Td 9294

26 CFR 1.401(a)–21: Rules relating to the use of an
electronic medium to provide applicable notices and
to make participant elections.

SUPPLEMENTARY INFORMATION:

T.D. 9294

The collections of information referenced in these final regulations were previously reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act
of 1995 (44 U.S.C. 3507(d)) under control
number 1545–1632, in conjunction with
the Treasury Decision (T.D. 8873, 2000–1
C.B. 713), relating to New Technologies
in Retirement Plans, published on February 8, 2000 in the Federal Register (65
FR 6001), and control number 1545–1780,
in conjunction with the Treasury Decision
(T.D. 9052, 2003–1 C.B. 879), relating to
Notice of Significant Reduction in the Rate
of Future Benefit Accrual, published on
April 9, 2003 in the Federal Register (68
FR 17277). Responses to these collections
of information are mandatory.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Office of Management and Budget.
Books or records relating to these collections of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and tax
return information are confidential, as required by 26 U.S.C. 6103.

DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 35, and 54
Use of Electronic Media
for Providing Employee
Benefit Notices and Making
Employee Benefit Elections
and Consents
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulation.
SUMMARY: This document contains final regulations setting forth standards for
electronic systems that make use of an
electronic medium to provide a notice to a
recipient, or to make a participant election
or consent, with respect to a retirement
plan, an employee benefit arrangement,
or an individual retirement plan. These
regulations reflect the provisions of the
Electronic Signatures in Global and National Commerce Act (E-SIGN). These
final regulations generally affect sponsors
of, and individuals entitled to benefits
under, certain retirement plans, employee
benefit arrangements, and individual retirement plans.
DATES: Effective Date: These regulations
are effective on October 20, 2006.
Applicability Date: These regulations generally apply to applicable notices provided, and participant elections
made, on or after January 1, 2007. See
§1.401(a)–21(g).
FOR
FURTHER
INFORMATION
CONTACT: Pamela R. Kinard at (202)
622–6060 (not a toll-free number).

Paperwork Reduction Act

Background
This document contains amendments
to 26 CFR parts 1, 35, and 54 under section 401 of the Internal Revenue Code
(Code) and other sections of the Code
relating to retirement plans, employee
benefit arrangements, and individual retirement plans. This Treasury Decision
adds §1.401(a)–21 to the Treasury regulations, which sets forth standards for
the use of an electronic medium to provide applicable notices to recipients, or to
make participant elections, with respect
to a retirement plan, an employee benefit
arrangement, or an individual retirement
plan. These final regulations reflect the
applicable provisions of the Electronic
Signatures in Global and National Commerce Act, Public Law 106–229 (114 Stat.

464 (2000)) (E-SIGN) as it relates to the
electronic delivery of notices.
The Code and regulations thereunder,
and the parallel provisions of the Employee Retirement Income Security Act of
1974 (ERISA), include a number of rules
that require certain notices, elections, or
consents to be written or in writing. Examples of notices, elections, or consents
required to be written or in writing include a section 402(f) notice (describing
rollover rights), a section 411(a)(11) notice (describing a participant’s benefit
commencement rights), a spousal consent under section 417(a)(2), and a section
204(h) notice (notice to participants of significant reduction in rate of future benefit
accrual). For a more in-depth description
of retirement plan notices, elections, or
consents that are required to be written or
in writing, see the background section to
the preamble of the 2005 proposed regulations (REG–138362–04, 2005–33 I.R.B.
299 [70 FR 40675]).
E-SIGN
E-SIGN, signed into law on June 30,
2000, generally provides that electronic
records and signatures are given the same
legal effect as their paper counterparts.
Section 101(a) of E-SIGN provides that,
with respect to a transaction in or affecting
interstate or foreign commerce, notwithstanding any statute, regulation, or rule of
law, a signature, contract, or other record
may not be denied legal effect, validity, or
enforceability solely because it is in electronic form and a contract relating to such
transaction may not be denied legal effect,
validity, or enforceability solely because
an electronic signature or electronic record
was used in its formation.1
Section 101(b) of E-SIGN provides that
E-SIGN does not limit, alter, or otherwise affect any requirement imposed by a
statute, regulation, or rule of law relating
to a person’s rights or obligations under
any statute, regulation, or rule of law except with respect to a requirement that contracts or other records be written, signed,
or in non-electronic form, and also provides that E-SIGN generally does not require any person to agree to use or accept
electronic signatures or records.

1 The rules of section 101 of E-SIGN do not apply to certain consumer notices. These include consumer notices that are necessary for the protection of a consumer’s health, safety, or shelter
(e.g., cancellation of health benefits or life insurance and foreclosure on a credit agreement secured by an individual’s primary residence). See section 103(b)(2)(B) and (C) of E-SIGN.

2006–48 I.R.B.

980

November 27, 2006

Section 101(c) of E-SIGN sets forth
special protections that apply when a
statute, regulation, or other rule of law
requires that information relating to a
transaction be provided or made available
to a consumer2 in writing. Under section
101(c) of E-SIGN, before the required
information can be provided or made
available electronically, a consumer must
first affirmatively consent to receive the
information electronically and the consent
must be made in a manner that reasonably demonstrates the consumer’s ability
to access the information in electronic
form (or, if the consent is not provided
in such a manner, confirmation of the
consent must be made electronically in a
manner that reasonably demonstrates the
consumer’s ability to access the information in electronic form). Prior to consent,
the consumer must receive certain specified disclosures. The disclosures must
include, among other items, the hardware
or software requirements for access to,
and retention of, the electronic records,
the consumer’s right to withdraw his or
her consent to receive the information
electronically (and the consequences that
follow the withdrawal of consent), the procedures for requesting a paper copy of the
electronic record, and the cost, if any, of
obtaining a paper copy. Section 101(c)(6)
of E-SIGN generally provides that, for
purposes of the consumer consent rules
of section 101(c), an oral communication
or a recording of an oral communication
does not qualify as an electronic record.
Section 101(e) of E-SIGN provides
rules relating to the electronic retention
of contracts and other records that are
required to be written or in writing. Section 101(e) of E-SIGN provides that if a
statute, regulation, or other rule of law
requires that a contract or other record
relating to a transaction in or affecting interstate or foreign commerce be in writing,
the legal effect, validity, or enforceability
of an electronic record of the contract or
other record may be denied if the contract
or other record is not in a form that is
capable of being retained and accurately
2

reproduced for later reference by all parties or persons who are entitled to retain
the contract or other record.
Section 104(b)(1) of E-SIGN generally provides that a Federal regulatory or
State regulatory agency that is responsible
for rulemaking under any other statute
has interpretative authority to issue guidance interpreting section 101 of E-SIGN
with respect to that other statute. However, as a limitation on that authority,
section 104(b)(2) of E-SIGN prohibits
the issuance of any guidance that is not
consistent with section 101 or that adds to
the requirements of that section. Section
104(b)(2) of E-SIGN also requires that
any agency issuing guidance interpreting
E-SIGN find that there is a substantial
justification for the guidance and that the
methods selected to carry out the purpose of the guidance are substantially
equivalent to the requirements imposed on
records that are not electronic, do not impose unreasonable costs on the acceptance
and use of electronic records, and do not
require or accord greater legal status to a
specific technology.
Section 104(d)(1) of E-SIGN authorizes a Federal regulatory agency to exempt, without condition, a specified category or type of record from the consumer
consent requirements in section 101(c).
The exemption may be issued only if the
exemption is necessary to eliminate a substantial burden on electronic commerce
and will not increase the material risk of
harm to consumers.
In
accordance
with
section
104(b)(2)(C) of E-SIGN, the Treasury Department and IRS find that there
is substantial justification for these final
regulations, that, for the reasons explained
below, the requirements imposed on
the use of electronic media under these
regulations are substantially equivalent to
those imposed on non-electronic records,
that the requirements will not impose
unreasonable costs on the acceptance
and use of electronic records, and that
these regulations do not require (or accord

greater legal status or effect to) the use of
any specific technology.
Prior Guidance Relating to Electronic
Communications
The Treasury Department and IRS have
issued several items of guidance relating to
the use of electronic media with respect to
retirement plans and individual retirement
plans.3 Section 1510 of the Taxpayer Relief Act of 1997, Public Law 105–34 (111
Stat. 788, 1068) (TRA ’97), provides for
the Secretary of Treasury to issue guidance designed to interpret the notice, election, consent, disclosure, and timing requirements (include related recordkeeping
requirements) under the Code and ERISA
relating to retirement plans as applied to
the use of new technologies by plan sponsors and administrators. Section 1510 of
TRA ’97 further provides that the guidance
should maintain the protection of the rights
of participants and beneficiaries.
Final regulations (T.D. 8873) relating
to the use of electronic media for transmissions of participant notices and consents
under sections 402(f), 411(a)(11), and
3405(e)(10)(B) were published in the
Federal Register (65 FR 6001) on February 8, 2000 (the 2000 regulations). The
2000 regulations set forth standards for the
electronic transmission of certain notices
and consents that are required in connection with distributions from retirement
plans.
Those regulations provide that a plan
may provide a notice required under section 402(f), 411(a)(11), or 3405(e)(10)(B)
either on a written paper document or
through an electronic medium that is reasonably accessible to the participant. In
addition, the 2000 regulations provide that
any electronic system must be reasonably
designed to provide the notice in a manner
no less understandable to the participant
than a written paper document. Furthermore, the participant must be advised of
the right to request and receive a paper
copy of the written paper document at no
charge, and, upon request, the document

Section 106(1) of E-SIGN generally defines a consumer as an individual who obtains products or services used primarily for personal, family, or household purposes.

3

The Treasury Department and IRS have also issued guidance regarding the use of electronic media with respect to tax reporting and other tax requirements with respect to employee benefit
plans. For example, Announcement 99–6, 1999–1 C.B. 352, authorizes payers of pensions, annuities, and other employee benefits to establish a system for payees to submit electronically
Forms W–4P, Withholding Certificate for Pension or Annuity Payments, W–4S, Request for Federal Income Tax Withholding From Sick Pay, and W–4V, Voluntary Withholding Request, if
certain requirements, including signature and recordkeeping requirements, are satisfied. In addition, Notice 2004–10, 2004–1 C.B. 433, authorizes the electronic delivery of certain forms
relating to the reporting of contributions and distributions of pensions, simplified employee pensions, traditional IRAs, Roth IRAs, qualified tuition programs, Coverdell education savings
accounts, and Archer Medical Savings Accounts. See also §§31.6051–1(j) and 1.6039–1(f).

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981

2006–48 I.R.B.

must be provided to the participant without charge.
The 2000 regulations also permit an
electronic system to satisfy the requirement of section 411(a)(11) that a participant provide written consent to a distribution if certain requirements are satisfied.
First, the electronic medium must be reasonably accessible to the participant. Second, the electronic system must be reasonably designed to preclude anyone other
than the participant from giving the consent. Third, the system must provide the
participant with a reasonable opportunity
to review and to confirm, modify, or rescind the terms of the consent before it becomes effective. Fourth, the system must
provide the participant, within a reasonable time after the consent is given, a confirmation of the terms (including the form)
of the distribution through either a written
paper document or in an electronic format
that satisfies the requirements for providing applicable notices. Thus, the participant must be advised of the right to request
and to receive a confirmation copy of the
consent on a written paper document without charge. The 2000 regulations did not
permit the use of electronic media for any
notice or election required under section
417 with respect to a waiver of a qualified
joint and survivor annuity (QJSA).
The Treasury Department and IRS
have issued other guidance applying the
standards set forth in the 2000 regulations to other retirement plan notices and
elections. For example, §1.7476–2(c)(2)
provides that a notice to an interested
party is deemed to be provided in a manner that satisfies the delivery requirements
of §1.7476–2(c)(1) if the notice is delivered using an electronic medium under a
system that satisfies the requirements of
§1.402(f)–1, Q&A–5. Q&A–7 of Notice
2000–3, 2000–1 C.B. 413, provides that,
until the issuance of further guidance, a
plan is permitted to use electronic media
to provide notices required under sections
401(k)(12) and 401(m)(11) (relating to
safe harbors for section 401(k) and section
401(m) plans) if the employee receives the
notice through an electronic medium that
is reasonably accessible, the system is designed to provide the notice in a manner no
less understandable to the employee than
a written paper document, and, at the time
the notice is provided, the employee is advised that the employee may request and

2006–48 I.R.B.

receive the notice on a written paper document at no charge. Similarly, §1.72(p)–1,
Q&A–3(b), requires a loan from a plan to
a participant to be set forth in a written
paper document, in an electronic medium
that satisfies standards that are the same
as the standards in the 2000 regulations,
or in such other form as may be approved
by the Commissioner. In addition, Notice
99–1, 1999–1 C.B. 269, provides guidance relating to qualified retirement plans
permitting the use of electronic media
for plan participants or beneficiaries conducting account transactions for which
there is no specific writing requirement,
such as plan enrollments, direct rollover
elections, beneficiary designations, investment change allocations, elective and
after-tax contribution designations, and
general plan or specific account inquiries.
In 2003, final regulations (T.D. 9052)
under section 4980F were published in the
Federal Register (68 FR 17277). Under
Q&A–13 of §54.4980F–1, for a plan to
provide a section 204(h) notice electronically, the section 204(h) notice must actually be received by the applicable individual or the plan administrator must take appropriate and necessary measures reasonably calculated to ensure that the method
for providing the section 204(h) notice results in actual receipt. Further, the plan
administrator must provide the applicable
individual with a clear and conspicuous
statement that the individual has a right
to receive a paper version of the section
204(h) notice without the imposition of
fees and, if the individual requests a paper
copy of the section 204(h) notice, the paper copy must be provided without charge.
The regulations under section 4980F also
provide a safe harbor method for delivering a section 204(h) notice electronically,
which is substantially the same as the consumer consent rules of E-SIGN.
The Department of Labor (DOL) and
the Pension Benefit Guaranty Corporation
(PBGC) have also issued regulations relating to the use of electronic media to furnish notices, reports, statements, disclosures, and other documents to participants,
beneficiaries, and other individuals under
titles I and IV of ERISA. See 29 CFR
2520.104b–1 and 29 CFR 4000.14.
On July 14, 2005, a notice of proposed
rulemaking (REG–138362–04) under section 401 of the Code was published in
the Federal Register (70 FR 40675) (the

982

2005 proposed regulations). On November 2, 2005, the IRS held a public hearing on the proposed regulations. Written
comments responding to the notice of proposed rulemaking were also received. Although commentators raised issues with
respect to certain provisions in the 2005
proposed regulations, the comments were
generally positive. After consideration of
all the comments, the 2005 proposed regulations are adopted, as amended by this
Treasury Decision. The significant revisions are discussed below.
Explanation of Provisions
I. Overview.
A. In General.
This
Treasury
Decision
adds
§1.401(a)–21 and modifies a number
of existing regulations (including the
2000 regulations and other regulations
described above). These regulations set
forth the standards by which a retirement
plan, an employee benefit arrangement, or
an individual retirement plan is permitted
to use an electronic medium to provide
applicable notices or for individuals in
such a plan to make participant elections.
For any requirement under the Code or
regulations that an employee benefit notice
or election be in writing or in written form,
the standards set forth in these regulations
are generally the exclusive rules for providing such communication through the
use of an electronic medium. Thus, for example, a retirement plan providing a section 402(f) notice through the use of an
electronic medium must satisfy the rules
set forth in these regulations.
For any employee benefit notice or
election that is not required to be in writing or in written form, the standards set
forth in these regulations function as a
safe harbor. Thus, a retirement plan, an
employee benefit arrangement, or individual retirement plan is permitted to
satisfy either these regulations or any
other applicable guidance issued by the
IRS. For example, with respect to creating
an electronic system to accept electronic
transmissions of beneficiary designations,
a retirement plan is permitted to use the
rules under these regulations or continue
to follow the standards set forth in Notice
99–1, which is not affected by E-SIGN.
B. Application of Standards.

November 27, 2006

Like the 2005 proposed regulations,
these regulations apply to any notice, election, or similar communication provided
to or made by a participant or beneficiary
in the following retirement plans: a section 401(a) plan; a section 403(a) plan; a
section 403(b) plan; a simplified employee
pension (SEP) under section 408(k); a simple retirement plan under section 408(p);
and an eligible governmental plan under
section 457(b). In response to a comment,
these regulations also provide that they
apply to any notice, election, or similar
communication provided to or made by an
individual entitled to benefits in an individual retirement plan, including a Roth
IRA under section 408A or a deemed IRA
under section 408(q).
In addition, these final regulations apply to any notice, election, or similar communication provided to or made by a participant or beneficiary under the following
employee benefit arrangements: an accident or health plan or arrangement under
sections 104(a)(3) or 105; a cafeteria plan
under section 125; an educational assistance program under section 127; a qualified transportation fringe program under
section 132; an Archer MSA under section
220; and a health savings account under
section 223.
These regulations do not apply to any
notice, election, consent, disclosure, or
obligation required under the provisions
of title I or IV of ERISA over which
the DOL or the PBGC has interpretative
and enforcement authority.4 For example,
the rules in 29 CFR 2520.104b–1 of the
Labor Regulations apply with respect to
an employee benefit plan furnishing disclosure documents, such as a summary
plan description or a summary annual
report. These regulations also do not apply to Code section 411(a)(3)(B) (relating
to suspension of benefits), Code section
4980B(f)(6) (relating to an individual’s
COBRA rights), or any other Code provision over which the DOL or the PBGC
has similar interpretative authority.

In addition, the rules in these regulations apply only with respect to notices and
elections relating to an individual’s rights
under a retirement plan, an employee benefit arrangement, or an individual retirement plan. Thus, these regulations do not
apply with respect to other requirements
under the Code, such as requirements relating to tax reporting, tax records, or substantiation of expenses.5
C. Requirements for Using Electronic
Media to Provide Notices and Make Elections.
These final regulations generally retain from the 2005 proposed regulations
the requirement that any communication that is provided using an electronic
medium satisfy all the otherwise applicable requirements (including the applicable
timing and content rules) relating to that
communication. Thus, for example, a
section 204(h) notice provided using an
electronic medium must be delivered on
or before the time period required under
Q&A–9 of §54.4980F–1, must satisfy the
content requirements set forth in Q&A–11
of §54.4980F–1, and must satisfy the
delivery requirements under these regulations.
These regulations provide that an electronic system used to provide a notice or
to make an election must satisfy certain
requirements. First, with respect to the
content of an applicable notice, the electronic system must be reasonably designed
to provide the information to a recipient in
a manner no less understandable to the recipient than if provided on a written paper document. For example, a plan delivering a lengthy section 402(f) notice
would not satisfy this requirement if the
plan chose to provide the notice through
a pre-recorded message on an automated
phone system.6 However, a plan with few
distribution options is permitted to provide a section 411(a)(11) notice through
the use of a pre-recorded message on an
automated phone system. Second, the regulations require that the electronic system
be reasonably designed to alert the recipi-

ent, at the time the applicable notice is provided, to the significance of the information in the notice (including the identification of the subject matter of the notice), and
provide any instructions needed to access
the notice, in a manner that is as readily
understandable and accessible as an applicable notice provided using a written paper
document. These requirements are necessary in order for the notice to fulfill their
intended purpose, are substantially equivalent to the requirements imposed on nonelectronic notices, and do not impose unreasonable costs on the acceptance or use
of electronic records. Moreover, they do
not require or accord greater legal status to
a particular technology since each technology must satisfy the same standards with
respect to each notice. Third, the final
regulations clarify that, pursuant to section 101(e) of E-SIGN, if an electronic
record of an applicable notice or a participant election is not maintained in a form
that is capable of being retained and accurately reproduced for later reference, then
the legal effect, validity, or enforceability
of such electronic record may be denied.
II. Use of an Electronic Medium to
Provide an Applicable Notice.
A. Two Methods for Providing Applicable Notices. These regulations provide
two methods by which a retirement plan,
employee benefit arrangement, or an individual retirement plan is permitted to
provide an applicable notice to a recipient
through the use of an electronic medium.
Under the first method, an applicable
notice is permitted to be provided to a
recipient using an electronic medium after
the recipient consents to the electronic delivery of the notice (the consumer consent
method). The rules under the consumer
consent method reflect the consumer consent requirements at section 101(c) in
E-SIGN. The Treasury Department and
IRS continue to believe that an individual entitled to benefits under a retirement
plan, an employee benefit arrangement, or

4

See generally Reorganization Plan No. 4 of 1978 (43 FR 47713). Pursuant to section 101(a) of the Reorganization Plan No. 4 of 1978, 29 U.S.C. 1001nt, the Secretary of the Treasury has
authority to issue regulations under parts 2 and 3 of subtitle B of title I of ERISA with certain exceptions. Under section 104 of the Reorganization Plan No. 4, the Secretary of Labor retains
enforcement authority with respects to parts 2 and 3 of subtitle B of title 1 of ERISA, but, in exercising that authority, is bound by the regulations issued by the Secretary of Treasury.
5

Code section 6001 provides rules relating to the maintenance of records, statements, and special returns. The IRS has issued guidance on electronic recordkeeping under section 6001. This
guidance applies to retirement plans, employee benefits plans, and individual retirement plans. Rev. Proc. 98–25, 1998–1 C.B. 689, sets forth standards for a taxpayer maintaining records on
an Automated Data Processing system. Under section 3.01 of Rev. Proc. 98–25, those standards apply to employee plans. Rev. Proc. 97–22, 1997–1 C.B. 652, provides guidance to taxpayers
using an electronic storage system to maintain books and records required under section 6001. Under section 3.02 of Rev. Proc. 97–22, those requirements apply to employee plans. See also
footnote 3 above.

6

Note that a section 204(h) notice cannot be provided using oral communication or a recording of an oral communication. See §54.4980F–1, A–13(c)(1).

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2006–48 I.R.B.

an individual retirement plan is generally
a consumer, within the meaning of section
106(1) of E-SIGN, when receiving a notice
that could affect the individual’s benefits
or other rights.7 The second method (the
alternative method) provides rules that are
intended generally to replicate the requirements in the 2000 regulations that apply
to notices required under sections 402(f),
411(a)(11), and 3405, and thereby allow
plans to continue to provide these notices
electronically using electronic systems
that satisfy the standards in the 2000 regulations.
B. Consumer Consent Method for Providing Applicable Notices.
Under the consumer consent method,
before an applicable notice is provided to
a recipient using an electronic medium,
the participant must consent to receive the
communication electronically. The consent generally must be made in a manner
that reasonably demonstrates that the participant can access the notice in the electronic form that will be used to provide the
notice. Alternatively, the consent may be
made using a written paper document, but
only if the participant confirms the consent in a manner that reasonably demonstrates that the participant can access the
notice in the electronic form to be provided. Prior to consenting, the participant
must receive a disclosure statement that
outlines the scope of the consent, the participant’s right to withdraw his or her consent to receive the communication electronically (including any conditions, consequences, or fees in the event of the withdrawal), and the right to receive the communication using paper and any fees imposed for receiving paper. The disclosure
must also specify the hardware and software requirements for accessing the electronic media and the procedures for updating information to contact the participant
electronically. In the event the hardware
or software requirements change, new consent must be obtained from the participant, generally following the rules of section 101(c) of E-SIGN. In addition, under

the consumer consent method, the applicable notice cannot be provided through the
use of oral communication or a recording
of an oral communication.8
Commentators requested several modifications to the rules under the consumer
consent method in these regulations, including requiring plans to give recipients
the opportunity to review their consumer
consent elections every five years and permitting plans to use oral communications
or recordings of oral communications
when providing applicable notices under the consumer consent rules. Other
commentators recommended that the regulations be revised to provide that, under
the consumer consent method, if a participant does not have the effective ability
to access the electronic medium used to
provide an applicable notice or if the participant does not consent to receive the
notice through the use of an electronic
medium, such participant would have the
right to a free paper copy of the notice.
The consumer consent method under
these regulations interprets the rules of
section 101(c) of E-SIGN, and section
104(b)(2) of E-SIGN restricts an agency’s
ability to interpret E-SIGN in any manner
that is inconsistent with section 101 of
E-SIGN or that adds to the requirements
of that section. Accordingly, the rules
under the consumer consent method of
these final regulations are retained without
substantive change. However, many of
the issues raised by the commentators are
ameliorated by the availability of the alternative method for providing applicable
notices, as discussed below in Alternative
Method for Providing Applicable Notices.
C. Alternative Method for Providing
Applicable Notices.
These regulations exempt applicable
notices from the consumer consent requirements of E-SIGN and provide an
alternative method of complying with the
requirement that an applicable notice be
in writing or in written form if certain
conditions are satisfied. This alternative
method of compliance, which is based

on the 2000 regulations previously issued
under section 1510 of TRA ’97, satisfies
the requirements of section 104(d)(1) of
E-SIGN, including the requirement that
any exemption from the consumer consent
requirements not increase the material risk
of harm to consumers.
This exemption is based on the judgment that, if the consumer consent method
were the only method available to satisfy
the requirements for providing an applicable notice through the use of an electronic medium, it would impose a substantial burden on electronic commerce with
respect to retirement plans, employee benefit arrangements, and individual retirement plans, and that the requirements and
safeguards in the 2000 regulations provide a less burdensome method without increasing the material risk of harm to recipients.
Under the alternative method, at the
time the applicable notice is provided, the
recipient must be advised that he or she
may request and receive the applicable notice in writing on paper at no charge. In
addition, any recipient of the notice must
be “effectively able” to access the electronic medium used to provide the notice. This is a change in wording from
the 2000 regulations, which required that
the electronic medium be “reasonably accessible” to the recipient. As explained
in the preamble to the 2005 proposed regulations, this change is not intended to
reflect a substantive change in the rules,
but rather to avoid confusion with Department of Labor Regulations interpreting the
words reasonably accessible as used in
section 101(i)(2)(D) of ERISA, as added
by section 306 of the Sarbanes-Oxley Act
of 2002, Public Law 107–204 (116 Stat.
745).9
One commentator requested that the
regulations provide a rule under which
an e-mail sent to the last known e-mail
address would be deemed to have been
successfully delivered. These regulations
do not include such a rule.

7

See also 12 CFR 202.16, 205.17, 213.6, and 2226.36, treating electronic disclosures in connection with certain credit transactions as consumer information for purposes of E-SIGN.

8

See section 101(c)(6) of E-SIGN.

9

Section 101(i) of ERISA sets forth a requirement for a plan administrator to notify plan participants and beneficiaries of a blackout period with respect to an individual account plan. Section
101(i)(2)(D) provides that the required blackout notice “shall be in writing, except that such notice may be in electronic or other form to the extent that such form is reasonably accessible
to the recipient.” Section 2520.101–3(b)(3) of the Labor Regulations interpreting this requirement provides for this notice to be in writing and furnished in any manner consistent with the
requirements of section 2520.104b–1 of the Labor Regulations, including the provisions in that section relating to the use of electronic media. Those regulations also deem a notice requirement
to be satisfied if certain measures are taken. Section 1.401(a)–21 of these final regulations only provides rules for satisfying, through the use of electronic media, a requirement that a notice
or election be in writing.

2006–48 I.R.B.

984

November 27, 2006

III. Use of an Electronic Medium to Make
a Participant Election.
A. In General.
These regulations also set forth the requirements that apply if a consent or election is made by a person using an electronic system. The participant election
rules, which are also based on the standards in the 2000 regulations, generally retain the requirements that (1) the participant be effectively able to access the electronic medium in order to make the participant election, (2) the electronic system
be reasonably designed to preclude any
person other than the appropriate individual from making a participant election, (3)
the electronic system provide the participant making a participant election with a
reasonable opportunity to review, confirm,
modify, or rescind the terms of the election
before it becomes effective, and (4) the
individual making a participant election,
within a reasonable time period, receive
a confirmation of the election through either a written paper document or an electronic medium under a system that satisfies
the applicable notice requirements of either the consumer consent delivery method
or the alternative delivery method. Section
101(c) of E-SIGN does not apply to participant elections.
These regulations require that a participant be effectively able to access the electronic medium under an electronic system
used to make a participant election, but,
like the 2000 regulations, do not require
that a plan also permit the election to be
made by paper as an alternative to using
an electronic system that is available to the
participant. However, these regulations do
not apply with respect to a participant who
is not effectively able to access the electronic medium or media in order to make a
participant election. Accordingly, the plan
must offer each such participant the right to
make an election in another medium that is
accessible to the participant (such as a paper election). A plan that fails to offer paper or an electronic medium that a participant is effectively able to access will fail
to comply with the participant election requirements and would likely violate other
qualification requirements, such as the requirements that a plan to operate in accordance with its terms (by actually making available all distribution options provided by the plan) and the requirements

November 27, 2006

of §1.401(a)(4)–4 under which benefits,
rights, and features (including the right to
early distribution) must be made available
in a nondiscriminatory manner.
B. Use of Electronic Media for QJSA
Notices and Elections.
The participant election rules in these
regulations extend the use of electronic
media to the notice and election rules applicable to plans that are subject to the
QJSA requirements of section 417. Accordingly, a plan subject to the QJSA requirements is permitted to provide the notice required by section 417 to a participant through the use of electronic media as
long as the plan complies with either of the
two methods described above for providing electronic notices. Similarly, a participant’s consent to a distribution is permitted to be provided through the use of electronic media if the plan complies with the
standards described below, subject to obtaining a valid spousal consent.
Section 417 requires any spousal consent to a waiver of a QJSA to be witnessed by a plan representative or a notary public. In accordance with section
101(g) of E-SIGN, these regulations authorize the use of an electronic acknowledgment or notarization if the standards
of section 101(g) of E-SIGN and State
law applicable to notary publics are satisfied. These regulations retain the requirement from the 2005 proposed regulations that the signature of a spouse be
witnessed in the physical presence of the
plan representative or notary public. Several comments were received on the participant election rules, particularly as they
relate to spousal consents. The comments
generally fall into two categories: (1) commentators who favored retaining the penand-ink signature and physical presence
requirements for spousal consents; and (2)
commentators who favored extending the
use of electronic media to spousal consents, and eliminating the physical presence requirement.
Commentators in the first category
raised issues with rules in the 2005 proposed regulations relating to the authentication requirement and the requirement
that a spousal consent of a waiver of a
QJSA be witnessed in the physical presence of a notary public or a plan representative. In general, these commentators
recommended that the regulations be revised to provide additional safeguards for

985

spousal consents because, unlike other participant elections, a spousal consent could
involve a conflict of interest between the
parties involved in the election. With respect to the authentication requirement,
these commentators argued that the authentication requirement would be vague
and not require an evidentiary record. According to the commentators, requiring
a pen-and-ink signature and maintaining
the physical presence requirement would
provide necessary additional safeguards
for spousal consents by creating an evidentiary record for later disputes regarding
the validity of the consent and reducing
the likelihood of fraud.
Commentators who favored extending
the use of electronic media for all participant elections, including spousal consents,
generally recommended that the final regulations eliminate the physical presence
requirement for spousal consents. These
commentators argued that protections are
already available to protect a spouse making a participant election using electronic
media. For example, a retirement plan
could require a separate PIN for the spouse
to which the participant would not have access.
In light of these comments, these regulations clarify that the determination of
whether an electronic system used in making participant elections is reasonably designed to preclude any person other than
the appropriate individual from making a
participant election is based on facts and
circumstances, and that a relevant factor is
whether the participant election has the potential for a conflict of interest between the
individuals involved in the election. See
Example 3 in §1.401(a)–21(f) of these regulations for an illustration of the participant election rules when a spousal consent
is required. These regulations also clarify that if an applicable notice or participant election is recorded electronically, the
electronic record must be in a form that is
capable of being reproduced for later reference (see discussion of the general rules
under the heading Requirements for Using
Electronic Media to Provide Notices and
Make Elections).
The requirement that the signature of
a spouse to be witnessed in the physical
presence of a plan representative or notary
public coordinates with the authentication
requirement because the physical presence
requirement increases the likelihood that

2006–48 I.R.B.

the electronic system is reasonably designed to preclude any person other than
the appropriate individual from making
the election. In contrast, an electronic system that permits the use of a spousal PIN
to sign a spousal consent electronically
creates greater risk that the spousal consent may be fraudulently signed. Because
of the potential risk that two spouses could
share information regarding PINs, the
Treasury Department and IRS believe that
any electronic system that relies solely on
separate PINs would not provide the same
level of safeguards as provided by the
physical presence requirement and would
not be reasonably designed to preclude any
person other than the appropriate individual from making the election. Accordingly
these regulations do not adopt the suggestion that spousal PINs be permitted in
lieu of the physical presence requirement,
and instead retain from the 2005 proposed
regulations the physical presence requirement for electronic notarization of spousal
consents. The Treasury Department and
IRS believe that permitting electronic notarization of spousal consents under the
participant election rules, in conjunction
with the physical presence requirement,
reflects the appropriate interpretation of
section 417 and properly balances minimizing the burden of plan administration
with protecting the rights of spouses.
Technology is constantly evolving and,
at some point in the future, technology
could exist that would provide the same
safeguards as the physical presence requirement. Therefore, in light of the
comments received, these regulations add
a delegation to the Commissioner. Under
this delegation, the Commissioner may
provide that the use of procedures under
an electronic system with respect to an
electronic medium is deemed to satisfy
the physical presence requirement, but
only if those procedures with respect to
the electronic system provide the same
safeguards for participant elections as
provided through the physical presence
requirement.
C. Conforming Amendments to Other
Rules in Law.
These regulations modify a number of
existing regulations (including the 2000
regulations) that have previously provided
rules relating to the use of new technologies in providing applicable notices
or making participant elections that are

2006–48 I.R.B.

required to be in writing or in written
form. These modifications, which merely
add the consumer consent requirements
of E-SIGN, are not expected to affect
adversely the existing administrative practices of plan sponsors designed to comply
with the 2000 regulations.
In addition, these regulations apply to
categories of applicable notices that were
not previously addressed in the 2000 regulations or subsequent regulations. As
such, these regulations apply whenever
there is a requirement that an applicable
notice under one of the covered sections
be provided in written form or in writing, without regard to whether that other
requirement specifically cross-references
these regulations. Thus, safe harbor notices under sections 401(k)(12)(D) and
401(m)(11), which are required to be in
writing, can be provided electronically if
the requirements of section 1.401(a)–21
of this chapter are satisfied.
Effective Date
The rules provided in §1.401(a)–21 apply to applicable notices provided, and to
participant elections made, on or after January 1, 2007. However, a retirement plan,
an employee benefit arrangement, or an individual retirement plan that provides an
applicable notice or makes a participant
election that complies with the requirements set forth in these regulations on or
after October 1, 2000, and before January
1, 2007, will not be treated as failing to
provide an applicable notice or to make a
participant election merely because the notice or election was not in writing or written form.

dia. Accordingly, a Regulatory Flexibility
Analysis is not required. Pursuant to section 7805(f) of the Code, the NPRM preceding this regulation was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of these regulations is Pamela R. Kinard of the Office of
Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), Internal Revenue Service. However,
personnel from other offices of the Internal
Revenue Service and Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 35, and
54 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.401(a)–21 also issued under
26 U.S.C. 401 and section 104 of the Electronic Signatures in Global and National
Commerce Act, Public Law 106–229 (114
Stat. 464). * * *
Par. 2. Section 1.72(p)–1, Q&A–3, is
amended by revising the text of paragraph
(b) to read as follows:
§1.72(p)–1 Loans treated as distributions.

Special Analyses
It has been determined that this Treasury Decision is not a significant regulatory action as defined in Executive Order
12866. Therefore a regulatory assessment
is not required. It has also been determined
that the provisions of 5 U.S.C. 553(b) and
(d) do not apply to this Treasury Decision.
It is hereby certified that the collection of
information in these regulations will not
have a significant impact on a substantial
number of small entities. This certification
is based on the fact that these regulations
only provide guidance on how to satisfy
existing collection of information requirements through the use of electronic me-

986

*****
A–3. * * *
(b) * * * A loan does not satisfy the
requirements of this paragraph unless the
loan is evidenced by a legally enforceable
agreement (which may include more than
one document) and the terms of the agreement demonstrate compliance with the requirements of section 72(p)(2) and this
section. Thus, the agreement must specify the amount and date of the loan and the
repayment schedule. The agreement does
not have to be signed if the agreement is
enforceable under applicable law without
being signed. The agreement must be set
forth either—

November 27, 2006

(1) In a written paper document; or
(2) In a document that is delivered
through an electronic medium under an
electronic system that satisfies the requirements of §1.401(a)–21 of this chapter.
*****
Par. 3. Section 1.132–9(b), Q&A–12,
is amended by adding a sentence to the
end of the text in paragraph (b) to read as
follows:
§1.132–9 Qualified transportation fringes.
*****
A–12. * * *
(b) * * * See §1.401(a)–21 of this chapter for rules permitting the use of electronic
media to make participant elections with
respect to employee benefit arrangements.
*****
Par. 4. Section 1.401(a)–21 is added to
read as follows:
§1.401(a)–21 Rules relating to the
use of an electronic medium to provide
applicable notices and to make participant
elections.
(a) Introduction—(1) In general—(i)
Permission to use an electronic medium.
This section provides rules relating to the
use of an electronic medium to provide
applicable notices and to make participant elections as defined in paragraph
(e)(1) and (6) of this section with respect
to retirement plans, employee benefit arrangements, and individual retirement
plans described in paragraph (a)(2) of this
section. The rules in this section reflect
the provisions of the Electronic Signatures
in Global and National Commerce Act,
Public Law 106–229 (114 Stat. 464 (2000)
(E-SIGN)).
(ii) Notices and elections required to
be in writing or in written form—(A) In
general. The rules of this section must
be satisfied in order to use an electronic
medium to provide an applicable notice or
to make a participant election if the notice
or election is required to be in writing or
in written form under the Internal Revenue
Code, Department of Treasury regulations,
or other guidance issued by the Commissioner.
(B) Rules relating to applicable notices.
An applicable notice that is provided using an electronic medium is treated as being provided in writing or in written form if

November 27, 2006

and only if the requirements of paragraph
(a)(5) of this section are satisfied and either the consumer consent requirements of
paragraph (b) of this section or the requirements for exemption from the consumer
consent requirements under paragraph (c)
of this section are satisfied. For example,
in order to provide a section 402(f) notice
electronically, a qualified plan must satisfy
either the consumer consent requirements
of paragraph (b) of this section or the requirements for exemption under paragraph
(c) of this section. If a plan fails to satisfy
either of these requirements, the plan must
provide the section 402(f) notice using a
written paper document in order to satisfy
the requirements of section 402(f).
(C) Rules relating to participant elections. A participant election that is made
using an electronic medium is treated as
being provided in writing or in written
form if and only if the requirements of
paragraphs (a)(5) and (d) of this section are
satisfied.
(iii) Safe harbor method for applicable
notices and participant elections that are
not required to be in writing or written
form. For an applicable notice or a participant election that is not required to be
in writing or in written form, the rules of
this section provide a safe harbor method
for using an electronic medium to provide
the applicable notice or to make the participant election.
(2) Application of rules—(i) Notices,
elections, or consents under retirement
plans. The rules of this section apply to
any applicable notice or any participant
election relating to the following retirement plans: a qualified retirement plan
under section 401(a) or 403(a); a section
403(b) plan; a simplified employee pension (SEP) under section 408(k); a simple
retirement plan under section 408(p); or an
eligible governmental plan under section
457(b).
(ii) Notices, elections, or consents under other employee benefit arrangements.
The rules of this section also apply to any
applicable notice or any participant election relating to the following employee
benefit arrangements: an accident and
health plan or arrangement under sections
104(a)(3) and 105; a cafeteria plan under section 125; an educational assistance
program under section 127; a qualified
transportation fringe program under section 132; an Archer MSA under section

987

220; or a health savings account under
section 223.
(iii) Notices, elections, or consents under individual retirement plans. The rules
of this section also apply to any applicable
notice or any participant election relating
to individual retirement plans, including a
Roth IRA under section 408A; or a deemed
IRA under a qualified employer plan described in section 408(q).
(3) Limitation on application of
rules—(i) In general. The rules of this
section do not apply to any notice, election, consent, disclosure, or obligation
required under the provisions of title I
or IV of the Employee Retirement Income Security Act of 1974, as amended
(ERISA), over which the Department of
Labor or the Pension Benefit Guaranty
Corporation has interpretative and enforcement authority. For example, the
rules in 29 CFR 2520.104b–1 of the Department of Labor Regulations apply with
respect to an employee benefit plan providing disclosure documents, such as a
summary plan description or a summary
annual report. The rules in this section
also do not apply to Internal Revenue
Code section 411(a)(3)(B) (relating to
suspension of benefits), Internal Revenue
Code section 4980B(f)(6) (relating to an
individual’s COBRA rights), or any other
Internal Revenue Code provision over
which Department of Labor or the Pension
Benefit Guaranty Corporation has similar
interpretative authority.
(ii) Recordkeeping and other requirements. The rules in this section only apply with respect to applicable notices and
participant elections relating to an individual’s rights under a retirement plan, an employee benefit arrangement, or an individual retirement plan. Thus, the rules in this
section do not alter the otherwise applicable requirements under the Internal Revenue Code, such as the requirements relating to tax reporting, tax records, or substantiation of expenses. See section 6001
for rules relating to the maintenance of
records, statements, and special returns.
See also section 101(e) of E-SIGN, which
provides that if an electronic record of an
applicable notice or a participant election
is not maintained in a form that is capable of being retained and accurately reproduced for later reference, then the legal
effect, validity, or enforceability of such
electronic record may be denied.

2006–48 I.R.B.

(4) General requirements related to
applicable notices and participant elections. The rules of this section supplement
the general requirements related to each
applicable notice and participant election.
Thus, in addition to satisfying the rules
for timing and content, the rules in this
section must be satisfied.
(5) Requirements related to the design
of an electronic system used to deliver applicable notices and to make participant
elections—(i) The electronic system must
take into account the content of a notice.
With respect to the content of an applicable
notice, the electronic system must be reasonably designed to provide the information in the notice to a recipient in a manner
that is no less understandable to the recipient than a written paper document.
(ii) Identification of the significance of
information in the notice. The electronic
system must be designed to alert the recipient, at the time an applicable notice is
provided, to the significance of the information in the notice (including identification of the subject matter of the notice), and
provide any instructions needed to access
the notice, in a manner that is readily understandable.
(b) Consumer consent requirements—(1) Requirements. With respect to
an applicable notice, the consumer consent requirements of this paragraph (b) are
satisfied if—
(i) The requirements in paragraphs
(b)(2) through (4) of this section are satisfied; and
(ii) In accordance with section
101(c)(6) of E-SIGN, the applicable notice is not provided through the use of oral
communication or a recording of an oral
communication.
(2) Consent—(i) In general. The recipient must affirmatively consent to the delivery of the applicable notice using an electronic medium. This consent must be either—
(A) Made electronically in a manner
that reasonably demonstrates that the recipient can access the applicable notice in
the electronic medium in the form that will
be used to provide the notice; or
(B) Made using a written paper document (or using another form not described
in paragraph (b)(2)(i)(A) of this section),
but only if the recipient confirms the consent electronically in a manner that reasonably demonstrates that the recipient can ac-

2006–48 I.R.B.

cess the applicable notice in the electronic
medium in the form that will be used to
provide the notice.
(ii) Withdrawal of consumer consent.
The consent to receive electronic delivery
requirement of this paragraph (b)(2) is not
satisfied if the recipient withdraws his or
her consent before the applicable notice is
delivered.
(3) Required disclosure statement. The
recipient, prior to consenting under paragraph (b)(2)(i) of this section, must be provided with a clear and conspicuous statement containing the disclosures described
in paragraphs (b)(3)(i) through (v) of this
section:
(i) Right to receive paper document—(A) In general. The statement
informs the recipient of any right to have
the applicable notice be provided using a
written paper document or other nonelectronic form.
(B) Post-consent request for paper
copy. The statement informs the recipient
how, after having provided consent to receive the applicable notice electronically,
the recipient may, upon request, obtain a
paper copy of the applicable notice and
whether any fee will be charged for such
copy.
(ii) Right to withdraw consumer consent. The statement informs the recipient
of the right to withdraw consent to receive
electronic delivery of an applicable notice
on a prospective basis at any time and explains the procedures for withdrawing that
consent and any conditions, consequences,
or fees in the event of the withdrawal.
(iii) Scope of the consumer consent.
The statement informs the recipient
whether the consent to receive electronic
delivery of an applicable notice applies
only to the particular transaction that gave
rise to the applicable notice or to other
identified transactions that may be provided or made available during the course
of the parties’ relationship. For example,
the statement may provide that a recipient’s consent to receive electronic delivery
will apply to all future applicable notices
of the recipient relating to the employee
benefit arrangement until the recipient is
no longer a participant in the employee
benefit arrangement (or withdraws the
consent).
(iv) Description of the contact procedures. The statement describes the proce-

988

dures to update information needed to contact the recipient electronically.
(v) Hardware or software requirements.
The statement describes the hardware and
software requirements needed to access
and retain the applicable notice.
(4) Post-consent change in hardware or
software requirements. If, after a recipient provides consent to receive electronic
delivery, there is a change in the hardware
or software requirements needed to access
or retain the applicable notice and such
change creates a material risk that the recipient will not be able to access or retain the applicable notice in electronic format—
(i) The recipient must receive a statement of—
(A) The revised hardware or software
requirements for access to and retention of
the applicable notice; and
(B) The right to withdraw consent to receive electronic delivery without the imposition of any fees for the withdrawal and
without the imposition of any condition or
consequence that was not previously disclosed in paragraph (b)(3) of this section;
and
(ii) The recipient must reaffirm consent to receive electronic delivery in accordance with the requirements of paragraph
(b)(2) of this section.
(c) Exemption from consumer consent
requirements—(1) In general. This paragraph (c) is satisfied if the conditions in
paragraphs (c)(2) and (3) of this section are
satisfied. This paragraph (c) constitutes an
exemption from the consumer consent requirements of section 101(c) of E-SIGN
pursuant to the authority granted in section
104(d)(1) of E-SIGN.
(2) Effective ability to access. For purposes of this paragraph (c), the electronic
medium used to provide an applicable notice must be a medium that the recipient
has the effective ability to access.
(3) Free paper copy of applicable notice. At the time the applicable notice is
provided, the recipient must be advised
that he or she may request and receive the
applicable notice in writing on paper at no
charge, and, upon request, that applicable
notice must be provided to the recipient at
no charge.
(d) Special rules for participant elections—(1) In general. This paragraph (d)
is satisfied if the conditions described in

November 27, 2006

the following paragraphs (d)(2) through
(6) are satisfied:
(2) Effective ability to access. The electronic medium under an electronic system
used to make a participant election must
be a medium that the person who is eligible to make the election is effectively able
to access. If the appropriate individual
is not effectively able to access the electronic medium for making the participant
election, the participant election will not
be treated as made available to that individual. Thus, for example, the participant
election will not be treated as made available to that individual for purposes of the
rules under section 401(a)(4).
(3) Authentication. The electronic system used in making participant elections is
reasonably designed to preclude any person other than the appropriate individual
from making the election. Whether this
condition is satisfied is based on facts and
circumstances, including whether the participant election has the potential for a conflict of interest between the individuals involved in the election. See Examples 3, 4,
and 5 of paragraph (f) of this section for
illustrations of electronic systems that satisfy the authentication requirement of this
paragraph (d)(3).
(4) Opportunity to review. The electronic system used in making participant
elections provides the person making the
participant election with a reasonable opportunity to review, confirm, modify, or rescind the terms of the election before the
election becomes effective.
(5) Confirmation of action. The person
making the participant election receives,
within a reasonable time, a confirmation of
the effect of the election under the terms
of the plan or arrangement through either
a written paper document or an electronic
medium under a system that satisfies the
requirements of either paragraph (b) or (c)
of this section (as if the confirmation were
an applicable notice).
(6) Participant elections, including
spousal consents, that are required to be
witnessed by a plan representative or a
notary public—(i) In general. In the case
of a participant election which is required
to be witnessed by a plan representative or
a notary public (such as a spousal consent
under section 417), the signature of the
individual making the participant election
is witnessed in the physical presence of a
plan representative or a notary public.

November 27, 2006

(ii) Electronic notarization permitted.
If the requirements of paragraph (d)(6)(i)
of this section are satisfied, an electronic
notarization acknowledging a signature (in
accordance with section 101(g) of E-SIGN
and state law applicable to notary publics)
will not be denied legal effect if the signature of the individual is witnessed in the
physical presence of a notary public.
(iii) Delegation to Commissioner. In
guidance published in the Internal Revenue Bulletin, the Commissioner may
provide that the use of procedures under
an electronic system is deemed to satisfy
the physical presence requirement under
paragraph (d)(6)(i) of this section, but
only if those procedures with respect to
the electronic system provide the same
safeguards for participant elections as are
provided through the physical presence
requirement. See §601.601(d)(2)(ii)(b) of
this chapter.
(e) Definitions. The definitions in this
paragraph (e) apply for purposes of this
section.
(1) Applicable notice. The term applicable notice includes any notice, report,
statement, or other document required to
be provided to a recipient under a retirement plan, employee benefit arrangement,
or individual retirement plan as described
in paragraph (a)(2) of this section.
(2) Electronic. The term electronic
means technology having electrical, digital, magnetic, wireless, optical, electromagnetic, voice-recording systems, or
similar capabilities.
(3) Electronic medium. The term electronic medium means an electronic method
of communication (e.g., website, electronic mail, telephonic system, magnetic
disk, and CD-ROM).
(4) Electronic record. The term electronic record means an applicable notice or
a participant election that is created, generated, sent, communicated, received, or
stored by electronic media.
(5) Electronic system. The term electronic system means a system designed for
creating, generating, sending, receiving,
storing, retrieving, displaying, or processing information that makes use of any electronic medium.
(6) Participant election. The term participant election includes any consent,
election, request, agreement, or similar
communication made by or from a participant, beneficiary, alternate payee, or

989

an individual entitled to benefits under
a retirement plan, employee benefit arrangement, or individual retirement plan
as described in paragraph (a)(2) of this
section.
(7) Recipient. The term recipient means
a plan participant, beneficiary, employee,
alternate payee, or any other person to
whom an applicable notice is to be provided.
(f) Examples. The following examples
illustrate the rules of this section. Examples 1, 2, 3, and 6 assume that the requirements of paragraph (a)(4) and (5) of this
section are satisfied.
Example 1. (i) Facts involving using the consumer consent requirements to deliver a section
402(f) notice via e-mail. Plan A, a qualified plan,
permits participants to request benefit distributions
from the plan on Plan A’s Internet website. Under
Plan A’s system for such transactions, a participant
must enter his or her account number, personal identification number (PIN), and his or her e-mail address
to which the notice is to be sent. The participant’s
PIN and account number must match the information
in Plan A’s records in order for the transaction to proceed. Participant H requests a distribution from Plan
A on Plan A’s website, and, at the time of the request
for distribution, a disclosure statement appears on the
computer screen that explains that Participant H can
consent to receive the section 402(f) notice electronically. The disclosure statement provides information
relating to the consent, including how to receive a
paper copy of the notice, how to withdraw consent,
the hardware and software requirements, and the
procedures for accessing the section 402(f) notice,
which is in a file format from a specific spreadsheet
program. After reviewing the disclosure statement,
which satisfies the requirements of paragraph (b)(3)
of this section, Participant H consents to receive
the section 402(f) notice via e-mail by selecting the
consent button at the end of the disclosure statement.
As a part of the consent procedure, an e-mail is sent
to Participant H’s e-mail address in order to demonstrate that Participant H can access the spreadsheet
program. In the e-mail, Participant H is prompted
to answer a question from the spreadsheet program,
which is in an attachment to the e-mail. Once Participant H correctly answers the question, the section
402(f) notice is then delivered to Participant H via
e-mail.
(ii) Conclusion. In this Example 1, Plan A’s delivery of the section 402(f) notice to Participant H satisfies the requirements of paragraph (b) of this section.
Example 2. (i) Facts—(A) Facts involving using
the alternative method to deliver a section 411(a)(11)
notice via e-mail. Plan B, a qualified plan, permits
participants to request benefit distributions from the
plan on Plan B’s Internet website. Under Plan B’s
system for such transactions, a participant must enter
his or her account number and personal identification
number (PIN), and his or her e-mail address to which
the notice is to be sent. The participant’s PIN and account number must match the information in Plan B’s
records in order for the transaction to proceed. After
Participant K, a single employee, requests a distribu-

2006–48 I.R.B.

tion from Plan B on Plan B’s Internet website, the
plan administrator provides Participant K with a section 411(a)(11) notice in an attachment to an e-mail.
Plan B sends the e-mail with a request for a computer generated notification that the message was received and opened. The e-mail instructs Participant
K to read the attachment for important information
regarding the request for a distribution. In addition,
the e-mail also states that Participant K may request
the section 411(a)(11) notice on a written paper document and that, if Participant K requests the notice on
a written paper document, it will be provided at no
charge. Plan B receives notification indicating that
the e-mail was received and opened by Participant K.
(B) Facts involving making a participant’s consent to a distribution. In order to consent to a distribution, Plan B requires a participant to enter the participant’s account number and PIN in order to preclude
any person other than the participant from making
the election. After the authentication process, Participant K completes a distribution request form on the
website. After completing the request form, the website provides a summary of the information entered
on the form and gives Participant K an opportunity
to review or modify the distribution request form before the transaction is completed. Within a reasonable period of time after Participant K consents to the
distribution, the plan administrator, by e-mail, sends
confirmation of the terms (including the form) of the
distribution to Participant K and advises Participant
K that, upon request, the confirmation may be provided to Participant K on a written paper document
at no charge. Plan B retains an electronic copy of the
consent to the distribution in a form that is capable
of being retained and accurately reproduced for later
reference by Participant K.
(ii) Conclusion. In this Example 2, Plan B’s delivery of the section 411(a)(11) notice and the electronic
system used to make Participant K’s consent to a distribution satisfy the requirements of paragraphs (a),
(c), and (d) of this section.
Example 3. (i) Facts involving the transmission
of a spousal consent via electronic notarization. Plan
C, a qualified money purchase pension plan, permits a
married participant to request a plan loan through the
Plan C’s Internet website with the notarized consent
of the spouse. Under Plan C’s system for requesting a plan loan, a participant must enter his or her account number, personal identification number (PIN),
and his or her e-mail address. The information entered by the participant must match the information
in Plan C’s records in order for the transaction to proceed. Participant M, a married participant, is effectively able to access the website available to apply for
a plan loan. In order to apply for a loan, Plan C requires a participant to enter the participant’s account
number and PIN in order to preclude any person other
than the participant from making the election. Participant M completes the loan application on Plan C’s
website. Within a reasonable period of time after submitting the plan loan application, the plan administrator, by e-mail, sends Participant M the loan application, including all attachments setting forth the terms
of the loan agreement and all other required information. In the e-mail, Plan C also notifies Participant M
that, upon request, the loan application may be provided to Participant M on a written paper document at
no charge. Plan C then instructs Participant M that, in
order for the loan application to proceed, Participant

2006–48 I.R.B.

M must submit to the plan administrator a notarized
spousal consent form. Participant M and M’s spouse
go to a notary public and the notary witnesses Participant M’s spouse signing the spousal consent for the
loan agreement on an electronic signature capture pad
with adequate security. After witnessing M’s spouse
signing the spousal consent, the notary public sends
an e-mail with an electronic acknowledgement that is
attached to or logically associated with the signature
of M’s spouse to the plan administrator. The electronic acknowledgement is in accordance with section 101(g) of E-SIGN and the relevant state law applicable to notary publics. After the plan receives the
e-mail, Plan C sends an e-mail to Participant M, giving M a reasonable period to review and confirm the
completed loan application and to determine whether
the loan application should be modified or rescinded.
In addition, the e-mail to Participant M also provides
that M may request the completed loan application
on a written paper document and that, if M requests
the written paper document, it will be provided at no
charge. Plan C retains an electronic copy of the loan
agreement, including the spousal consent, in a form
that is capable of being retained and accurately reproduced for later reference by all parties.
(ii) Conclusion. In this Example 3, the transmission of the plan loan agreement satisfies the requirements of paragraphs (a), (c), and (d) of this section.
By requiring that the spouse sign the spousal consent
on an electronic signature capture pad in the physical
presence of a notary public, the electronic system satisfies the requirement that the system be reasonably
designed to preclude any person other than the appropriate individual from making the election. Thus, the
electronic notarization of spousal consent satisfies the
requirements of paragraphs (a) and (d) of this section.
Example 4. (i) Facts—(A) Facts involving using the alternative method of compliance to deliver a
section 411(a)(11) notice via an automated telephone
system. A qualified profit-sharing plan (Plan D) permits participants to request distributions through an
automated telephone system. Under Plan D’s system
for such transactions, a participant must enter his or
her account number and personal identification number (PIN); this information must match the information in Plan D’s records in order for the transaction to
proceed. Plan D provides only the following distribution options: single-sum payment; and annual installments over 5, 10, or 20 years. Participant N, a
single participant, requests a distribution from Plan
D by following the applicable instructions on the automated telephone system. After Participant N has
requested the distribution, the automated telephone
system recites the section 411(a)(11) notice over the
phone. The automated telephone system also advises
Participant N that, upon request, the notice may be
provided on a written paper document and that, if Participant N so requests, the notice will be provided on
a written paper document at no charge.
(B) Facts involving making a participant’s consent to a distribution via an automated telephone system. In order to consent to a distribution, Plan D requires a participant to enter the participant’s account
number and PIN in order to preclude any person other
than the participant from making the election. Participant N requests a distribution by entering information on the automated telephone system. After completing the request, the automated telephone system
provides a oral summary of the information entered

990

and gives Participant N an opportunity to review or
modify the distribution request before the transaction
is completed. Plan D’s automated telephone system
confirms the distribution request to Participant N and
advises Participant N that, upon request, a confirmation may be provided on a written paper document at
no charge. Plan D retains an electronic copy of the
consent to the distribution in a form that is capable
of being retained and accurately reproduced for later
reference by Participant N.
(ii) Conclusion. In this Example 4, because Plan
D has relatively few and simple distribution options, the provision of the section 411(a)(11) notice
through the automated telephone system is no less
understandable to the participant than a written paper
notice for purposes of paragraph (a)(5)(i) of this
section. In addition, the automated telephone procedures of Plan D satisfy the applicable requirements
of paragraphs (a), (c), and (d) of this section.
Example 5. (i) Facts. Same facts as Example 4
of this paragraph (f), except that, pursuant to Plan
D’s system for processing such transactions, a participant who so requests is transferred to a customer service representative whose conversation with the participant is recorded. The customer service representative provides the section 411(a)(11) notice from a
prepared text and processes the participant’s distribution in accordance with the predetermined instructions from the plan administrator.
(ii) Conclusion. As in Example 4 of this paragraph (f), because Plan D has relatively few and simple distribution options, the provision of the section
411(a)(11) notice through the automated telephone
system is no less understandable to the participant
than a written paper notice for purposes of paragraph
(a)(4) of this section. Further, in this Example 5, the
customer service telephone procedures of Plan D satisfy the requirements of paragraphs (a), (c), and (d)
of this section.
Example 6. (i) Facts. Plan E, a qualified plan,
permits participants to request distributions by e-mail
on the employer’s e-mail system. Under this system,
a participant must enter his or her account number,
personal identification number (PIN), and e-mail address. This information must match that in Plan E’s
records in order for the transaction to proceed. If a
participant requests a distribution by e-mail, the plan
administrator provides the participant with a section
411(a)(11) notice by e-mail. The plan administrator
also advises the participant by e-mail that he or she
may request the section 411(a)(11) notice on a written
paper document and that, if the participant requests
the notice on a written paper document, it will be provided at no charge. Participant Q requests a distribution and receives the section 411(a)(11) notice from
the plan administrator by reply e-mail. However, before Participant Q elects a distribution, Q terminates
employment. Following termination of employment,
Participant Q no longer has access to the employer’s
e-mail system.
(ii) Conclusion. In this Example 6, Plan E does
not satisfy the participant election requirements under
paragraph (d) of this section because Participant Q is
not effectively able to access the electronic medium
used to make the participant election. Plan E must
provide Participant Q with the opportunity to make
the participant election through a written paper document or another system that Participant Q is effectively able to access, such as the automated telephone

November 27, 2006

systems described in Example 4 and Example 5 of this
paragraph (f).

(g) Effective date. The rules provided in this section apply to applicable
notices provided, and to participant elections made, on or after January 1, 2007.
However, a retirement plan, an employee
benefit arrangement, or an individual retirement plan that provides an applicable
notice or makes a participant election that
complies with the requirements set forth
in these regulations on or after October 1,
2000, and before January 1, 2007, will not
be treated as failing to provide an applicable notice or to make a participant election
merely because the notice or election was
not in writing or written form.
Par. 5. Section 1.401(k)–3 is amended
by adding a sentence to the end of the text
of paragraph (d)(1) to read as follows:
§1.401(k)–3 Safe harbor requirements.
*****
(d) * * *
(1) * * * See §1.401(a)–21 of this chapter for rules permitting the use of electronic
media to provide applicable notices to recipients with respect to retirement plans.
*****
Par. 6. Section 1.402(f)–1 is amended
by:
(1) Revising A–5.
(2) Removing Q&A–6.
The revision reads as follows:
§1.402(f)–1 Required explanation of
eligible rollover distributions; questions
and answers.

(f) * * *
(1) * * * The notice of a participant’s
rights described in paragraph (c)(2) of
this section or the summary of that notice
described in paragraph (c)(2)(iii)(B)(2)
of this section must be provided on a
written paper document. However, see
§1.401(a)–21 of this chapter for rules
permitting the use of electronic media to
provide applicable notices to recipients
with respect to retirement plans.
(2) * * * The consent described in paragraphs (c)(2) and (3) of this section must
be given on a written paper document.
However, see §1.401(a)–21 of this chapter
for rules permitting the use of electronic
media to make participant elections with
respect to retirement plans.
Par. 8. Section 1.417(a)(3)–1 is
amended by adding a sentence to the
end of the text of paragraph (a)(3) to read
as follows:
§1.417(a)(3)–1 Required explanation of
qualified joint and survivor annuity and
qualified preretirement survivor annuity.
(a) * * *
(3) * * * But see §1.401(a)–21 of this
chapter for rules permitting the use of electronic media to provide applicable notices
to recipients with respect to retirement
plans.
*****
Par. 9. Section 1.7476–2 is amended
by revising paragraph (c)(2) to read as follows:
§1.7476–2 Notice to interested parties.

*****
A–5. Yes. See §1.401(a)–21 of this
chapter for rules permitting the use of
electronic media to provide applicable
notices to recipients with respect to retirement plans.
Par. 7. Section 1.411(a)–11 is amended
by:
(1) Revising the text of paragraphs
(f)(1) and (2).
(2) Removing paragraph (g).
The revisions read as follows.
§1.411(a)–11 Restriction and valuation
of distributions.
*****

November 27, 2006

*****
(c) * * *
(2) If the notice to interested parties
is delivered using an electronic medium
under an electronic system that satisfies
the applicable notice requirements of
§1.401(a)–21 of this chapter, the notice is
deemed to be provided in a manner that
satisfies the requirements of paragraph
(c)(1) of this section.
*****
PART 35—EMPLOYMENT TAX AND
COLLECTION OF INCOME TAX AT
SOURCE REGULATIONS UNDER

991

THE TAX EQUITY AND FISCAL
RESPONSIBILITY ACT OF 1982
Par. 10. The authority citation for part
35 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 11. Section 35.3405–1 is amended
by:
(1) Revising d–35, A.
(2) Removing d–36, Q&A.
The revision reads as follows:
§35.3405–1 Questions and answers
relating to withholding on pensions,
annuities, and certain other deferred
income.
*****
d–35. * * *
A. A payor may provide the notice
required under section 3405 (including
the abbreviated notice described in d–27
of §35.3405–1T and the annual notice
described in d–31 of §35.3405–1T) to a
payee on a written paper document. However, see §1.401(a)–21 of this chapter
for rules permitting the use of electronic
media to provide applicable notices to
recipients with respect to retirement plans
and individual retirement plans.
PART 54—PENSION EXCISE TAXES
Par. 12. The authority citation for part
54 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par.
13.
Section 54.4980F–1,
Q&A–13, is amended as follows:
(1) Revising paragraph A–13 (c)(1)(ii)
and (iii).
(2) Revising the introductory text to
paragraph A–13 (c)(2).
(3) Removing paragraph A–13 (c)(3).
The revisions read as follows:
§54.4980F–1 Notice requirements
for certain pension plan amendments
significantly reducing the rate of future
benefit accrual.
*****
A–13. * * *
(c) * * *
(1) * * *
(ii) The section 204(h) notice is delivered using an electronic medium (other
than an oral communication or a recording

2006–48 I.R.B.

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

(Filed by the Office of the Federal Register on October 19,
2006, 8:45 a.m., and published in the issue of the Federal
Register on October 20, 2006, 71 F.R. 61877)

Section 408A.—Roth IRAs
The Service provides inflation adjustments to
the applicable dollar amounts used to calculate the
amount by which a taxpayer must reduce the maximum amount allowed as contributions to Roth IRAs
for taxable years beginning the 2007. See Rev. Proc.
2006-53, page 996.

Section 472.—Last-in,
First-out Inventories

*****
26 CFR 1.472–1: Last-in, first-out inventories.

Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved October 10, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary
of the Treasury (Tax Policy).

LIFO; price indexes; department
stores. The September 2006 Bureau of
Labor Statistics price indexes are accepted
for use by department stores employing
the retail inventory and last-in, first-out
inventory methods for valuing inventories
for tax years ended on, or with reference
to, September 30, 2006.

Rev. Rul. 2006–59
The following Department Store Inventory Price Indexes for September
2006 were issued by the Bureau of Labor Statistics. The indexes are accepted
by the Internal Revenue Service, under
§ 1.472–1(k) of the Income Tax Regulations and Rev. Proc. 86–46, 1986–2 C.B.
739, for appropriate application to inventories of department stores employing the
retail inventory and last-in, first-out inventory methods for tax years ended on,
or with reference to, September 30, 2006.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of departments, (b) three special combinations of
the major groups — soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, except for the following: candy, food, liquor,
tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)

Groups
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.

Sep 2005

Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Women’s Underwear. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . .
Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . . . . .
Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jewelry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Housewares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Major Appliances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Radio and Television. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automotive Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2006–48 I.R.B.

992

497.3
514.7
700.4
890.9
569.6
541.1
338.6
572.2
364.0
532.9
561.0
393.1
882.6
807.4
996.4
596.0
606.7
703.4
204.4
38.6
77.4
136.4
116.3

Sep 2006
455.4
493.1
691.1
888.7
570.3
549.5
347.1
521.2
377.0
526.6
572.0
403.0
906.4
818.5
1008.3
598.4
610.8
693.9
204.6
35.1
76.2
140.9
121.6

Percent Change
from Sep 2005
to Sep 20061
-8.4
-4.2
-1.3
-0.2
0.1
1.6
2.5
-8.9
3.6
-1.2
2.0
2.5
2.7
1.4
1.2
0.4
0.7
-1.4
0.1
-9.1
-1.6
3.3
4.6

November 27, 2006