Final Regs Allow 401(k) Plans To Provide E-Notices; Conform To E-SIGN Act

(December 7, 2006)

401(k) plans have long been able to use automated phone systems, e-mail, and the Internet to provide required notices and allow employees to make elections and consent to distributions. Final regulations now give plans the option of conforming to the Electronic Signatures in Global and National Commerce Act, otherwise known as the E-SIGN Act, or sticking to their current electronic systems. The regs also expand the plans that may communicate electronically, to include health plans and health savings accounts, cafeteria plans, educational assistance plans, and plans that provide qualified transportation fringe benefits. The regs are effective for notices provided to employees on or after January 1, 2007.

All Mandatory Notices May Be Provided Electronically 

401(k) plans must provide employees with a host of notices. These include notices related to plan loans; notices safe harbor 401(k) plans must provide; eligible rollover notices; cash-out notices; notices of 10% withholding on lump-sum distributions; notices of plan amendments that provide for a significant reduction in the rate of future benefit accruals or that eliminate or significantly reduce an early retirement benefit or retirement-type subsidy; and spousal consent to waive the qualified joint and survivor annuity rule.

The regs allow those so-called mandatory notices to be provided to employees who consent to receive them electronically under either the E-SIGN Act or the plan's current electronic delivery system. The regs state that the electronic standards will also serve as a safe harbor for plans, including non-pension plans, that use electronic systems to deliver non-mandatory notices or employee elections. So, for example, employees may make beneficiary designations electronically under a system that conforms to these regs or a system that complies with previously issued standards. Important: The regs specify that COBRA notices, notices relating to a suspension of benefits when a former employee returns to work, summary plan descriptions, and summary annual reports may not be provided electronically.

E-SIGN Standards For Employees' Consent 

Whatever electronic system is chosen, the regs don't change the timing or content of any notice. Accordingly, electronic systems must ensure that the content of notices is as understandable as written notices. In addition, systems must be designed to alert employees to a notice's significance at the time the notice is sent. Finally, electronic systems must keep records and be able to reproduce a notice for later reference.

The E-SIGN standards require that employees' consent to receive e-notices be made in a manner that reasonably demonstrates their ability to access the information electronically. If plans opt for e-mail, for example, employees must consent via e-mail. If employees consent on paper, plans must follow up to ensure that employees can use the electronic system.

Prior to consenting to e-notices, employees must receive a disclosure statement that outlines the following information:

• the scope of their consent (i.e., whether it's limited to one transaction or ongoing);

• their right to withdraw consent and receive paper notices, and whether they'll be charged a fee for their copies;

• the hardware and software needed for using the electronic system; and

• the procedure for updating personal information.

Non-E-SIGN Standards

Plans may decide to maintain their current electronic systems, the standards for which were established in 2000. More importantly, the regs stress that employees' elections to participate in a plan aren't covered by the E-SIGN Act. Upshot: Electronic systems must conform to the 2000 standards. Reminder: For plans that want to keep their current systems, or for plans (primarily non-pension plans) that want to allow electronic elections, employees must have the effective ability to access the system; the system must be reasonably designed to prevent impersonations; employees must be allowed to review their selections in order to confirm, modify, or rescind the terms before their elections become final; and the e-consent terms must be confirmed to employees. Employees must be allowed to request free paper copies of notices.

To view the final regs in their entirety, visit:

http://edocket.access.gpo.gov/2006/pdf/E6-17528.pdf

Related Topic(s): Benefits