the potential for a 
conflict of interest between the individuals involved in the election. 
See Examples 3, 4, and 5 of paragraph (f) of this section for 
illustrations of electronic systems that satisfy the authentication 
requirement of this paragraph (d)(3).
    (4) Opportunity to review. The electronic system used in making 
participant elections provides the person making the participant 
election with a reasonable opportunity to review, confirm, modify, or 
rescind the terms of the election before the election becomes 
effective.
    (5) Confirmation of action. The person making the participant 
election receives, within a reasonable time, a confirmation of the 
effect of the election under the terms of the plan or arrangement 
through either a written paper document or an electronic medium under a 
system that satisfies the requirements of either paragraph (b) or (c) 
of this section (as if the confirmation were an applicable notice).
    (6) Participant elections, including spousal consents, that are 
required to be witnessed by a plan representative or a notary public--
(i) In general. In the case of a participant election which is required 
to be witnessed by a plan representative or a notary public (such as a 
spousal consent under section 417), the signature of the individual 
making the participant election is witnessed in the physical presence 
of a plan representative or a notary public.
    (ii) Electronic notarization permitted. If the requirements of 
paragraph (d)(6)(i) of this section are satisfied, an electronic 
notarization acknowledging a signature (in accordance with section 
101(g) of E-SIGN and State law applicable to notary publics) will not 
be denied legal effect if the signature of the individual is witnessed 
in the physical presence of a notary public.
    (iii) Delegation to Commissioner. In guidance published in the 
Internal Revenue Bulletin, the Commissioner may provide that the use of 
procedures under an electronic system is deemed to satisfy the physical 
presence requirement under paragraph (d)(6)(i) of this section, but 
only if those procedures with respect to the electronic system provide 
the same safeguards for participant elections as

[[Page 61886]]

are provided through the physical presence requirement. See Sec.  
601.601(d)(2)(ii)(b) of this chapter.
    (e) Definitions. The definitions in this paragraph (e) apply for 
purposes of this section.
    (1) Applicable notice. The term applicable notice includes any 
notice, report, statement, or other document required to be provided to 
a recipient under a retirement plan, employee benefit arrangement, or 
individual retirement plan as described in paragraph (a)(2) of this 
section.
    (2) Electronic. The term electronic means technology having 
electrical, digital, magnetic, wireless, optical, electromagnetic, 
voice-recording systems, or similar capabilities.
    (3) Electronic medium. The term electronic medium means an 
electronic method of communication (e.g., Web site, electronic mail, 
telephonic system, magnetic disk, and CD-ROM).
    (4) Electronic record. The term electronic record means an 
applicable notice or a participant election that is created, generated, 
sent, communicated, received, or stored by electronic media.
    (5) Electronic system. The term electronic system means a system 
designed for creating, generating, sending, receiving, storing, 
retrieving, displaying, or processing information that makes use of any 
electronic medium.
    (6) Participant election. The term participant election includes 
any consent, election, request, agreement, or similar communication 
made by or from a participant, beneficiary, alternate payee, or an 
individual entitled to benefits under a retirement plan, employee 
benefit arrangement, or individual retirement plan as described in 
paragraph (a)(2) of this section.
    (7) Recipient. The term recipient means a plan participant, 
beneficiary, employee, alternate payee, or any other person to whom an 
applicable notice is to be provided.
    (f) Examples. The following examples illustrate the rules of this 
section. Examples 1, 2, 3, and 6 assume that the requirements of 
paragraph (a)(4) and (5) of this section are satisfied.

    Example 1. (i) Facts involving using the consumer consent 
requirements to deliver a section 402(f) notice via e-mail. Plan A, 
a qualified plan, permits participants to request benefit 
distributions from the plan on Plan A's Internet Web site. Under 
Plan A's system for such transactions, a participant must enter his 
or her account number, personal identification number (PIN), and his 
or her e-mail address to which the notice is to be sent. The 
participant's PIN and account number must match the information in 
Plan A's records in order for the transaction to proceed. 
Participant H requests a distribution from Plan A on Plan A's Web 
site, and, at the time of the request for distribution, a disclosure 
statement appears on the computer screen that explains that 
Participant H can consent to receive the section 402(f) notice 
electronically. The disclosure statement provides information 
relating to the consent, including how to receive a paper copy of 
the notice, how to withdraw consent, the hardware and software 
requirements, and the procedures for accessing the section 402(f) 
notice, which is in a file format from a specific spreadsheet 
program. After reviewing the disclosure statement, which satisfies 
the requirements of paragraph (b)(3) of this section, Participant H 
consents to receive the section 402(f) notice via e-mail by 
selecting the consent button at the end of the disclosure statement. 
As a part of the consent procedure, an e-mail is sent to Participant 
H's e-mail address in order to demonstrate that Participant H can 
access the spreadsheet program. In the e-mail, Participant H is 
prompted to answer a question from the spreadsheet program, which is 
in an attachment to the e-mail. Once Participant H correctly answers 
the question, the section 402(f) notice is then delivered to 
Participant H via e-mail.
    (ii) Conclusion. In this Example 1, Plan A's delivery of the 
section 402(f) notice to Participant H satisfies the requirements of 
paragraph (b) of this section.
    Example 2.  (i) Facts--(A) Facts involving using the alternative 
method to deliver a section 411(a)(11) notice via e-mail. Plan B, a 
qualified plan, permits participants to request benefit 
distributions from the plan on Plan B's Internet Web site. Under 
Plan B's system for such transactions, a participant must enter his 
or her account number and personal identification number (PIN), and 
his or her e-mail address to which the notice is to be sent. The 
participant's PIN and account number must match the information in 
Plan B's records in order for the transaction to proceed. After 
Participant K, a single employee, requests a distribution from Plan 
B on Plan B's Internet Web site, the plan administrator provides 
Participant K with a section 411(a)(11) notice in an attachment to 
an e-mail. Plan B sends the e-mail with a request for a computer 
generated notification that the message was received and opened. The 
e-mail instructs Participant K to read the attachment for important 
information regarding the request for a distribution. In addition, 
the e-mail also states that Participant K may request the section 
411(a)(11) notice on a written paper document and that, if 
Participant K requests the notice on a written paper document, it 
will be provided at no charge. Plan B receives notification 
indicating that the e-mail was received and opened by Participant K.
    (B) Facts involving making a participant's consent to a 
distribution. In order to consent to a distribution, Plan B requires 
a participant to enter the participant's account number and PIN in 
order to preclude any person other than the participant from making 
the election. After the authentication process, Participant K 
completes a distribution request form on the Web site. After 
completing the request form, the Web site provides a summary of the 
information entered on the form and gives Participant K an 
opportunity to review or modify the distribution request form before 
the transaction is completed. Within a reasonable period of time 
after Participant K consents to the distribution, the plan 
administrator, by e-mail, sends confirmation of the terms (including 
the form) of the distribution to Participant K and advises 
Participant K that, upon request, the confirmation may be provided 
to Participant K on a written paper document at no charge. Plan B 
retains an electronic copy of the consent to the distribution in a 
form that is capable of being retained and accurately reproduced for 
later reference by Participant K.
    (ii) Conclusion. In this Example 2, Plan B's delivery of the 
section 411(a)(11) notice and the electronic system used to make 
Participant K's consent to a distribution satisfy the requirements 
of paragraphs (a), (c), and (d) of this section.
    Example 3.  (i) Facts involving the transmission of a spousal 
consent via electronic notarization. Plan C, a qualified money 
purchase pension plan, permits a married participant to request a 
plan loan through the Plan C's Internet Web site with the notarized 
consent of the spouse. Under Plan C's system for requesting a plan 
loan, a participant must enter his or her account number, personal 
identification number (PIN), and his or her e-mail address. The 
information entered by the participant must match the information in 
Plan C's records in order for the transaction to proceed. 
Participant M, a married participant, is effectively able to access 
the Web site available to apply for a plan loan. In order to apply 
for a loan, Plan C requires a participant to enter the participant's 
account number and PIN in order to preclude any person other than 
the participant from making the election. Participant M completes 
the loan application on Plan C's Web site. Within a reasonable 
period of time after submitting the plan loan application, the plan 
administrator, by e-mail, sends Participant M the loan application, 
including all attachments setting forth the terms of the loan 
agreement and all other required information. In the e-mail, Plan C 
also notifies Participant M that, upon request, the loan application 
may be provided to Participant M on a written paper document at no 
charge. Plan C then instructs Participant M that, in order for the 
loan application to proceed, Participant M must submit to the plan 
administrator a notarized spousal consent form. Participant M and 
M's spouse go to a notary public and the notary witnesses 
Participant M's spouse signing the spousal consent for the loan 
agreement on an electronic signature capture pad with adequate 
security. After witnessing M's spouse signing the spousal consent, 
the notary public sends an e-mail with an electronic acknowledgement 
that is attached to or logically associated with the signature of 
M's spouse to the plan administrator. The electronic acknowledgement 
is in accordance with section 101(g) of E-SIGN and the relevant 
State law applicable to notary publics. After the plan receives the 
e-mail, Plan C sends an e-mail to Participant M, giving M a 
reasonable period to review and

[[Page 61887]]

confirm the completed loan application and to determine whether the 
loan application should be modified or rescinded. In addition, the 
e-mail to Participant M also provides that M may request the 
completed loan application on a written paper document and that, if 
M requests the written paper document, it will be provided at no 
charge. Plan C retains an electronic copy of the loan agreement, 
including the spousal consent, in a form that is capable of being 
retained and accurately reproduced for later reference by all 
parties.
    (ii) Conclusion. In this Example 3, the transmission of the plan 
loan agreement satisfies the requirements of paragraphs (a), (c), 
and (d) of this section. By requiring that the spouse sign the 
spousal consent on an electronic signature capture pad in the 
physical presence of a notary public, the electronic system 
satisfies the requirement that the system be reasonably designed to 
preclude any person other than the appropriate individual from 
making the election. Thus, the electronic notarization of spousal 
consent satisfies the requirements of paragraphs (a) and (d) of this 
section.
    Example 4.  (i) Facts--(A) Facts involving using the alternative 
method of compliance to deliver a section 411(a)(11) notice via an 
automated telephone system. A qualified profit-sharing plan (Plan D) 
permits participants to request distributions through an automated 
telephone system. Under Plan D's system for such transactions, a 
participant must enter his or her account number and personal 
identification number (PIN); this information must match the 
information in Plan D's records in order for the transaction to 
proceed. Plan D provides only the following distribution options: 
single-sum payment; and annual installments over 5, 10, or 20 years. 
Participant N, a single participant, requests a distribution from 
Plan D by following the applicable instructions on the automated 
telephone system. After Participant N has requested the 
distribution, the automated telephone system recites the section 
411(a)(11) notice over the phone. The automated telephone system 
also advises Participant N that, upon request, the notice may be 
provided on a written paper document and that, if Participant N so 
requests, the notice will be provided on a written paper document at 
no charge.
    (B) Facts involving making a participant's consent to a 
distribution via an automated telephone system. In order to consent 
to a distribution, Plan D requires a participant to enter the 
participant's account number and PIN in order to preclude any person 
other than the participant from making the election. Participant N 
requests a distribution by entering information on the automated 
telephone system. After completing the request, the automated 
telephone system provides a oral summary of the information entered 
and gives Participant N an opportunity to review or modify the 
distribution request before the transaction is completed. Plan D's 
automated telephone system confirms the distribution request to 
Participant N and advises Participant N that, upon request, a 
confirmation may be provided on a written paper document at no 
charge. Plan D retains an electronic copy of the consent to the 
distribution in a form that is capable of being retained and 
accurately reproduced for later reference by Participant N.
    (ii) Conclusion. In this Example 4, because Plan D has 
relatively few and simple distribution options, the provision of the 
section 411(a)(11) notice through the automated telephone system is 
no less understandable to the participant than a written paper 
notice for purposes of paragraph (a)(5)(i) of this section. In 
addition, the automated telephone procedures of Plan D satisfy the 
applicable requirements of paragraphs (a), (c), and (d) of this 
section.
    Example 5.  (i) Facts. Same facts as Example 4 of this paragraph 
(f), except that, pursuant to Plan D'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 the 
predetermined instructions from the plan administrator.
    (ii) Conclusion. As in Example 4 of this paragraph (f), because 
Plan D has relatively few and simple distribution options, the 
provision of the section 411(a)(11) notice through the automated 
telephone system is no less understandable to the participant than a 
written paper notice for purposes of paragraph (a)(4) of this 
section. Further, in this Example 5, the customer service telephone 
procedures of Plan D satisfy the requirements of paragraphs (a), 
(c), and (d) of this section.
    Example 6. (i) Facts. Plan E, a qualified plan, permits 
participants to request distributions by e-mail on the employer's e-
mail system. Under this system, a participant must enter his or her 
account number, personal identification number (PIN), and e-mail 
address. This information must match that in Plan E's records in 
order for the transaction to proceed. If a participant requests a 
distribution 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. 
Participant Q requests a distribution and receives the section 
411(a)(11) notice from the plan administrator by reply e-mail. 
However, before Participant Q elects a distribution, Q terminates 
employment. Following termination of employment, Participant Q no 
longer has access to the employer's e-mail system.
    (ii) Conclusion. In this Example 6, Plan E does not satisfy the 
participant election requirements under paragraph (d) of this 
section because Participant Q is not effectively able to access the 
electronic medium used to make the participant election. Plan E must 
provide Participant Q with the opportunity to make the participant 
election through a written paper document or another system that 
Participant Q is effectively able to access, such as the automated 
telephone systems described in Example 4 and Example 5 of this 
paragraph (f).

    (g) Effective date. The rules provided in this section apply to 
applicable notices provided, and to participant elections made, on or 
after January 1, 2007. However, a retirement plan, an employee benefit 
arrangement, or an individual retirement plan that provides an 
applicable notice or makes a participant election that complies with 
the requirements set forth in these regulations on or after October 1, 
2000, and before January 1, 2007, will not be treated as failing to 
provide an applicable notice or to make a participant election merely 
because the notice or election was not in writing or written form.

0
Par. 5. Section 1.401(k)-3 is amended by adding a sentence to the end 
of the text of paragraph (d)(1) to read as follows:


Sec.  1.401(k)-3  Safe harbor requirements.

* * * * *
    (d) * * *
    (1) * * * See Sec.  1.401(a)-21 of this chapter for rules 
permitting the use of electronic media to provide applicable notices to 
recipients with respect to retirement plans.
* * * * *

0
Par. 6. Section 1.402(f)-1 is amended by:
0
(1) Revising A-5.
0
(2) Removing Q&A-6.
    The revision reads as follows:


Sec.  1.402(f)-1  Required explanation of eligible rollover 
distributions; questions and answers.

* * * * *
    A-5. Yes. See Sec.  1.401(a)-21 of this chapter for rules 
permitting the use of electronic media to provide applicable notices to 
recipients with respect to retirement plans.

0
Par. 7. Section 1.411(a)-11 is amended by:
0
(1) Revising the text of paragraphs (f)(1) and (2).
0
(2) Removing paragraph (g).
    The revisions read as follows.


Sec.  1.411(a)-11  Restriction and valuation of distributions.

* * * * *
    (f) * * *
    (1) * * * 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 must be 
provided on a written paper document. However, see Sec.  1.401(a)-21 of 
this chapter for rules permitting the use of electronic media to 
provide applicable

[[Page 61888]]

notices to recipients with respect to retirement plans.
    (2) * * * The consent described in paragraphs (c)(2) and (3) of 
this section must be given on a written paper document. However, see 
Sec.  1.401(a)-21 of this chapter for rules permitting the use of 
electronic media to make participant elections with respect to 
retirement plans.

0
Par. 8. Section 1.417(a)(3)-1 is amended by adding a sentence to the 
end of the text of paragraph (a)(3) to read as follows:


Sec.  1.417(a)(3)-1  Required explanation of qualified joint and 
survivor annuity and qualified preretirement survivor annuity.

    (a) * * *
    (3) * * * But see Sec.  1.401(a)-21 of this chapter for rules 
permitting the use of electronic media to provide applicable notices to 
recipients with respect to retirement plans.
* * * * *

0
Par. 9. Section 1.7476-2 is amended by revising paragraph (c)(2) to 
read as follows:


Sec.  1.7476-2  Notice to interested parties.

* * * * *
    (c) * * *
    (2) If the notice to interested parties is delivered using an 
electronic medium under an electronic system that satisfies the 
applicable notice requirements of Sec.  1.401(a)-21 of this chapter, 
the notice is deemed to be provided in a manner that satisfies the 
requirements of paragraph (c)(1) of this section.
* * * * *

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

0
Par. 10. The authority citation for part 35 continues to read, in part, 
as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 11. Section 35.3405-1 is amended by:
0
(1) Revising d-35, A.
0
(2) Removing d-36, Q&A.
    The revision reads as follows:


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

* * * * *
    d-35. * * *
    A. A payor may provide the notice required under section 3405 
(including the abbreviated notice described in d-27 of Sec.  35.3405-1T 
and the annual notice described in d-31 of Sec.  35.3405-1T) to a payee 
on a written paper document. However, see Sec.  1.401(a)-21 of this 
chapter for rules permitting the use of electronic media to provide 
applicable notices to recipients with respect to retirement plans and 
individual retirement plans.

PART 54--PENSION EXCISE TAXES

0
Par. 12. The authority citation for part 54 continues to read, in part, 
as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 13. Section 54.4980F-1, Q&A-13, is amended as follows:
    (1) Revising paragraph A-13 (c)(1)(ii) and (iii).
    (2) Revising the introductory text to paragraph A-13 (c)(2).
    (3) Removing paragraph A-13 (c)(3).
    The revisions read as follows:


Sec.  54.4980F-1  Notice requirements for certain pension plan 
amendments significantly reducing the rate of future benefit accrual.

* * * * *
    A-13. * * *
    (c) * * *
    (1) * * *
    (ii) The section 204(h) notice is delivered using an electronic 
medium (other than an oral communication or a recording of an oral 
communication) under an electronic system that satisfies the applicable 
notice requirements of Sec.  1.401(a)-21.
    (iii) Special effective date. For plan years beginning prior to 
January 1, 2007, Q&A-13 of this section, as it appeared in the April 1, 
2006 edition of 26 CFR part 1, applies.
    (2) * * * The following examples illustrate the requirement in 
paragraph (c)(1)(i) of this Q&A-13. In these examples, it is assumed 
that the notice satisfies the requirements in paragraphs (c)(1)(ii) of 
this section. The examples are as follows:
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: October 10, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E6-17528 Filed 10-19-06; 8:45 am]
BILLING CODE 4830-01-P