New Technologies in Retirement Plans

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1, 35, and 602 [TD 8873] RIN
1545-AW78

TITLE: New Technologies in Retirement Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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

DATES: Effective Date: These regulations are effective January 1,
2001.

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

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

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and
Budget in accordance with the Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545-1632.

Responses to this collection of information are mandatory. An agency
may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless the collection of information
displays a valid control number.

The estimated annual burden per respondent and/or recordkeeper is 76
minutes. Comments concerning the accuracy of this burden estimate
and suggestions for reducing this burden should be sent to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer,
OP:FS:FP, Washington, DC 20224, and to the Office of Management and
Budget, Attn: Desk Officer for the Department of the Treasury,
Office of Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background

This document contains amendments to the Income Tax Regulations (26
CFR parts 1 and 35) under sections 402(f), 411(a)(11) and 3405(e)
(10)(B). The regulations under section 3405(e)(10)(B) (new Q/A d-35
and d-36 of section 35.3405-1), like the regulations under sections
402(f) and 411(a)(11) are final regulations. These regulations
finalize proposed regulations that were published as a notice of
proposed rulemaking (REG-118662-98) in the Federal Register (63 FR
70071) on December 18, 1998. A public hearing was held on the
proposed regulations on April 15, 1999.

In addition to the proposed regulations, the IRS and Treasury issued
Notice 99-1 (1999-2 I.R.B. 8), and Announcement 99-6 (1999-4 I.R.B.
24), concerning the use of electronic media under retirement plans.
Notice 99-1 confirms that the A paperless administration of
participant enrollments, contribution elections, investment
elections, beneficiary designations (other than designations
requiring spousal consent), direct rollover elections, and certain
other transactions do not cause a qualified plan to fail to satisfy
the requirements of section 401(a) (or the requirements for a
qualified cash or deferred arrangement under section 401(k)).
Announcement 99-6 authorizes the electronic transmission of Form
W-4P.

The proposed regulations, Notice 99-1, and Announcement 99-6 were
issued pursuant to section 1510 of the Taxpayer Relief Act of 1997.
That section provides for the Secretary of the Treasury to issue
guidance designed to interpret the notice, election, consent,
disclosure, time, and related recordkeeping requirements under the
Code and the Employee Retirement Income Security Act of 1974 (ERISA)
regarding the use of new technologies by sponsors and administrators
of retirement plans and to clarify the extent to which writing
requirements under the Code relating to retirement plans permit
paperless transactions. Section 1510 provides that the guidance must
protect participant and beneficiary rights. Any final regulations
applicable to this guidance may not be effective until the first
plan year beginning at least six months after issuance as final
regulations.

Explanation of Provisions

General

Commentators generally praised the approach taken in the proposed
regulations of providing broad, flexible standards for the
transmission of certain notices and consent required for
distributions through electronic media. Commentators stated that the
guidelines set forth in the proposed regulations facilitate the
expanded use of new technologies and recognize the likelihood of
future technological advances in plan administration. Accordingly,
the final regulations retain this approach and:

$ Permit electronic delivery of the notice of distribution options
and the right to defer distribution under section 411(a)(11), the
rollover notice under section 402(f), and the withholding notice
under section 3405(e)(10)(B);

$ Permit electronic transmission of participant consent to a
distribution under section 411(a)(11); and

$ Permit a plan to provide the section 411(a)(11) and section 402(f)
notices more than 90 days before a distribution, if the plan
provides a summary of the notices within 90 days before the
distribution. Notices under sections 402(f), 411(a)(11), and 3405(e)
(10)(B)

1. Use of electronic media for delivery of notices The proposed
regulations provide that, in general, a plan may furnish a notice
required under section 402(f), 411(a)(11), or 3405(e)(10)(B) either
on a written paper document or through an electronic medium
reasonably accessible to the participant to whom the notice is
given. The proposed regulations require that any electronic notice
be provided under a system reasonably designed to give the notice in
a manner no less understandable to the participant than a written
paper document and that the participant be advised of the right to
request and to receive a copy of the notice on a written paper
document without charge. The final regulations adopt these rules
without change.

One commentator noted that the proposed regulations do not define
the term reasonably accessible and suggested that the final
regulations require that participants have effective access at their
place of work to any electronic medium used to deliver the notices
under sections 402(f), 411(a)(11), and 3405(e)(10)(B). The IRS and
Treasury, after further consideration, believe that the reasonably
accessible standard protects the interests of plan participants and,
therefore, have retained the proposed terminology.

The same commentator raised more general concerns with the use of
electronic media to transmit notices. This commentator argued that
an electronic notice should be Aactually received (not just sent or
available) and read by the participant, be permanently accessible,
and easily converted to a printed document, by using an available
printer and/or through a request for a paper writing.@ In response
to these concerns, the IRS and Treasury reiterate the view,
expressed in the preamble to the proposed regulations, that the
legal standards for the delivery of distribution-related notices
under sections 402(f), 411(a)(11), and 3405(e)(10)(B) should be the
same regardless of the medium of delivery. Additionally, the IRS and
Treasury note that many of the concerns raised by this commentator
about electronic media are adequately addressed by the requirement
in the regulations that participants always have the right to
request and to receive a written paper notice without charge.

Several commentators objected to the requirement that participants
be able to receive the notice on a written paper document upon
request. These commentators argued that simply making written paper
notices available through an electronic medium (such as a printing
option on an e-mail system or a plan web site) protects the
interests of participants in having access to written paper notices
without placing the burden of providing written paper notices on
plan sponsors and administrators.

However, the IRS and Treasury believe that the right to request and
to receive a written paper notice is an important fail-safe for
paperless plan administration. The requirement ensures that no
participant is denied ready access to a usable copy of a required
distribution notice, and it limits the need for the IRS and Treasury
to regulate the manner in which written paper notices are made
available through electronic media.

The IRS and Treasury believe that the burden for plan sponsors and
administrators to maintain a process that will generate written
paper notices upon request is outweighed by the important safeguards
provided by the requirement. In addition, as indicated in the
preamble to the proposed regulations, the written paper notice
provided on request need not be identical to the electronic notice.
Therefore, the written paper notice can be either a printed version
of the electronic notice or a separate notice prepared for
distribution on paper. In light of these considerations, the
requirement is retained in the final regulations.

One commentator requested clarification that the proposed
regulations under section 3405 would permit the electronic delivery
of the annual notice described in section 3405(e)(10)(B)(i)(III)
(which is provided to recipients of periodic payments).

The proposed regulations, as written, apply to that annual notice;
however, the final regulations make this point expressly. One
commentator asked that the proposed regulations be amended to
provide for electronic withholding elections under section 3405 in
addition to electronic transmission of notices under section 3405.
It is unclear what, if any, utility such a change in the regulations
would have in light of the ability to use electronic media for
transmission of Form W-4P, as set out in Announcement 99-6.
Therefore, no change has been made to the regulations on this point.

2. Flexibility for timing requirement in providing notices

Commentators favored the provision in the proposed regulations that
provided flexibility with respect to the 90-day period under
sections 402(f) and 411(a)(11) by providing an alternative timing
rule. Under this alternative timing rule, a plan may give the full
section 402(f) and section 411(a)(11) notices more than 90 days
before the distribution and provide the participant a summary of the
notice during the 90/30-day period under those sections. The full
notice is not required to be provided on a regular periodic basis
and may be provided in connection with other materials (for example,
in the summary plan description or in a brochure describing plan
distribution features), but it must be updated (and provided to the
participant) as necessary to ensure accuracy.For example, many plan
sponsors provide a copy of the summary plan description to each
employee when the employee is first hired. If the full notice is
provided through the summary plan description, the precise date on
which the full notice was last provided could differ for each
participant as of the time the summary is given. The proposed
regulations provide that the summary notice must set out the
principal provisions of the full notice, must refer the participant
to the most recent occasion on which the full notice was provided,
and must advise the participant of the right to request and to
receive a copy of the full notice without charge.

Several commentators interpreted the requirement in the proposed
regulations that the summary refer the participant to the most
recent occasion on which the full notice was provided as requiring
an indication of the precise date on which the participant was given
the full notice and the precise location of the full notice if it
was provided in a document containing other information (such as the
summary plan description). These commentators argued that this
information may vary on a participant-by-participant basis and so
imposes a considerable administrative burden on plan sponsors and
administrators.

The IRS and Treasury did not intend for the proposed regulations to
be construed as requiring individualized information about the full
notice. Therefore, the final regulations clarify, first, that the
summary must refer participants to the most recent version of the
full notice. The purpose of this rule is to minimize confusion among
participants if more than one version of a full notice has been
provided in the past. In many of those cases, this reference could
reasonably be made by calendar year (for example, by referring to
the 1999 version of the section 402(f) notice). If more than one
version of a distribution notice was provided in a single calendar
year, more precise reference should be made (for example, by
referring to the May 1999 version of the section 402(f) notice).
Reference to the notice by month or year would not be necessary if
only one version of the notice had been provided in the past. If the
full notice were constantly available (for example, a notice that is
available on a plan web site and is kept up-to-date), it would be
adequate to state that fact.

Additionally, the regulations have been modified to provide that, in
the case of a full notice provided in a document containing other
information, the summary must identify that document and must
provide a reasonable indication of where the notice may be found in
the document. This requirement could be satisfied through a number
of means, including identification of page number, section heading,
an index reference, the title of the notice, or any other reference
that would reasonably direct the participant to the notice.

One commentator objected to the alternative timing rule set out in
the proposed regulations. This commentator argued that distribution-
related notices should be tied to a specific event (such as a
participant request for a distribution) and that Ait is
inappropriate to provide a notice of the notice when using
electronic or other new.11 technologies when it is just as easy to
provide the actual notice itself.@ The IRS and Treasury agree that
the information contained in the section 402(f) and section 411(a)
(11) notices should be provided to a participant in connection with
the participant=s contemplation of a distribution, but the IRS and
Treasury believe that providing a summary of a previously provided
notice and informing the participant of the right to request and to
receive the full notice adequately protect the interests of
participants in this regard.

The preamble to the proposed regulations includes an example of a
summary section 402(f) notice provided through an automated
telephone system. Many commentators raised questions about this
example. Several commentators argued that the sample summary is too
long and complex to be of use in plan administration; others argued
that it does not include reference to every potentially applicable
rule concerning the taxation of plan distributions (for example, it
does not refer to the taxation of net unrealized appreciation on the
distribution of employer securities). Commentators also inquired
about the legal status of the example because of its placement in
the preamble. The example was intended merely to illustrate a
summary notice that, in the view of the IRS and Treasury, satisfies
the requirements of the proposed regulations. It was not intended as
a model summary or as the exclusive form for such a summary.
Although the example is not restated in these final regulations, the
IRS and Treasury are considering whether to issue additional
guidance providing additional examples of summary notices. In this
regard, the IRS and Treasury will solicit comments from interested
parties regarding the development of those examples and will invite
interested parties to submit draft summary notices to assist in the
development of that guidance.

Consent Under Section 411(a)(11)

Consistent with the proposed regulations, the final regulations
provide that, in general, a plan may receive a participant=s consent
either on a written paper document or through an electronic medium
reasonably accessible to the participant. As in the case of
participant notices, the regulations generally do not categorize
particular electronic media as either permissible or impermissible
for this purpose and do not prescribe detailed, media-specific
rules. The standards are intended to parallel the key attributes of
participant consent provided on written paper documents without
imposing more stringent requirements on electronic consents. The
proposed regulations provide that participant consent transmitted
through an electronic medium must be given under a system that is
reasonably designed to preclude an individual other than the
participant from giving the consent and that provides the
participant a reasonable opportunity to review and to confirm,
modify, or rescind the terms of the distribution before the consent
to the distribution becomes effective. Comments on this portion of
the proposed regulations were generally favorable, and no change has
been made in the final regulations.

One commentator, however, objected outright to the use of electronic
media for the transmission of participant consent and argued that,
at a minimum, such consent Ashould not be effective until after a
written confirmation is received and the participant has a specified
amount of time to revoke it.@ This commentator also argued that the
final regulations should prohibit the use of automated telephone
systems to provide distribution-related notices and to receive
participant consent unless an automatic, mandatory written
confirmation of the participant=s election of a distribution option
is required along with a seven-day right of revocation. The IRS and
Treasury concluded that it is not advisable to impose new revocation
rules based on the medium through which a participant consents to a
distribution. Both the proposed regulations and the final
regulations require that the terms of any consent made through an
electronic medium be confirmed to the participant. Additionally, the
IRS and Treasury do not believe that a right of revocation for a
defined period after consent is given is more necessary or
appropriate in the case of consent made through an electronic medium
than it is in the case of consent made through a written paper
document. More generally, the IRS and Treasury do not believe that
the use of electronic media is improper or inappropriate for the
transmission of a participant=s consent under section 411(a)(11). If
the requirements of the regulations are satisfied, consent provided
in that manner should reflect the considered wishes of the
participant as reliably as a consent provided through a written
paper document.

Changes to the Examples in the Regulations

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

Notice 99-1 and Announcement 99-6

Commentators expressed support for Notice 99-1, which indicates that
a qualified plan will not fail to meet the requirements of section
401(a) (and that a qualified cash-or-deferred arrangement will not
fail to meet the requirements of section 401(k)) merely because it
permits a participant or beneficiary to use electronic media to
effect a transaction for which no specific provision of the Code,
the regulations, or other guidance of general applicability sets
forth rules or standards regarding the media through which it may be
conducted. Announcement 99-6 permits the electronic transmission of
Form W-4P.

Commentators asked for clarification whether Form W-4P may be
transmitted through a telephone system. The underlying standards for
the electronic transmission of Form W-4P are intended to be the same
as those for the electronic transmission of Form W-4, as set out in
§31.3402(f)(5)-1(c). The preamble to the proposed regulations for
the electronic transmission of Form W-4 indicates that A[i]f an
employer chooses to establish an electronic system, the employer
will be free to determine the type of system (such as telephone or
computer) or systems available to its employees.@ (59 FR 18508 (Apr.
15, 1994)). Therefore, the use of a telephone system for electronic
transmission of Form W-4P, if otherwise consistent with Announcement
99-6 and §31.3402(f)(5)-1(c), is permissible.

Commentators also asked the IRS and Treasury to reconsider the
requirement, stated in Announcement 99-6, that the electronic
signature on Form W-4P be the final entry in the submission of the
form. These commentators argue that this effectively requires the
participant in most cases to enter a PIN at both the beginning and
the end of a transaction that involves the use of an electronic Form
W-4P. The IRS and Treasury are considering this issue and anticipate
issuing additional guidance on this question.

Scope of These Regulations

These regulations do not address the application of Title I of ERISA
(except for section 203(e)) to the use of electronic media for any
plan communication or transaction. Several commentators requested
that the regulations be expanded to include matters not covered by
the proposed regulations. Most notably, commentators asked that the
IRS and Treasury provide guidance on the use of electronic media for
plan loans under section 72(p), nondiscrimination safe-harbor
notices under sections 401(k)(12) and 401(m)(11), notices under
section 204(h) of ERISA, and distribution notices, elections, and
spousal consents governed by sections 401(a)(11) and section 417.

The IRS and Treasury are actively considering comments submitted on
regulations proposed under section 72(p) and expect to issue
additional guidance under that section. It is anticipated that any
guidance on the use of electronic media in connection with plan
loans would be issued in connection with that additional guidance.

As the IRS and Treasury have noted in the past, notices under
sections 401(k)(12) and 401(m)(11) and ERISA section 204(h) present
legal issues distinct from those presented by notices under sections
402(f), 411(a)(11), and 3405(e)(10)(B). Notice 2000-3 (2000-4 I.R.B.
413) provides that, pending further guidance, notices under.One
commentator suggested that electronic transmission of spousal
consent be permitted if the plan has Areasonable certainty that the
spouse has consented. That suggested standard appears to fall far
short of the witnessing requirement specifically set forth in the
statute.

sections 401(k)(12) and 401(m)(11) may be issued through electronic
media if standards set forth in Notice 2000-3 which are similar to
those applicable to notices under these regulations, are satisfied.
Because of the unique considerations applicable to notices under
ERISA section 204(h), guidance with respect to the use of electronic
media in connection with section 204(h) notices is not being issued
at this time.

Finally, regarding notices, elections, and spousal consents governed
by sections 401(a)(11) and section 417, the IRS and Treasury note
that the statutory requirement that spousal consent be witnessed
either by a notary public or a plan representative appears to
presuppose that a spouse be in the physical presence of the notary
public or the plan representative at the time consent is given. This
appears to place significant limitations on the utility of
electronic media in effecting spousal consent Thus, it is unclear
what guidance the IRS and Treasury could issue that would
meaningfully facilitate paperless distributions in the case of plans
subject to sections 401(a)(11) and 417.

Reliance

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

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory impact analysis is not required. It is
hereby certified that these regulations will not have a significant
economic impact on a substantial number of small entities. This
certification is based on the fact that the regulations provide
paperless alternatives to notices that otherwise must be sent as
written paper documents. It is anticipated that most small
businesses affected by these regulations will be sponsors of
retirement plans. Since these notices are provided only upon
distributions and since, in the case of a small plan, there will be
relatively few distributions per year, small plans that implement a
paperless system for delivering these notices will likely contract
for them as part of a paperless system for distributions offered by
outside vendors. The paperless delivery of the notices will not add
more than a minor increment to the cost of these distribution
systems or the plan sponsor will continue to use a paper-based
system. Accordingly, a Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of the Code, the notice of
proposed rulemaking preceding these regulations was submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.

Drafting Information

The principal author of these regulations is Catherine Livingston
Fernandez, Office of the Associate Chief Counsel (Employee Benefits
and Exempt Organizations), IRS. However, personnel from other
offices of the IRS and Treasury Department participated in their
development.

List of Subjects

26 CFR Part 1 Income taxes, Reporting and recordkeeping
requirements.

26 CFR Part 35 Employment taxes, Income taxes, Reporting and
recordkeeping requirements.

26 CFR Part 602 Reporting and recordkeeping requirements. Amendments
to the Regulations

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

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read, in
part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.402(f)-1 is
amended by:

1. Revising Q&A-2.

2. Adding Q&A-5 and Q&A-6.

The revision and additions read as follows: '1.402(f)-1 Required
explanation of eligible rollover distributions; questions and
answers

*****

Q-2: When must the plan administrator provide the section 402(f)
notice to a distributee?

A-2: The plan administrator must provide the section 402(f) notice
to a distributee at a time that satisfies either paragraph (a) or
(b) of this Q&A-2. (a) This paragraph (a) is satisfied if the plan
administrator provides a distributee with the section 402(f) notice
no less than 30 days and no more than 90 days before the date of a
distribution. However, if the distributee, after having received the
section 402(f) notice, affirmatively elects a distribution, a plan
will not fail to satisfy section 402(f) merely because the
distribution is made less than 30 days after the section 402(f)
notice was provided to the distributee, provided the plan
administrator clearly indicates to the distributee that the
distributee has a right to consider the decision of whether or not
to elect a direct rollover for at least 30 days after the notice is
provided.

The plan administrator may use any method to inform the distributee
of the relevant time period, provided that the method is reasonably
designed to attract the attention of the distributee. For example,
this information could be either provided in the section 402(f)
notice or stated in a separate document (e.g., attached to the
election form) that is provided at the same time as the notice. For
purposes of satisfying the requirement in the first sentence of
paragraph (a) of this Q&A-2, the plan administrator may substitute
the annuity starting date, within the meaning of '1.401(a)-20,
Q&A-10, for the date of the distribution.

(b) This paragraph (b) is satisfied if the plan administrator--

(1) Provides a distributee with the section 402(f) notice;

(2) Provides the distributee with a summary of the section 402(f)
notice within the time period described in paragraph (a) of this
Q&A-2; and

(3) If the distributee so requests after receiving the summary
described in paragraph (b)(2) of this Q&A-2, provides the section
402(f) notice to the distributee without charge and no less than 30
days before the date of a distribution (or the annuity starting
date), subject to the rules for the distributee=s waiver of that 30-
day period.

The summary described in paragraph (b)(2) of this Q&A-2 must set
forth a summary of the principal provisions of the section 402(f)
notice, must refer the distributee to the most recent version of the
section 402(f) notice (and, in the case of a notice provided in any
document containing information in addition to the notice, must
identify that document and must provide a reasonable indication of
where the notice may be found in that document, such as by index
reference or by section heading), and must advise the distributee
that, upon request, a copy of the section 402(f) notice will be
provided without charge.

*****

Q-5: Will the requirements of section 402(f) be satisfied if a plan
administrator provides a distributee with the section 402(f) notice
or the summary of the notice described in paragraph (b)(2) of Q&A-2
of this section other than through a written paper document?

A-5: A plan administrator may provide a distributee with the section
402(f) notice or the summary of that notice described in paragraph
(b)(2) of Q&A-2 of this section either on a written paper document
or through an electronic medium reasonably accessible to the
distributee. A notice or summary provided through an electronic
medium must be provided under a system that satisfies the following
requirements:

(a) The system must be reasonably designed to provide the notice or
summary in a manner no less understandable to the distributee than a
written paper document.

(b) At the time the notice or summary is provided, the distributee
must be advised that the distributee may request and receive the
notice on a written paper document at no charge, and, upon request,
that document must be provided to the distributee at no charge.

Q-6: Are there examples that illustrate the provisions of Q&A-2 and
Q&A-5 of this section?.23

A-6: The following examples illustrate the provisions of Q&A-2 and
Q&A-5 of this section:

Example 1. (i) A qualified plan (Plan A) permits participants to
request distributions by e-mail. Under Plan A=s system for such
transactions, a participant must enter his or her account number and
personal identification number (PIN); this information must match
that in Plan A=s records in order for the transaction to proceed. If
a participant requests a distribution from Plan A by e-mail and the
distribution is an eligible rollover distribution, the plan
administrator provides the participant with a section 402(f) notice
by e-mail. The plan administrator also advises the participant that
he or she may request the section 402(f) notice on a written paper
document and that, if the participant requests the notice on a
written paper document, it will be provided at no charge. To proceed
with the distribution by e-mail, the participant must acknowledge
receipt, review, and comprehension of the section 402(f) notice.

(ii) In Example 1, Plan A does not fail to satisfy the notice
requirement of section 402(f) merely because the notice is provided
to the participant other than through a written paper document.

Example 2. (i) A qualified plan (Plan B) permits participants to
request distributions through the Plan B web site (Internet or
intranet). Under Plan B=s system for such transactions, a
participant must enter his or her account number and personal
identification number (PIN); this information must match that in
Plan B=s records in order for the transaction to proceed. A
participant may request a distribution from Plan B by following the
applicable instructions on the Plan B web site. After the
participant has requested a distribution that is an eligible
rollover distribution, the participant is automatically shown a page
on the web site containing a section 402(f) notice.

Although this page of the web site may be printed, the page also
advises the participant that he or she may request the section
402(f) notice on a written paper document by calling a telephone
number indicated on the web page and that, if the participant
requests the notice on a written paper document, it will be provided
at no charge. To proceed with the distribution by e-mail, the
participant must acknowledge receipt, review, and comprehension of
the section 402(f) notice.

(ii) In this Example 2, Plan B does not fail to satisfy the notice
requirement of section 402(f) merely because the notice is provided
to the participant other than through a written paper document.

Example 3. (i) A qualified plan (Plan C) permits participants to
request distributions through Plan C=s automated telephone system.
Under Plan C=s system for such transactions, a participant must
enter his or her account number and personal identification number
(PIN); this information must match that in Plan C=s records in order
for the transaction to proceed. Plan C provides the section 402(f)
notice in the summary plan description, the most recent version of
which was distributed to participants in 1997. A participant may
request a distribution from Plan C by following the applicable
instructions on the automated telephone system. In 1999, a
participant, using Plan C=s automated telephone system, requests a
distribution that is an eligible rollover distribution. The
automated telephone system refers the participant to the most recent
version of the section 402(f) notice which was provided in the
summary plan description, informs the participant where the section
402(f) notice may be located in the summary plan description, and
provides an oral summary of the material provisions of the section
402(f) notice. The system also advises the participant that the
participant may request the section 402(f) notice on a written paper
document and that, if the participant requests the notice on a
written paper document, it will be provided at no charge. Before
proceeding with the distribution, the participant must acknowledge
receipt, review, and comprehension of the summary. Under Plan C=s
system for processing such transactions, the participant=s
distribution will be made no more than 90 days and no fewer than 30
days after the participant requests the distribution and receives
the summary of the section 402(f) notice (unless the participant
waives the 30- day period).

(ii) In this Example 3, Plan C does not fail to satisfy the notice
requirement of section 402(f) merely because Plan C provides a
summary of the section 402(f) notice or merely because the summary
is provided to the participant other than through a written paper
document.

Example 4. (i) Same facts as Example 3, except that, pursuant to
Plan C=s system for processing such transactions, a participant who
so requests is transferred to a customer service representative
whose conversation with the participant is recorded. The customer
service representative provides the summary of the section 402(f)
notice by reading from a prepared text.

(ii) In this Example 4, Plan C does not fail to satisfy the notice
requirement of section 402(f) merely because Plan C provides a
summary of the section 402(f) notice or merely because the summary
of the section 402(f) notice is provided to the participant other
than through a written paper document.

Example 5. (i) Same facts as Example 3, except that Plan C does not
provide the section 402(f) notice in the summary plan description.
Instead, the automated telephone system reads the section 402(f)
notice to the participant. (ii) In this Example 5, Plan C does not
satisfy the notice requirement of section 402(f) because oral
delivery alone of the section 402(f) notice through the automated
telephone system is not sufficient.

Example 6. (i) The facts are the same as in Example 1, except that
Participant D requested a distribution by e-mail, then terminated
employment, and, following the termination, no longer has reasonable
access to Plan A e-mail. (ii) In this Example 6, Plan A does not
satisfy the notice requirement of section 402(f) because the
electronic medium through which the notice is provided is not
reasonably accessible to Participant D. Plan A must provide the
section 402(f) notice to Participant D in a written paper document
or by an electronic means that is reasonably accessible to
Participant D.

Par. 3. Section 1.411(a)-11 is amended by:

1. Revising paragraphs (c)(2)(i) and (iii).

2. Removing the language AWritten consent@ in paragraph (c)(2)(ii)
and (c)(3) and adding AConsent@ in its place.

3. Adding paragraphs (f) and (g). The revisions and additions read
as follows:

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

* * * * *

(c) * * *

(2) Consent. (i) No consent is valid unless the participant has
received a general description of the material features of the
optional forms of benefit available under the plan. In addition, so
long as a benefit is immediately distributable, a participant must
be informed of the right, if any, to defer receipt of the
distribution. Furthermore, consent is not valid if a significant
detriment is imposed under the plan on any participant who does not
consent to a distribution. Whether or not a significant detriment is
imposed shall be determined by the Commissioner by examining the
particular facts and circumstances.

* * * * *

(iii) A plan must provide a participant with notice of the rights
specified in this paragraph (c)(2) at a time that satisfies either
paragraph (c)(2)(iii)(A) or (B) of this section:

(A) This paragraph (c)(2)(iii)(A) is satisfied if the plan provides
a participant with notice of the rights specified in this paragraph
(c)(2) no less than 30 days and no more than 90 days before the date
the distribution commences. However, if the participant, after
having received this notice, affirmatively elects a distribution, a
plan will not fail to satisfy the consent requirement of section
411(a)(11) merely because the distribution commences less than 30
days after the notice was provided to the participant, provided the
plan administrator clearly indicates to the participant that the
participant has a right to at least 30 days to consider whether to
consent to the distribution.

(B) This paragraph (c)(2)(iii)(B) is satisfied if the plan--

(1) Provides the participant with notice of the rights specified in
this paragraph

(c)(2);

(2) Provides the participant with a summary of the notice within the
time period described in paragraph (c)(2)(iii)(A) of this section;
and

(3) If the participant so requests after receiving the summary
described in paragraph (c)(2)(iii)(B)(2) of this section, provides
the notice to the participant without charge and no less than 30
days before the date the distribution commences, subject to the
rules for the participant=s waiver of that 30-day period. The
summary described in paragraph (c)(2)(iii)(B)(2) of this section
must advise the participant of the right, if any, to defer receipt
of the distribution, must set forth a summary of the distribution
options under the plan, must refer the participant to the most
recent version of the notice (and, in the case of a notice provided
in any document containing information in addition to the notice,
must identify that document and must provide a reasonable indication
of where the notice may be found in that document, such as by index
reference or by section heading), and must advise the participant
that, upon request, a copy of the notice will be provided without
charge.

* * * * *

(f) Medium for notice and consent--(1) Notice. The notice of a
participant=s rights described in paragraph (c)(2) of this section
or the summary of that notice described in paragraph (c)(2)(iii)(B)
(2) of this section may be provided either on a written paper
document or through an electronic medium reasonably accessible to
the participant. A notice or summary provided through an electronic
medium must be provided under a system that satisfies the following
requirements:

(i) The system must be reasonably designed to provide the notice or
summary in a manner no less understandable to the participant than a
written paper document.

(ii) At the time the notice or summary is provided, the participant
must be advised that he or she may request and receive the notice on
a written paper document at no charge, and, upon request, that
document must be provided to the participant at no charge.

(2) Consent. The consent described in paragraphs (c)(2) and (3) of
this section may be given either on a written paper document or
through an electronic medium reasonably accessible to the
participant. A consent given through an electronic medium must be
given under a system that satisfies the following requirements:

(i) The system must be reasonably designed to preclude any
individual other than the participant from giving the consent.

(ii) The system must provide the participant with a reasonable
opportunity to review and to confirm, modify, or rescind the terms
of the distribution before the consent to the distribution becomes
effective.

(iii) The system must provide the participant, within a reasonable
time after the consent is given, a confirmation of the terms
(including the form) of the distribution either on a written paper
document or through an electronic medium under a system that
satisfies the requirements of paragraph (f)(1) of this section. (g)
Examples. The provisions of paragraph (f) of this section are
illustrated by the following examples:

Example 1. (i) A qualified plan (Plan A) permits participants to
request distributions by e-mail. Under Plan A=s system for such
transactions, a participant must enter his or her account number and
personal identification number (PIN); this information must match
that in Plan A=s records in order for the transaction to proceed. If
a participant requests a distribution from Plan A by e-mail, the
plan administrator provides the participant with a section 411(a)
(11) notice by e-mail. The plan administrator also advises the
participant by e-mail that he or she may request the section 411(a)
(11) notice on a written paper document and that, if the participant
requests the notice on a written paper document, it will be provided
at no charge. To proceed with the distribution by e-mail, the
participant must acknowledge receipt, review, and comprehension of
the section 411(a)(11) notice and must consent to the distribution
within the time required under section 411(a)(11). Within a
reasonable time after the participant=s consent by e-mail, the plan
administrator, by e-mail, sends confirmation of the terms (including
the form) of the distribution to the participant and advises the
participant that he or she may request the confirmation on a written
paper document that will be provided at no charge.

(ii) In this Example 1, Plan A does not fail to satisfy the notice
or consent requirement of section 411(a)(11) merely because the
notice and consent are provided other than through written paper
documents.

Example 2. (i) Same facts as Example 1, except that, instead of
sending a confirmation of the distribution by e-mail, the plan
administrator, within a reasonable time after the participant=s
consent, sends the participant an account statement for the period
that includes information reflecting the terms of the distribution.
(ii) In this Example 2, Plan A does not fail to satisfy the consent
requirement of section 411(a)(11) merely because the consent is
provided other than through a written paper document.

Example 3. (i) A qualified plan (Plan B) permits participants to
request distributions through the Plan B web site (Internet or
intranet). Under Plan B=s system for such transactions, a
participant must enter his or her account number and personal
identification number (PIN); this information must match that in
Plan B=s records in order for the transaction to proceed. A
participant may request a distribution from Plan B by following the
applicable instructions on the Plan B web site. After the
participant has requested a distribution, the participant is
automatically shown a page on the web site containing a section
411(a)(11) notice. Although this page of the web site may be
printed, the page also advises the participant that he or she may
request the section 411(a)(11) notice on a written paper document by
calling a telephone number indicated on the web page and that, if
the participant requests the notice on a written paper document, it
will be provided at no charge. To proceed with the distribution by
e-mail, the participant must acknowledge receipt, review, and
comprehension of the section 411(a)(11) notice and must consent to
the distribution within the time required under section 411(a)(11).
The web site requires the participant to review and confirm the
terms (including the form) of the distribution before the
transaction is completed. After the participant has given consent
via e-mail, the Plan B web site confirms the distribution to the
participant and advises the participant that he or she may request
the confirmation on a written paper document that will be provided
at no charge. (ii) In this Example 3, Plan B does not fail to
satisfy the notice or consent requirement of section 411(a)(11)
merely because the notice and consent are provided other than
through written paper documents.

Example 4. (i) A qualified plan (Plan C) permits participants to
request distributions through Plan C=s automated telephone system.
Under Plan C=s system for such transactions, a participant must
enter his or her account number and personal identification number
(PIN); this information must match that in Plan C=s records in order
for the transaction to proceed. Plan C provides only the following
distribution options: a lump sum and annual installments over 5, 10,
or 20 years. A participant may request a distribution from Plan C by
following the applicable instructions on the automated telephone
system. After the participant has requested a distribution, the
automated telephone system reads the section 411(a)(11) notice to
the participant. The automated telephone system also advises the
participant that he or she may request the notice on a written paper
document and that, if the participant requests the notice on a
written paper document, it will be provided at no charge. Before
proceeding with the distribution transaction, the participant must
acknowledge receipt, review, and comprehension of the section 411(a)
(11) notice and must consent to the distribution within the time
required under section 411(a)(11). The automated telephone system
requires the participant to review and confirm the terms (including
the form) of the distribution before the transaction is completed.
After the participant has given consent, the automated telephone
system confirms the distribution to the participant and advises the
participant that he or she may request the confirmation on a written
paper document that will be provided at no charge. Because Plan C
has relatively few and simple distribution options, the provision of
the section 411(a)(11) notice over the automated telephone system is
no less understandable to the participant than a written paper
notice.

(ii) In this Example 4, Plan C does not fail to satisfy the notice
or consent requirement of section 411(a)(11) merely because the
notice and consent are provided other than through written paper
documents.

Example 5. (i) Same facts as Example 4, except that, pursuant to
Plan C=s system for processing such transactions, a participant who
so requests is transferred to a customer service representative
whose conversation with the participant is recorded. The customer
service representative provides the section 411(a)(11) notice from a
prepared text and processes the participant=s distribution in
accordance with predetermined instructions of the plan
administrator.

(ii) In this Example 5, Plan C does not fail to satisfy the notice
or consent requirement of section 411(a)(11) merely because the
notice and consent are provided other than through written paper
documents. Example 6. (i) Same facts as Example 1, except that
Participant D requested a distribution by e-mail, then terminated
employment and, following the termination, no longer has access to
e-mail.

(ii) In this Example 6, Plan A does not satisfy the notice or
consent requirement of section 411(a)(11) because the electronic
medium through which the notice is provided is not reasonably
accessible to Participant D. Plan A must provide Participant D the
section 411(a)(11) notice in a written paper document or by an
electronic means that is reasonably accessible to Participant D.

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

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

Par. 5. The authority citation for part 35 is revised to read as
follows: Authority: 26 U.S.C. 6047(e), 7805; 68A Stat. 917; 96 Stat.
625; Public Law 97- 248 (96 Stat. 623).

Section 35.3405-1 also issued under 26 U.S.C. 3405(e)(10)(B)(iii).
Section 35.3405-1T also issued under 26 U.S.C. 3405(e)(10)(B)(iii).
Par. 6. Redesignate '35.3405-1 as '35.3405-1T and revise the heading
to read as follows:

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

* * * * *

Par. 7. A new '35.3405-1 is added to read as follows: §35.3405-1
Questions and answers relating to withholding on pensions,
annuities, and certain other deferred income.

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

*****

d-35. Q. Through what medium may a payor provide the notice required
under section 3405 to a payee?

A. A payor may provide the notice required under section 3405
(including the abbreviated notice described in d-27 of '35.3405-1T
and the annual notice described in d-31 of '35.3405-1T) to a payee
either on a written paper document or through an electronic medium
reasonably accessible to the payee. A notice provided through an
electronic medium must be provided under a system that satisfies the
following requirements:

(a) The system must be reasonably designed to provide the notice in
a manner no less understandable to the payee than a written paper
document.

(b) At the time the notice is provided, the payee must be advised
that the payee may request and receive the notice on a written paper
document at no charge, and, upon request, that document must be
provided to the payee at no charge. d-36. Q. Are there examples that
illustrate the provisions of d-35 of this section?

A. The provisions of d-35 of this section are illustrated by the
following examples:

Example 1. (i) An employer deferred compensation plan (Plan A)
permits participants to request distributions by e-mail. Under Plan
A=s system for such transactions, a participant must enter his or
her account number and personal identification number (PIN); this
information must match that in Plan A=s records in order for the
transaction to proceed. The plan administrator is the payor. If a
participant requests a distribution from Plan A by e-mail, the plan
administrator provides the participant with the notice required
under section 3405 by e-mail. The plan administrator also advises
the participant by e-mail that he or she may request the notice on a
written paper document and that, if the participant requests the
notice on a written paper document, it will be provided at no
charge. To proceed with the distribution by e-mail, the participant
must acknowledge receipt, review, and comprehension of the notice.

(ii) In this Example 1, the plan administrator does not fail to
satisfy the notice requirement of section 3405 merely because the
notice is provided to the participant other than through a written
paper document.

Example 2. (i) An employer deferred compensation plan (Plan B)
permits participants to request distributions through the Plan B web
site (Internet or intranet). Under Plan B=s system for such
transactions, a participant must enter his or her account number and
personal identification number (PIN); this information must match
that in Plan B=s records in order for the transaction to proceed.
The plan administrator is the payor. A participant may request a
distribution from Plan B by following the applicable instructions on
the Plan B web site. After the participant has requested a
distribution, the participant is automatically shown a page on the
web site containing the notice required by section 3405. Although
this page of the web site may be printed, the page also advises the
participant that he or she may request the notice on a written paper
document and that, if the participant requests the notice on a
written paper document, it will be provided at no charge. To proceed
with the distribution through the web site, the participant must
acknowledge receipt, review, and comprehension of the notice. (ii)
In this Example 2, the plan administrator does not fail to satisfy
the notice requirement of section 3405 merely because the notice is
provided to the participant other than through a written paper
document.

Example 3. (i) An employer deferred compensation plan (Plan C)
permits participants to request distributions through Plan C=s
automated telephone system. Under Plan C=s system for such
transactions, a participant must enter his or her account number and
personal identification number (PIN); this information must match
that in Plan C=s records in order for the transaction to proceed.
The plan administrator is the payor. A participant may request a
distribution from Plan C by following the applicable instructions on
the automated telephone system. After the participant has requested
a distribution, the automated telephone system reads the notice
required by section 3405 to the participant. The automated telephone
system also advises the participant that he or she may request the
notice on a written paper document and that, if the participant
requests the notice on a written paper document, it will be provided
at no charge. Before proceeding with the distribution transaction,
the participant must acknowledge receipt, review, and comprehension
of the notice.

(ii) In this Example 3, the plan administrator does not fail to
satisfy the notice requirement of section 3405 merely because the
notice is provided to the participant other than through a written
paper document.

Example 4. (i) Same facts as Example 3, except that, pursuant to the
system for processing such transactions, a participant who so
requests is transferred to a customer service representative whose
conversation with the participant is recorded. The customer service
representative provides the notice required by section 3405 by
reading from a prepared text.

(ii) Conclusion. In this Example 4, the plan administrator does not
fail to satisfy the notice requirement of section 3405 merely
because the notice is provided to the participant other than through
a written paper document. Example 5. (I) Same facts as Example 1,
except that Participant D requested a distribution by e-mail and
then terminated employment. Participant D no longer has access to e-
mail.

(ii) In this Example 5, Plan A does not satisfy the notice
requirement of section 3405 because the electronic medium through
which the notice is provided is not reasonably accessible to
Participant D. Plan A must provide the notice required by section
3405 to Participant D in a written paper document or by an
electronic medium that is reasonably accessible to Participant D.

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

Par. 6. The authority citation for part 602 continues to read as
follows: Authority: 26 U.S.C. 7805.

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

'602.101 OMB Control numbers.

* * * * *

(b) * * *

___________________________________________________________________

CFR part or section where Current OMB identified and described
control No.

*****

1.402(f)-1......................................1545-1632

*****

1.411(a)-11.....................................1545-1632

*****

Robert E. Wenzel
Deputy Commissioner of Internal Revenue
Approved: 1-20-00
Jonathan Talisman
Acting Assistant Secretary of the Treasury

SEARCH:

You can search the entire Tax Professionals section, or all of Uncle Fed's Tax*Board. For a more focused search, put your search word(s) in quotes.

2000 Regulations Main | IRS Regulations Main | Home