New Technologies in Retirement Plans

Federal RegisterDec 18, 1998

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 35

[REG-118662-98]

RIN 1545-AW78

New Technologies in Retirement Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed amendments to the regulations

governing certain notices and consent required in connection with

distributions from retirement plans. Specifically, these proposed

regulations set forth applicable standards for the transmission of

those notices and consent through electronic media and modify the

timing requirements for providing certain distribution-related notices.

The proposed regulations provide guidance to plan sponsors and

administrators by interpreting the notice and consent requirements in

the context of the electronic administration of retirement plans. The

proposed regulations affect retirement plan sponsors, administrators,

and participants. This document also provides notice of a public

hearing on these proposed regulations.

DATES: Written comments must be received by March 18, 1999. Outlines of

topics to be discussed at the public hearing scheduled for April 15,

1999, at 10 a.m. must be received by March 25, 1999.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-118662-98), Room

5226, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC. 20044. Submissions

[[Page 70072]]

may be hand delivered Monday through Friday between the hours of 8 a.m.

and 5 p.m. to: CC:DOM:CORP:R (REG-118662-98), Courier's Desk, Internal

Revenue Service, 1111 Constitution Avenue, NW., Washington, DC.

Alternatively, taxpayers may submit comments electronically via the

Internet by selecting the ``Tax Regs'' option on the IRS Home Page, or

by submitting comments directly to the IRS Internet site at http://

www.irs.ustreas.gov/prod/tax__regs/comments.html. The public hearing

will be held in room 2615, Internal Revenue Service Building, 1111

Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,

Catherine Livingston Fernandez (202) 622-6030; concerning submissions

of comments and the hearing, and/or to be placed on the building access

list to attend the hearing Michael L. Slaughter (202) 622-7180 (not

toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in this notice of proposed

rulemaking have been submitted to the Office of Management and Budget

for review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)). Comments on the collection of information should be

sent to the Office of Management and Budget, Attn: Desk Officer for the

Department of the Treasury, Office of Information and Regulatory

Affairs, Washington, DC 20503, with copies to the Internal Revenue

Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC

20224. Comments on the collection of information should be received by

February 16, 1999. Comments are specifically requested concerning:

Whether the proposed collections of information are necessary for the

proper performance of the functions of the Internal Revenue Service,

including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed

collection of information (see below);

How the quality, utility, and clarity of the information to be

collected may be enhanced; How the burden of complying with the

proposed collections of information may be minimized, including through

the application of automated collection techniques or other forms of

information technology; and

Estimates of capital or start-up costs and costs of operation,

maintenance, and purchase of service to provide information.

The collections of information in this proposed regulation are in

26 CFR 1.402(f)-1, 1.411(a)-11, and 35.3405-1. This information is

required for notices to recipients of distributions from retirement

plans, individual retirement accounts, and annuities. This information

will be used to help recipients make informed decisions regarding these

distributions. The collections of information are mandatory. The likely

respondents are individuals, business or other for-profit institutions,

and nonprofit institutions.

Estimated total annual reporting and/or recordkeeping burden:

477,563 hours.

Estimated average annual burden hours per respondent and/or

recordkeeper: 76 minutes.

Estimated number of respondents and/or recordkeepers: 375,000.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless it displays a valid

control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

Section 411(a)(11) of the Internal Revenue Code generally provides

that if the value of a participant's accrued benefit exceeds $5,000,

the benefit may not be immediately distributed without the

participant's consent. Section 1.411(a)-11(c) of the Income Tax

Regulations states that this requirement applies until the later of

normal retirement age or age 62 and requires that the consent be in

writing. Section 1.411(a)-11(c)(2) of the regulations provides that the

participant's consent is not valid unless, prior to the distribution,

the participant is given an explanation of the plan distribution

options (e.g., lump sum, annual installments, annuity, etc.) and is

advised of the right to defer the distribution in a manner that would

satisfy the notice requirement of section 417(a)(3).

Section 402(f) requires that the plan administrator of a qualified

retirement plan provide the recipient of an eligible rollover

distribution with a written explanation of the direct rollover,

mandatory 20-percent income tax withholding, and other relevant tax

information. Section 1.402(f)-1 Q&A-2 requires that notices under

section 402(f) be provided no less than 30 and no more than 90 days

before the date of a distribution, although a participant may waive the

30-day period.

Section 3405(e)(10)(B) of the Code requires the payor of any

designated distribution (other than an eligible rollover distribution)

to transmit to the payee a notice of the right not to have income tax

withheld from the payment.

Section 1510 of the Taxpayer Relief Act of 1997 provides for the

Secretary of the Treasury to issue guidance designed to interpret the

notice, election, consent, disclosure, time, and related recordkeeping

requirements under the Code and the Employee Retirement Income Security

Act of 1974 (ERISA) regarding the use of new technologies by sponsors

and administrators of retirement plans and to clarify the extent to

which writing requirements under the Code relating to retirement plans

permit ``paperless'' transactions. Section 1510 provides that the

guidance must protect participant and beneficiary rights. Any final

regulations applicable to this guidance may not be effective until the

first plan year beginning at least six months after issuance as final

regulations.

The IRS and Treasury issued Announcement 98-62, 1998-29 I.R.B.13,

to request comments from interested members of the public concerning

the development of the guidance described in section 1510. Announcement

98-62 solicited information on the kinds of electronic or ``paperless''

technologies used by sponsors and administrators in plan

administration, identified a number of specific legal and practical

issues for comment, and requested that commentators identify the issues

most in need of administrative guidance. Commentators generally

encouraged the IRS and Treasury to issue guidance facilitating the use

of new technologies in plan administration, particularly the use of

electronic technologies for transmission of the notices and consent

required for plan distributions. These proposed regulations respond to

the comments by providing the guidance most frequently requested by

commentators.

Additionally, in response to many of the comments submitted under

Announcement 98-62, the IRS and Treasury are issuing a notice

concerning the use of electronic media for general plan transactions.

The notice confirms that the ``paperless'' administration of

participant enrollments, contribution elections, investment elections,

beneficiary designations (other than designations requiring spousal

consent), direct rollover elections, and certain other transactions

will not cause a

[[Page 70073]]

qualified plan to fail to satisfy the requirements of section 401(a)

(or the requirements for a qualified cash or deferred arrangement under

section 401(k)). The notice is intended to apply to a broad range of

general plan transactions and electronic media, but it does not apply

to transactions for which the Code, the regulations, or other guidance

of general applicability prescribes requirements for the media through

which such transactions may be conducted (for example, it does not

apply to providing the section 402(f) notice). Additionally, the notice

does not address the application of Title I of ERISA to the use of

electronic media for any plan transactions.

Explanation of Provisions

General

These proposed regulations permit the use of electronic media for

the transmission of certain notices and consent required for

distributions from qualified plans. Using flexible standards--rather

than detailed requirements--the proposed regulations:

Permit electronic delivery of the notice of distribution

options and the right to defer under section 411(a)(11), the rollover

notice under section 402(f), and the voluntary tax withholding notice

under section 3405(e)(10)(B);

Permit participant consent to a distribution under section

411(a)(11) to be given electronically; and

Permit a plan to provide the section 411(a)(11) and

section 402(f) notices more than 90 days before a distribution, if the

plan provides a summary of the notices within 90 days before the

distribution.

Notices Under Sections 402(f), 411(a)(11), and 3405(e)(10)(B)

1. Use of Electronic Media for Delivery of Notices

The proposed regulations provide that, in general, a plan may

provide a notice required under section 402(f), 411(a)(11), or

3405(e)(10)(B) either on a written paper document or through an

electronic medium reasonably accessible to the participant to whom the

notice is given. The proposed regulations generally do not categorize

particular electronic media as either permissible or impermissible for

this purpose and do not prescribe detailed, media-specific rules.

Instead, the proposed regulations set forth generally applicable

standards that are intended to parallel the key attributes of notices

provided on written paper documents without imposing more stringent

requirements on electronic notices. The use of generally applicable

standards rather than detailed rules is consistent with the comments

received under Announcement 98-62.

Under the proposed regulations, an electronic notice must be

provided under a system reasonably designed to give the notice in a

manner no less understandable to the participant than a written paper

document. The no-less-understandable requirement is to be applied

taking into account the method of delivery and the format and content

of the electronic notice; however, the standard is not intended to

require that the electronic notice be identical in form or content to a

corresponding notice provided on a written paper document (although an

electronic notice must contain all the information that would be

required if the notice were provided on a written paper document).

The IRS and Treasury would expect that provision of notices through

e-mail or a plan web site would in most cases satisfy the no-less-

understandable requirement under well designed systems. However, the

IRS and Treasury expect that the amount and nature of the information

that must be provided in the section 402(f) notice would preclude oral

delivery of the full section 402(f) notice through a telephone system.

By contrast, the amount and nature of the information required in the

notice under section 3405(e)(10)(B) is such that the no-less-

understandable standard may be met by a notice provided through a

telephone system.\1\ Whether a section 411(a)(11) notice may be

provided through a telephone system will depend on the complexity of

the plan distribution options. A plan with a few simple distribution

options could provide, through a well designed telephone system, a

section 411(a)(11) notice that is just as understandable as a notice

provided on a written paper document; a plan with more numerous or more

complex distribution options may not be able to satisfy the no-less-

understandable standard in that manner.

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\1\ The permissibility under the proposed regulations of

providing the section 3405 notice through an electronic medium is

not limited to qualified plans described in section 401(a); rather,

it applies with respect to any payor under section 3405.

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The IRS and Treasury believe that participants should be able to

receive a written paper notice from the plan on request and that the

right to receive a written paper notice is an important safeguard for

participants. Many of the comments submitted under Announcement 98-62

strongly supported this proposition. Certain participants may be unable

to use paperless technologies in an effective manner, particularly as

these new technologies emerge and change rapidly. In such cases, the

right to receive a notice on a written paper document may be necessary

to ensure that the participant has an adequate opportunity to

deliberate about his or her rights and options (and to seek advice from

third parties, if desired). In accordance with these considerations,

the proposed regulations provide that a participant who is given a

legally required notice through an electronic medium be advised at the

time the notice is given that he or she may request and receive the

notice on a written paper document at no charge.

Because of its potential significance to individuals, this written

paper notice must be a copy that participants can retain for their own

records (thus, a posted copy is not adequate). Merely making paper

notices available through the electronic medium used to deliver the

notice or another electronic medium (for example, by including a

``print'' option on an e-mail system or a web site) is not adequate

because of the uncertainty in determining whether a participant will in

fact be able to generate the paper version of the notice. A written

paper notice furnished on request need not contain precisely the same

information or be presented in the same format as the notice delivered

through an electronic medium. Rather, the written paper notice (like

the electronic notice) need only satisfy the applicable legal

requirements regarding that notice.

These generally applicable standards for electronic notices are

illustrated by several examples. The examples illustrate whether

certain uses of electronic technologies satisfy the proposed

regulations, but they are not intended to constitute an exhaustive list

of permissible uses, systems, or media. Other uses, systems, or media

(whether extant, such as CD-ROM or touch-screen kiosk, or not yet

developed) that satisfy the applicable standards would be permitted.

To conform the rules for providing the section 411(a)(11) notice to

the standards described above, the proposed regulations remove from the

existing regulations the requirement that the section 411(a)(11) notice

be received ``in a manner that would satisfy the notice requirements of

section 417(a)(3).'' Also, while they do not remove references in the

existing regulations to the ``written'' section 402(f) notice (because

the statutory provisions of section 402(f) specifically refer to a

``written'' notice), the proposed regulations provide for the

electronic transmission of the section

[[Page 70074]]

402(f) notice and modify the timing requirement for providing that

notice.

2. Flexibility for Timing Requirement in Providing Notices

The proposed regulations modify the timing requirement for

providing the section 402(f) and section 411(a)(11) notices. Under

existing regulations, those notices must be provided no less than 30

days and no more than 90 days before the date of a distribution,

although a participant is permitted to waive the 30-day period.\2\ As

discussed above, the proposed regulations permit plans with

comparatively few and simple distribution options to provide the

section 411(a)(11) notice through a variety of electronic media,

including (in many cases) automated telephone systems. This will make

it easier for those plans to provide the notice within the 90/30-day

period (for example, by providing the notice when a participant

requests a distribution through the automated telephone system).

Similarly, plans with more numerous or more complex distribution

options that use an e-mail system or a web site may provide the notice

when a participant requests a distribution through the e-mail system or

the web site.

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\2\ The timing requirements and waiver provisions for purposes

of the section 411(a)(11) notice are provided in Treasury

Regulations Secs. 1.411(a)-11(c)(2)(ii) and (iii), which are part of

final regulations published elsewhere in this issue of the Federal

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The proposed regulations also provide flexibility with respect to

the 90-day period by providing an alternative timing rule under

sections 402(f) and 411(a)(11). Under this alternative timing rule, a

plan may give the full section 402(f) and section 411(a)(11) notices

more than 90 days before the distribution and provide the participant a

summary of the notice during the 90/30-day period. The full notice is

not required to be provided on a regular periodic basis and could be

provided in connection with other materials (for example, in the

summary plan description or in a brochure describing plan distribution

features), but it must be updated (and provided to the participant) as

necessary to ensure accuracy as of the time the summary is provided.

The summary of the notice must set forth the material provisions of

the notice, must refer the participant to the most recent occasion on

which the full notice was provided (and, in the case of a notice

provided in a document--such as the summary plan description--that

contains other information, must identify that document and must

indicate where the notice may be found in that document), and must

advise the participant of the right to request and receive a full

notice without charge. The plan could make this full notice available

through an electronic medium under a system that satisfies the

standards discussed above if it also offers the participant the option

to request the full notice on a written paper document. Whether written

or electronic, the full notice, if requested, must be provided without

charge no fewer than 30 days prior to the date of the distribution

(although the participant may waive this 30-day period).

In the case of the section 411(a)(11) notice, the summary will

consist of a statement that the participant has a right to defer

receipt of the distribution (if applicable) and a summary of the plan

distribution options. In the case of the section 402(f) notice, the

summary must summarize the principal provisions of the section 402(f)

notice. The use of electronic media to provide these summaries is

subject to the same generally applicable standards that apply to the

electronic transmission of the full section 411(a)(11) and section

402(f) notices, as described above. In contrast to the full section

402(f) notice, however, the IRS and Treasury believe that the summary

of the section 402(f) notice can be provided orally through a well

designed telephone system in a manner no less understandable than a

written paper summary. The following summary, based on the summary set

forth in Notice 92-48, 1992-2 C.B. 377, is an example of a section

402(f) summary that may be provided through an automated telephone

system:

Summary of Notice Regarding Important Tax Information

The following is a brief explanation of an important decision

you must make about any distribution you request from the Plan.

Please listen to it carefully. You can find a more complete written

explanation of these rules in the Summary Plan Description for the

Plan, beginning on page x. You can obtain a free copy of the

complete explanation from the Personnel Office, or you will have an

opportunity at the end of this message to request to have a copy

mailed to you.

A payment from the Plan may be eligible for ``rollover''

treatment. A payment that is eligible for ``rollover'' can be taken

in two ways. You can have ALL OR ANY PORTION of your payment either

(1) PAID IN A ``DIRECT ROLLOVER'' or (2) PAID TO YOU.

A rollover is a payment of your Plan benefits to your individual

retirement arrangement (IRA) or to another employer plan. This

choice will affect the tax you owe.

If you choose a DIRECT ROLLOVER

1. Your payment will not be taxed in the current year and no

income tax will be withheld.

2. Your payment will be made directly to your IRA or, if you

choose, to another employer plan that accepts your rollover.

3. Your payment will be taxed later when you take it out of the

IRA or the employer plan.

If you choose to have your Plan benefits PAID TO YOU

1. You will receive only 80% of the payment, because the plan

administrator is required to withhold 20% of the payment and send it

to the IRS as income tax withholding to be credited against your

taxes.

2. Your payment will be taxed in the current year unless you

roll it over. You may be able to use special tax rules that could

reduce the tax you owe. However, if you receive the payment before

age 59\1/2\, you also may have to pay an additional 10% tax.

3. You can roll over the payment by paying it to your IRA or to

another employer plan that accepts your rollover within 60 days of

receiving the payment. The amount rolled over will not be taxed

until you take it out of the IRA or employer plan.

4. If you choose to have your Plan benefits paid to you and you

want to roll over 100% of the payment to an IRA or an employer plan,

YOU MUST FIND OTHER MONEY TO REPLACE THE 20% THAT WAS WITHHELD. If

you roll over only the 80% that you received, you will be taxed on

the 20% that was withheld and that is not rolled over.

You can find a complete explanation of these rules, as well as

additional rules that may apply in special circumstances, beginning

on page x of your Summary Plan Description. You can also obtain a

free copy of the complete explanation from the Personnel Office.

If you wish to have a free copy of the complete explanation

mailed to you, press 1.

If you wish to hear this explanation again, press 2.

If you wish to end this transaction now, without requesting any

distribution, press 3.

If you wish to continue with this transaction, press 4.

Consent Under Section 411(a)(11)

The proposed regulations provide that, in general, a plan may

receive a participant's consent either on a written paper document or

through an electronic medium reasonably accessible to the participant.

As in the case of participant notices, the proposed regulations

generally do not categorize particular electronic media as either

permissible or impermissible for this purpose and do not prescribe

detailed, media-specific rules. Instead, the proposed regulations set

forth generally applicable standards for transmitting consent through

electronic media. The standards are intended to parallel the key

attributes of participant consent provided on written paper documents

without imposing more stringent requirements on electronic consents. To

conform the existing regulations to this change, the proposed

regulations

[[Page 70075]]

remove the requirement that a participant's consent be ``written.''

The proposed regulations provide that participant consent

transmitted through an electronic medium must be given under a system

that is reasonably designed to preclude an individual other than the

participant from giving the consent and that provides the participant a

reasonable opportunity to review and to confirm, modify, or rescind the

terms of the distribution before the consent to the distribution

becomes effective. The proposed regulations do not set out specific

rules regarding adequate identification or authentication of

participants; the IRS and Treasury note, however, that many comments

submitted under Announcement 98-62 confirmed that ``paperless'' systems

ordinarily use passwords and personal identification numbers to ensure

participant identity in plan transactions.

The requirement that a participant be given a reasonable

opportunity to review and to confirm, modify, or rescind the terms of a

distribution before his or her consent becomes effective is not

intended to require a mandatory rescission period after a transaction

has been completed; it is sufficient for the plan to provide this

opportunity immediately before the participant completes the session in

which the consent is given (for example, before exiting the plan web

site or at the end of an automated telephone transaction). The

opportunity to review and to confirm, modify, or rescind the terms of

the distribution may be compared to a participant's opportunity to

review the terms of a distribution on a written paper distribution

election form prior to submitting that written paper form to the plan.

Many comments submitted under Announcement 98-62 indicated that it

is a very common practice in electronic plan administration to provide

participants with confirmations (usually written confirmations) of plan

transactions. The receipt of a confirmation is, for the participant,

analogous to the opportunity to retain a photocopy of a written paper

distribution election form. Consistent with these comments, the

proposed regulations provide for the plan to give the participant a

confirmation of the terms of the distribution within a reasonable time

after the participant has given consent through an electronic medium.

However, the confirmation of the participant's consent to the

distribution generally need not be given through a written paper

document; it may be given through any electronic medium that would

satisfy the provisions of the proposed regulations for delivery of the

section 411(a)(11) notice. (Thus, if the confirmation is given through

an electronic medium, the participant must be given the right to

request and to receive the confirmation on a written paper document.)

Additionally, the confirmation need not be given as a separate

transaction. For example, the confirmation could be given immediately

before completion of a session conducted on a plan web site.

Alternatively, a plan could provide the confirmation by reflecting the

transaction in a participant's periodic account statement (provided

that the confirmation is given within a reasonable time after the

consent).\3\

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\3\ Several commentators requested that guidance on electronic

plan administration clarify that participants need not receive

written paper confirmation of every plan transaction conducted

through an electronic medium (such as an inquiry regarding a

participant's account value). The IRS and Treasury note that (apart

from the provision of the proposed regulations described above)

neither the Code or the regulations impose a requirement to provide

confirmation (written or otherwise) of plan transactions conducted

through an electronic medium.

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As with notices, the general standards for the section 411(a)(11)

consent are illustrated by several examples intended to describe in

broad terms certain uses of electronic technologies that would satisfy

the proposed regulations. The examples illustrate consent given through

e-mail, web sites (Internet or intranet), and automated telephone

systems and clarify that a participant may consent to a distribution

orally through an automated telephone system. The examples are not

intended to constitute an exhaustive list of permissible uses, systems,

or electronic media or to imply that other uses, systems, or electronic

media (whether extant or not yet developed) would fail to satisfy the

proposed regulations.

Other Transactions and Recordkeeping

A few comments submitted under Announcement 98-62 requested

guidance on the use of electronic media for waivers of the qualified

joint and survivor annuity and the qualified preretirement survivor

annuity, spousal consent, and related explanations under section 417.

Guidance on those issues has not been issued at this time because any

use of electronic media for those purposes--as well as for the notice

requirements of sections 401(k)(12) and 401(m)(11) (pertaining to the

safe harbor methods of satisfying the nondiscrimination requirements of

sections 401(k) and (m)) and the notice requirements of section 204(h)

of ERISA--would raise substantial issues distinct from those raised by

the use of electronic media for the notice and consent requirements of

sections 402(f), 411(a)(11), and 3405(e)(10)(B). The IRS and Treasury

will be reviewing those issues and will consider whether guidance

should be issued in the future.

Several comments also requested guidance regarding the use of

electronic media for withholding elections under section 3405. The IRS

and Treasury are issuing guidance permitting payors to establish

systems to receive Form W-4P (Withholding Certificate for Pension or

Annuity Payments) electronically. Interested parties are invited to

submit comments concerning what, if any, additional guidance is needed

concerning the use of electronic media for withholding elections under

section 3405.

Several comments submitted under Announcement 98-62 addressed

recordkeeping under section 6001 for electronic plan administration.

Revenue Procedure 98-25, 1998-11 I.R.B. 7, specifies the basic

requirements that the IRS considers to be essential in cases where a

taxpayer's records are maintained within an Automatic Data Processing

system. Under section 3.01 of Revenue Procedure 98-25, these

requirements apply to employee plans. Additionally, Revenue Procedure

97-22, 1997-1 C.B. 652, provides guidance to taxpayers maintaining

books and records by using an electronic storage system that either

images their hardcopy (paper) books and records, or transfers their

computerized books and records, to an electronic storage medium, such

as an optical disk. Under section 3.02 of Revenue Procedure 97-22, the

requirements of that revenue procedure apply employee plans. The IRS

and Treasury invite interested parties to submit comments on what

specific guidance is needed concerning recordkeeping requirements for

electronic plan administration in addition to that provided in Revenue

Procedures 98-25 and 97-22.

Reliance

Plan sponsors and administrators may rely on these proposed

regulations for guidance pending the issuance of final regulations. If,

and to the extent, future guidance is more restrictive than the

guidance in these proposed regulations, the future guidance will be

applied without retroactive effect.

Proposed Effective Date

These regulations are proposed to be effective the first day of the

first plan year beginning on or after the date that is six months after

they are published in the Federal Register as final regulations.

[[Page 70076]]

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It is hereby certified that

these regulations will not have a significant economic impact on a

substantial number of small entities. This certification is based on

the fact that the regulations provide paperless alternatives to notices

that otherwise must be sent as written paper documents. It is

anticipated that most small businesses affected by these regulations

will be sponsors of retirement plans. Since these notices are provided

only upon distributions and since, in the case of a small plan, there

will be relatively few distributions per year, small plans that

implement a paperless system for delivering these notices will likely

contract for them as part of a paperless system for distributions

offered by outside vendors. The paperless delivery of the notices will

only add a minor increment to the cost of these paperless distribution

systems or the plan sponsor will continue to use a paper-based system.

Accordingly, a Regulatory Flexibility Analysis is not required.

Pursuant to section 7805(f) of the Code, this notice of proposed

rulemaking will be submitted to the Chief Counsel for Advocacy of the

Small Business Administration for comment on its impact on small

business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any electronic and written comments (a

signed original and eight (8) copies) that are submitted timely to the

IRS. The IRS and Treasury specifically request comments on the clarity

of the proposed regulations and how it may be made easier to

understand. All comments will be available for public inspection and

copying.

A public hearing has been scheduled for April 15, 1999, at 10 a.m.

in room 2615, Internal Revenue Service Building, 1111 Constitution

Avenue, NW., Washington, DC. Due to security procedures, visitors must

enter at the 10th Street entrance, located between Constitution and

Pennsylvania Avenues, NW. In addition, all visitors must present a

photo identification to enter the building. Because of access

restrictions, visitors will not be admitted beyond the immediate

entrance area more than 15 minutes before the hearing starts. For

information about having your name placed on the building access list,

see the FOR FURTHER INFORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written comments and an outline of topics to be discussed and

the time to be devoted to each topic (signed original and eight (8)

copies) by March 25, 1999.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of speakers will be prepared after

the deadline for receiving outlines has passed. Copies of the agenda

will be available free of charge at the hearing.

Drafting Information

The principal author of these regulations is Catherine Livingston

Fernandez, Office of the Associate Chief Counsel (Employee Benefits and

Exempt Organizations), Internal Revenue Service. However, personnel

from other offices of the IRS and Treasury Department participated in

their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 35

Employment taxes, Income taxes, Reporting and recordkeeping

requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 35 are proposed to be amended as

follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read,

in part, as follows:

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

Par. 2. Section 1.402(f)-1 is amended by:

1. Revising Q&A-2.

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

The revision and additions read as follows:

Sec. 1.402(f)-1 Required explanation of eligible rollover

distributions; questions and answers.

* * * * *

Q-2: When must the plan administrator provide the section 402(f)

notice to a distributee?

A-2: The plan administrator must provide the section 402(f) notice

to a distributee at a time that satisfies either paragraph (a) or (b)

of this Q&A-2.

(a) Paragraph (a) of this Q&A-2 is satisfied if the plan

administrator provides a distributee with the section 402(f) notice no

less than 30 days and no more than 90 days before the date of a

distribution. However, if the distributee, after having received the

section 402(f) notice, affirmatively elects a distribution, a plan will

not fail to satisfy section 402(f) merely because the distribution is

made less than 30 days after the section 402(f) notice was provided to

the distributee, provided the plan administrator clearly indicates to

the distributee that the distributee has a right to consider the

decision of whether or not to elect a direct rollover for at least 30

days after the notice is provided. The plan administrator may use any

method to inform the distributee of the relevant time period, provided

that the method is reasonably designed to attract the attention of the

distributee. For example, this information could be either provided in

the section 402(f) notice or stated in a separate document (e.g.,

attached to the election form) that is provided at the same time as the

notice. For purposes of satisfying the requirement in the first

sentence of paragraph (a) of this Q&A-2, the plan administrator may

substitute the annuity starting date, within the meaning of

Sec. 1.401(a)-20, Q&A-10, for the date of the distribution.

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

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

(2) Provides the distributee with a summary of the section 402(f)

notice within the time period described in paragraph (a) of this Q&A-2;

and

(3) If the distributee so requests after receiving the summary

described in paragraph (b)(2) of this Q&A-2, provides the section

402(f) notice to the distributee without charge and within the period

specified in paragraph (a) of this Q&A-2 (disregarding the 90-day

period described in paragraph (a) of this Q&A-2). The summary described

in paragraph (b)(2) of this Q&A-2 must set forth a summary of the

principal provisions of the section 402(f) notice, must refer the

distributee to the most recent occasion on which the section 402(f)

notice was provided (and, in the case of a notice provided in any

document containing information in addition to the notice, must

identify that document and must indicate where the notice may be found

in that document), and must advise the distributee that, upon request,

a copy of the section 402(f) notice will be provided without charge.

* * * * *

[[Page 70077]]

Q-5: Will the requirements of section 402(f) be satisfied if a plan

administrator provides a distributee with the section 402(f) notice or

the summary of the notice described in paragraph (b)(2) of Q&A-2 of

this section other than through a written paper document?

A-5: A plan administrator may provide a distributee with the

section 402(f) notice or the summary of that notice described in

paragraph (b)(2) of Q&A-2 of this section either on a written paper

document or through an electronic medium reasonably accessible to the

distributee. A notice or summary provided through an electronic medium

must be provided under a system that satisfies the following

requirements:

(a) The system must be reasonably designed to provide the notice or

summary in a manner no less understandable to the distributee than a

written paper document.

(b) At the time the notice or summary is provided, the distributee

must be advised that the distributee may request and receive the notice

on a written paper document, and, upon request, that document must be

provided to the distributee at no charge.

Q-6: Are there examples that illustrate the provisions of Q&A-2 and

Q&A-5 of this section?

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

Q&A-5 of this section:

Example 1. A qualified plan (Plan A) permits participants to

request distributions by e-mail. Under Plan A's system for such

transactions, a participant must enter his or her account number and

personal identification number (PIN); this information must match

that in Plan A's records in order for the transaction to proceed. If

a participant changes his or her PIN, the participant may not

proceed with a transaction until Plan A has sent confirmation of the

change to the participant. If a participant requests a distribution

from Plan A by e-mail and the distribution is an eligible rollover

distribution, the plan administrator provides the participant with a

section 402(f) notice by e-mail. The plan administrator also advises

the participant that he or she may request the section 402(f) notice

on a written paper document and that, if the participant so

requests, the written paper document will be provided at no charge.

To proceed with the distribution by e-mail, the participant must

acknowledge receipt, review, and comprehension of the section 402(f)

notice. Plan A does not fail to satisfy the notice requirement of

section 402(f) merely because the notice is provided to the

participant other than through a written paper document.

Example 2. A qualified plan (Plan B) permits participants to

request distributions through the Plan B web site (Internet or

intranet). Under Plan B's system for such transactions, a

participant must enter his or her account number and personal

identification number (PIN); this information must match that in

Plan B's records in order for the transaction to proceed. If a

participant changes his or her PIN, the participant may not proceed

with a transaction until Plan B has sent confirmation of the change

to the participant. A participant may request a distribution from

Plan B by following the applicable instructions on the Plan B web

site. After the participant has requested a distribution that is an

eligible rollover distribution, the participant is automatically

shown a page on the web site containing a section 402(f) notice.

Although this page of the web site may be printed, the page also

advises the participant that he or she may request the section

402(f) notice on a written paper document and that, if the

participant so requests, the written paper document will be provided

at no charge. To proceed with the distribution through the web site,

the participant must acknowledge review and comprehension of the

section 402(f) notice. Plan B does not fail to satisfy the notice

requirement of section 402(f) merely because the notice is provided

to the participant other than through a written paper document.

Example 3. A qualified plan (Plan C) permits participants to

request distributions through Plan C's automated telephone system.

Under Plan C's system for such transactions, a participant must

enter his or her account number and personal identification number

(PIN); this information must match that in Plan C's records in order

for the transaction to proceed. If a participant changes his or her

PIN, the participant may not proceed with a transaction until Plan C

has sent confirmation of the change to the participant. Plan C

provides the section 402(f) notice in the summary plan description,

the most recent version of which was distributed to participants in

1997. A participant may request a distribution from Plan C by

following the applicable instructions on the automated telephone

system. In 1999, a participant, using Plan C's automated telephone

system, requests a distribution that is an eligible rollover

distribution. The automated telephone system refers the participant

to the most recent occasion on which the section 402(f) notice was

provided in the summary plan description, informs the participant

where the section 402(f) notice may be located in the summary plan

description, and provides an oral summary of the material provisions

of the section 402(f) notice. The system also advises the

participant that the participant may request the section 402(f)

notice on a written paper document and that, if the participant so

requests, the written paper document will be provided at no charge.

Before proceeding with the distribution, the participant must

acknowledge comprehension of the summary. Under Plan C's system for

processing such transactions, the participant's distribution will be

made no more than 90 days and no fewer than 30 days after the

participant requests the distribution and receives the summary of

the section 402(f) notice (unless the participant waives the 30-day

period). Plan C does not fail to satisfy the notice requirement of

section 402(f) merely because Plan C provides a summary of the

section 402(f) notice or merely because the summary is provided to

the participant other than through a written paper document.

Example 4. The facts are the same as in Example 3, except that,

pursuant to Plan C's system for processing such transactions, a

participant who so requests is transferred to a customer service

representative whose conversation with the participant is recorded.

The customer service representative provides the summary of the

section 402(f) notice by reading from a prepared text. Plan C does

not fail to satisfy the notice requirement of section 402(f) merely

because Plan C provides a summary of the section 402(f) notice or

merely because the summary of the section 402(f) notice is provided

to the participant other than through a written paper document.

Example 5. The facts are the same as in Example 3, except that

Plan C does not provide the section 402(f) notice in the summary

plan description. Instead, the automated telephone system reads the

section 402(f) notice to the participant. Plan C does not satisfy

the notice requirement of section 402(f) by oral delivery of the

section 402(f) notice through the automated telephone system.

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

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

2. Adding paragraphs (f) and (g).

3. Removing the language ``Written consent'' in paragraph

(c)(2)(ii) and (c)(3) and adding the language ``Consent'' in its place.

The revisions and additions read as follows:

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

* * * * *

(2) Consent. (i) No consent is valid unless the participant has

received a general description of the material features of the optional

forms of benefit available under the plan. In addition, so long as a

benefit is immediately distributable, a participant must be informed of

the right, if any, to defer receipt of the distribution. Furthermore,

consent is not valid if a significant detriment is imposed under the

plan on any participant who does not consent to a distribution. Whether

or not a significant detriment is imposed shall be determined by the

Commissioner by examining the particular facts and circumstances.

* * * * *

(iii) A plan must provide a participant with notice of the rights

specified in this paragraph (c)(2) at a time that satisfies either

paragraph (c)(2)(iii)(A) or (B) of this section:

(A) This paragraph (c)(2)(iii)(A) is satisfied if the plan provides

a participant with notice of the rights

[[Page 70078]]

specified in this paragraph (c)(2) no less than 30 days and no more

than 90 days before the date the distribution commences. However, if

the participant, after having received this notice, affirmatively

elects a distribution, a plan will not fail to satisfy the consent

requirement of section 411(a)(11) merely because the distribution

commences less than 30 days after the notice was provided to the

participant, provided the plan administrator clearly indicates to the

participant that the participant has a right to at least 30 days to

consider whether to consent to the distribution.

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

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

this paragraph (c)(2);

(2) Provides the participant with a summary of the notice within

the time period described in paragraph (c)(2)(iii)(A) of this section;

and

(3) If the participant so requests after receiving the summary

described in paragraph (c)(2)(iii)(B)(2) of this section, provides the

notice to the participant without charge and within the period

specified in paragraph (c)(2)(iii)(A) of this section (disregarding the

90-day period described in paragraph (c)(2)(iii)(A) of this section).

The summary described in paragraph (c)(2)(iii)(B)(2) of this section

must advise the participant of the right, if any, to defer receipt of

the distribution, must set forth a summary of the distribution options

under the plan, must refer the participant to the most recent occasion

on which the notice was provided (and, in the case of a notice provided

in any document containing information in addition to the notice, must

identify that document and must indicate where the notice may be found

in that document), and must advise the participant that, upon request,

a copy of the notice will be provided without charge.

* * * * *

(f) Medium for notice and consent--(1) Notice. The notice of a

participant's rights described in paragraph (c)(2) of this section or

the summary of that notice described in paragraph (c)(2)(iii)(B)(2) of

this section may be provided either on a written paper document or

through an electronic medium reasonably accessible to the participant.

A notice or summary provided through an electronic medium must be

provided under a system that satisfies the following requirements:

(i) The system must be reasonably designed to provide the notice or

summary in a manner no less understandable to the participant than a

written paper document.

(ii) At the time the notice or summary is provided, the participant

must be advised that he or she may request and receive the notice on a

written paper document, and, upon request, that document must be

provided to the participant at no charge.

(2) Consent. The consent described in paragraphs (c)(2) and (3) of

this section may be given either on a written paper document or through

an electronic medium reasonably accessible to the participant. A

consent given through an electronic medium must be given under a system

that satisfies the following requirements:

(i) The system must be reasonably designed to preclude any

individual other than the participant from giving the consent.

(ii) The system must provide the participant with a reasonable

opportunity to review and to confirm, modify, or rescind the terms of

the distribution before the consent to the distribution becomes

effective.

(iii) The system must provide the participant, within a reasonable

time after the consent is given, a confirmation of the terms (including

the form) of the distribution either on a written paper document or

through an electronic medium under a system that satisfies the

requirements of paragraph (f)(1) of this section.

(g) Examples. The provisions of paragraph (f) of this section are

illustrated by the following examples: