The Internal Revenue Code (the Code) and the Employee Retirement Income Security Act (ERISA) set forth numerous disclosure, notice and election requirements for employee benefit plans. These communications can involve thousands of pages per year, per participant, and be very expensive if they must be printed on paper and mailed. Few participants really want all that paper. So what is an employer to do in normal times, and now that we are in a pandemic?
Pre-COVID-19 Guidance Regarding Electronic Media
In 2002, the Department of Labor (DOL) finalized rules (DOL Regulation Section 2520.104b-1(c)) setting forth a safe harbor regarding electronic disclosures related to ERISA requirements.
In 2006, the Internal Revenue Service (IRS) finalized rules (Treasury Regulation Section 1.401(a)-21) for electronic communication regarding the use of an electronic medium to provide applicable notices and to make participant elections under the Code (IRS E-Disclosure Standards).
Other rules specific to certain requirements have also been issued. Notably, the DOL issued Field Assistance Bulletin (FAB) 2006-03 regarding periodic pension benefit statements, FAB 2008-003 (Q&A 7) regarding qualified default investment alternatives, and Technical Release (TR) 2011-03R regarding electronic disclosures under DOL Regulation Section 2550.404a-5. Spoiler alert: These three will be superseded in 18 months, as discussed below.
It can be confusing to comply with different sets of rules, and there are some hurdles, such as the requirement to notify participants that they can elect to receive paper disclosures. But this guidance effectively allows employers whose employees all use the company’s computer system as a regular part of their duties to communicate electronically. By the way, if you are distributing materials electronically and are not familiar with those hurdles, we urge you to consult with your ERISA legal counsel.
The existing rules also provide some guidance for communicating electronically with beneficiaries, and with participants who do not use the company’s computer system as a regular part of their duties. Essentially, the plan administrator can provide paper invitations to opt into electronic communication by providing consent and an email address for communications. This is still a bit challenging because, for example, consenting to electronic communication from a retirement plan recordkeeper does not mean consenting to electronic communication about health and welfare plan benefits. Obtaining global consents might be easier with new employees in the onboarding process than obtaining them from existing employees.
IRS Notice 2020-42: COVID-19 Temporary Guidance Regarding Electronic Elections
One example of a special rule is set forth in Treasury Regulation Section 1.401(a)-21(d)(6), which applies to plans that are subject to the Code Section 417 qualified joint and survivor rules. This rule applies to participant elections required to be witnessed by a plan representative or a notary public, including a required spousal consent. Specifically, the rules require the participant or spouse to be in the physical presence of the plan representative or notary public. Meanwhile, states have begun to allow remote electronic notary services. In response to the COVID-19 pandemic, and the Coronavirus Aid, Relief, and Economic Security Act provisions allowing participants greater access to retirement plan distributions and loans, the IRS issued Notice 2020-42. Importantly, this notice provides temporary relief, so do not make any global changes to your procedures. It provides relief from the physical presence requirement only from January 1, 2020 through December 31, 2020. We are hopeful that this temporary guidance will pave the way for permanent adaptation to new technologies.
For an election witnessed by a notary public, Notice 2020-42 provides that the physical presence requirement is deemed satisfied for an electronic system that uses remote notarization if the election is executed via live audio-video technology that otherwise satisfies the requirements for participant elections under Section 1.401(a)-21(d)(6) and is consistent with state law requirements applicable to the notary public.
For an election witnessed by a plan representative, Notice 2020-42 provides that the physical presence requirement is deemed satisfied for an electronic system that uses live audio-video technology if the following requirements are met:
- The individual signing the election presents a valid photo ID to the plan representative during the live audio-video conference. The individual is not permitted to merely transmit a copy of the photo ID prior to or after the witnessing.
- The live audio-video conference allows for direct interaction between the individual and the plan representative. A pre-recorded video of the individual signing the document is not sufficient.
- The individual transmits by fax or electronic means a legible copy of the signed document directly to the plan representative on the same date it was signed.
- After receiving the signed document, the plan representative acknowledges that the signature was witnessed by the plan representative in accordance with the requirements of Notice 2020-42 and transmits the signed document, including the acknowledgment, back to the individual. The transmission must be by an electronic medium the individual is effectively able to access and must notify the individual of the right to request a free paper copy, in compliance with Section 1.401(a)-21(c).
EBSA Disaster Relief Notice 2020-01
The DOL Employee Benefits Security Administration (EBSA) provided temporary relief related to ERISA notice and disclosure requirements in EBSA Disaster Relief Notice 2020-01:
An employee benefit plan and the responsible plan fiduciary will not be in violation of ERISA for a failure to timely furnish a notice, disclosure, or document that must be furnished between March 1, 2020, and 60 days after the announced end of the COVID-19 National Emergency, if the plan and responsible fiduciary act in good faith and furnish the notice, disclosure, or document as soon as administratively practicable under the circumstances. Good faith acts include use of electronic alternative means of communicating with plan participants and beneficiaries who the plan fiduciary reasonably believes have effective access to electronic means of communication, including email, text messages, and continuous access websites.
We discussed Notice 2020-01 in more detail here.
DOL Safe Harbor for Electronic Media for Retirement Plans
The DOL just recently finalized a regulation (DOL Regulation Section 2520.104b-31) regarding an alternative voluntary safe harbor for disclosure though electronic media. The safe harbor provides for delivery via email or via website posting – a new “notice and access” type of delivery. The safe harbor applies only to retirement plans, and only to disclosures and notices required under ERISA, although the DOL is reportedly exploring whether to extend the safe harbor to welfare plans and is working with the Treasury and the IRS to coordinate the disclosure standards.
The safe harbor can be used to deliver any document or information that must be furnished to retirement plan participants or beneficiaries under Title I of ERISA (but not any that must be furnished only on request). These “covered documents” include summary plan descriptions (SPDs), summaries of material modification, summary annual reports, annual funding notices, plan-related and investment-related disclosures under ERISA Section 404(a), qualified default investment alternative (QDIA) notices, pension benefit statements, blackout notices, and claim determination notices.
The safe harbor can be applied to any participant, beneficiary or other individual who is entitled to a covered document and either:
- is assigned an electronic address by the employer for employment purposes (e.g., email, smartphone), or
- provides an electronic address at which the individual can receive email delivery of the covered document or receive a notice that a covered document is available for access on a website established by the ERISA plan administrator.
These individuals are referred to as “covered individuals.” The notice is referred to as a notice of internet availability (NOIA).
NOIA and Website Requirements
The NOIA is given when the disclosure is made available on the website. It must be separate from other documents or disclosures and needs to be specifically titled and include specific “alert” language: “Important information about your retirement plan is now available. Please review this information.” The NOIA also must identify the disclosure, provide a brief description of the covered document (but only if not apparent from the identity of the disclosure – e.g., quarterly benefit statements would typically require no description), provide a hyperlink or website address for the document, give notice of the right to request a free paper copy, give notice of the right to opt out of electronic delivery, caution that the document may not be available on the website for longer than one year and provide a phone number to contact a designated representative of the plan.
The system for delivering NOIAs must be designed to provide alerts of invalid or inoperable electronic addresses. Any such “bounce backs” are treated as if the individual elected to opt out of electronic delivery.
The disclosure document itself should be presented in a manner “calculated to be understood by the average plan participant.” The document should be in a widely available format suitable for being both read online and printed clearly on paper, and should be searchable electronically. The document needs to be placed on the website by the date it is required to be furnished under ERISA and must be maintained on the website until it is superseded (and in any event for at least one year).
Annual Combined NOIA
A single NOIA (combined NOIA) that is given only once per year (no more than 14 years apart) for each plan year for can address the availability of multiple documents. These include:
- The SPD, and
- any Title I disclosure that must be furnished annually, rather than on the occurrence of a particular event, and which does not require action by the covered individual by a particular deadline, which:
- Includes annual funding notices, plan-related and investment-related disclosures under ERISA Section 404(a), QDIA notices, and annual pension benefit statements.
- Does not include a quarterly benefit statement for self-directed individual account plans.
The combined NOIA allows for the established practice of making certain routine annual disclosures and the SPD available on the website.
Alternative Delivery by Email
As an alternative to the “notice and access” method, the safe harbor allows for direct delivery of the covered document by email to the covered individual. The email needs to contain the same information as would have been provided in the NOIA, and the system needs to be designed with the same features as the notice and access method (e.g., notification of invalid email addresses and opt-out alternatives). The covered document may be in the body of the email or an attachment to the email and must comply with the same content requirements as under the notice and access method.
Initial Paper Notice
To utilize the safe harbor, an initial paper notice must be provided to the covered individuals advising them of the electronic address that will be used to deliver specified covered documents, of the right to opt out, of the right to request a free paper copy, and that the covered documents may be on the website for only one year.
Effective Date and Transition
This new safe harbor is effective July 27, 2020, although the preamble provides that it may be relied upon earlier. To ease transition, plan administrators are permitted to rely on electronic addresses in the plan’s possession as of the effective date, provided the administrator acts reasonably, in good faith, and otherwise complies with the requirements of the safe harbor. This includes providing the initial paper notice and implementing system requirements that alert the administrator to an invalid or inoperable address.
2002 Safe Harbor Remains Effective
The DOL 2002 safe harbor for electronic delivery of ERISA Title I documents for retirement, health and welfare plans remains effective. Either safe harbor can be used and, as the Preambles (to both safe harbors) point out, a safe harbor method is not the exclusive method for compliance, although it provides some certainty.
The 2020 safe harbor, unlike the 2002 safe harbor, allows for systematic use of website posting for certain routine disclosures. The 2020 safe harbor requires an initial paper notice emphasizing importance, and applies only to retirement plans. The 2002 safe harbor does not require an initial notice to participants who access the employer’s electronic system as a part of their employment duties, but does require initial notice to other participants and beneficiaries, which notice can be electronic or on paper, and requires notice of importance with each disclosure.
Sub-Regulatory Guidance Superseded
With the 2020 safe harbor, certain DOL sub-regulatory guidance will be superseded effective 18 months after the July 27, 2020 effective date. During the 18-month phase-out period, plan administrators may continue to rely on the sub-regulatory guidance and the DOL will take no enforcement action for such reliance. The following TR and FABs will be superseded in 18 months:
- FAB 2006-03, which allows benefit statements to be provided using the IRS E‑Disclosure Standards or by continuous access through a secure website. ERISA Section 105 requires benefit statements to be provided at least quarterly for participant-directed individual account plans, annually for non-directed individual account plans, and every three years for defined benefit plans. After the 18-month phase-out period, use of IRS E-Disclosure Standards or continuous access as described in this FAB will no longer be viewed by the DOL as good faith compliance with the disclosure requirements.
- FAB 2008-03 (Q&A-7), which allows QDIA notices to be furnished electronically under the IRS E-Disclosure Standards. For plan fiduciaries who want protection under ERISA Section 404(c), QDIA notices are required annually and are sometimes accompanied by IRS notices for qualified automatic contribution arrangements under Code Section 401(k)(13) and eligible automatic contribution arrangements under Code Section 414(w). After the 18-month phase-out period, plan administrators may no longer rely on electronic delivery under the IRS E-Disclosure Standards as satisfying the ERISA disclosure requirements for QDIA notices.
- TR 2011-03R, which allows certain information required to be disclosed for participant-directed individual account plans under ERISA Section 404(a) to be provided using the IRS E-Disclosure Standards, by continuous access through a secure website, or otherwise through electronic media consistent with the TR. ERISA Section 404(a) requires, among other things, annual disclosure of plan information, administrative expenses, individual expenses, and investment information. After the 18-month phase-out period, plan administrators may no longer rely on electronic delivery under the IRS E‑Disclosure Standards, continuous access, or electronic media as described in this TR as satisfying the ERISA disclosure requirements for this information.
Actions for Plan Administrators
While employers have been given a bit of a break during the pandemic, as we move ahead, we encourage plan administrators to review their practices for distributing employee benefit plan disclosures and notices and for obtaining elections, and to continue to monitor the evolving guidance. There are various significant potential penalties associated with failure to satisfy these compliance requirements. Opportunities to use technology to reduce administrative expenses exist, but plan administrators need to be certain that they have established practices and procedures that comply with applicable Code and ERISA requirements. For example, if the plan administrator emails documents, is that being done intentionally in accordance with the existing safe harbors?
With respect to retirement plans, disclosures being made under the soon-to-be superseded FABs and TR need to be brought under the 2002 or 2020 safe harbor by roughly the end of 2021 if safe harbor electronic disclosure is sought. Would it be practical and beneficial to couple all Title I annual disclosures under a single NOIA under the 2020 safe harbor and routinely post these documents on the website? Is the plan already complying with the 2002 safe harbor such that bringing these disclosures within that safe harbor would make more sense? How much more burdensome is it to provide a notice with each disclosure if the plan is already providing notice via email? How important is it to provide ERISA disclosures for the employer’s pension and welfare benefit plans under the same safe harbor?
Deciding Whether to Adopt the DOL 2020 Safe Harbor for Retirement Plans
The 2020 safe harbor for retirement plans contains some new requirements, and employers that have already figured out how to communicate electronically may want to stay the course rather than adopt the new safe harbor. But for employers that are struggling with electronic communication, particularly as so many employees are now working remotely due to the COVID-19 pandemic, this safe harbor might be something to consider.
This 2020 safe harbor does allow the employer to be a little more heavy-handed in encouraging employees to receive electronic communications regarding retirement plans. Specifically, the employer may request the employee to provide an electronic address as part of plan enrollment or may use an address provided on an employment application or other human resources document or, as in the past, may assign the employee an electronic address for employment-related purposes that includes but is not limited to delivery of covered documents. Cellphone numbers that accept text messages also can be used if certain requirements are met.
However, the devil is in the details, and there is even more detail in the regulation than we have summarized here. An employer that decides to use this safe harbor will need to develop model documents and careful procedures to ensure, for example, that someone does not decide to use a different subject line for an NOIA or email. Perhaps the biggest hurdle that distinguishes this safe harbor from existing guidance is the requirement that notices and the covered documents themselves be “written in a manner calculated to be understood by the average plan participant.” An understandability requirement already applies with respect to some of the substantive disclosures, but not to others. This provision seemingly would impose new substantive requirements, despite the Preamble acknowledgment that the standards for furnishing materials should not be stricter for electronic than for other methods of delivery. Why would a plan administrator be found to have failed to have delivered a document based on a subjective determination about the contents of the document?
This concept seems to trace back to the August 31, 2018 Executive Order on Strengthening Retirement Security in America that resulted in this safe harbor, directing the DOL to review actions that could make retirement plan disclosures “more understandable and useful for participants and beneficiaries, while also reducing the costs and burdens they impose on employers and other plan fiduciaries responsible for their production and distribution.” Understandability is a laudable goal, but benefit plans are complicated, disclosure requirements are extensive and this regulation did not simplify anything. Even DOL model disclosures require reading ability at a high grade level. Realistically, an employer whose employees have reading ability at low average grade level is not going to be able to satisfy both the disclosure requirement and the understandability requirement. Therefore, plan administrators who are considering applying this safe harbor will need to weigh the risks of doing so.