Employee Benefits Administration Goes High Tech ' Almost

In 1977, the DOL promulgated general standards governing the delivery of all information required under Title I of ERISA. These standards require that plan administrators use “measures reasonably calculated to ensure actual receipt of the material” by the individual. In 2002, the DOL updated this provision by adding a safe harbor for the use of electronic media to satisfy the general disclosure requirements. This safe harbor, set forth at 29 C.F.R. ' 2520.140b-1(c), remains the standard today and generally applies to disclosures required by Parts 1 and 4 of Title I of ERISA, such as the summary plan description, a summary of material modifications, the summary annual report, blackout notices and qualified default investment alternative notices. The requirements that plans must meet in order to fulfill the safe harbor are:

• The plan administrator must take appropriate and necessary measures reasonably calculated to ensure that the system results in actual receipt of transmitted information and protects the confidentiality of personal information;
• The electronically delivered documents must be prepared and furnished in a manner consistent with the style, format and content requirements applicable to the particular document;
• Notice must be provided to each recipient, in electronic or non-electronic form, at the time a document is furnished electronically, that apprises the individual of the significance of the document and of the right to request and obtain a paper version of the document; and
• Upon request, the recipient must be furnished a paper version of the electronically delivered documents.

Significantly, this safe harbor only applies to two categories of recipients: those who have access to the electronic documents at work as part of their job, and those who consent to receive information electronically. The first category consists of recipients who can effectively access the electronic documents in a location where they are reasonably expected to perform their employee duties and whose access to the electronic documents is an integral part of those duties. The second category consists of recipients who have affirmatively consented to receive electronic information in a manner reasonably demonstrating the recipient's ability to access information in the electronic form used to provide the information, and who have provided an electronic address for receipt. Prior to consenting, the recipient must be provided, in electronic or non-electronic form, a clear and conspicuous statement indicating:

• The types of documents to which consent would apply;
• That consent can be withdrawn at any time free of charge;
• The procedures for withdrawing consent and for updating the recipient's address for receipt of electronic communications;
• The right to request and obtain a paper version of an electronically furnished document, and whether the paper version will be provided free of charge; and
• Any hardware and software requirements for accessing and retaining the documents.

Following consent, if a change in the hardware or software requirements creates a material risk that the individual will be unable to access or retain electronically furnished documents, the plan must provide the recipient with a statement of the revised requirements and the right to withdraw consent without charge.

Electronic Disclosure Under The Internal Revenue Code

In 2006, the IRS published regulations governing the use of electronic communications. These regulations generally apply to disclosures relating to qualified plans under the Internal Revenue Code and contain an electronic disclosure safe harbor that, while similar to its DOL counterpart, is also significantly broader. Under the IRS safe harbor there are two permissible electronic communication methods. The first is “consumer consent” ' a plan may use electronic communication after the recipient consents to electronic delivery. Consent must reasonably demonstrate the recipient's ability to access the information in electronic form. Prior to consenting, the recipient must receive a disclosure statement indicating substantially the same information as the “clear and conspicuous statement” required by the DOL.

The second method requires that the recipient have “the effective ability to access” the electronic medium used to provide the information. Additionally, the recipient must be advised that he or she may, free of charge, request and receive the information via paper copy. The IRS safe harbor, merely requiring electronic access anywhere, is much broader than that of the DOL, which requires access at work that is an integral part of the recipient's work duties. Significantly, the IRS regulations do not apply to any communication over which the DOL or the Pension Benefit Guaranty Corporation (PBGC) has interpretive authority under ERISA.

Recent Momentum for An Update to the DOL
Electronic Disclosure Safe Harbor

Several recent developments have created momentum for a broadening of the DOL electronic disclosure safe harbor, including three ERISA Advisory Council reports, a 2011 Presidential Executive Order, the majority of the comments in response to the recent DOL Request for Information on the subject, and the even more recent DOL Transitional Guidance on Electronic Delivery.

ERISA Advisory Council Reports

The ERISA Advisory Council (Council), established pursuant to ERISA, consists of 15 members appointed by the Secretary of Labor from a wide range of areas related to employee benefit plans. The Council advises the Secretary of Labor and makes recommendations regarding the Secretary's functions under ERISA. Three separate ERISA Advisory Council reports (in 2006, 2007, and 2009) considered the DOL electronic disclosure safe harbor, and each one recommended that the DOL relax its “integral part of the employee's duties” standard by adopting the IRS' broader “reasonable access” standard. The reports cited several reasons for this recommendation, including the growth of Web-based communication and its use by plan participants, as well as the many advantages of electronic disclosure such as cost efficiencies, improved plan recordkeeping, and simplification of plan administration and participant access. The 2009 report also concluded that the differing electronic disclosure regimes “have caused substantial confusion among plan administrators” that would be eliminated if the DOL were to adopt the IRS safe harbor.

Executive Order 13563 Improving Regulation and
Regulatory Review

In early 2011, President Obama issued Executive Order 13563 entitled “Improving Regulation and Regulatory Review,” which emphasized the importance of identifying and using the best, most innovative and least burdensome tools for achieving regulatory ends, and affirmed the role of the regulatory system in protecting the environment. Significantly, the Executive Order stated that “[s]ome sectors and industries face a significant number of regulatory requirements, some of which may be redundant, inconsistent, or overlapping,” and argued that
“[g]reater coordination across agencies could reduce these requirements, thus reducing costs and simplifying and harmonizing rules.” This characterization applies explicitly to the differing DOL and IRS electronic disclosure regimes for employee benefit plans.

DOL Request for Information (RFI) Regarding Electronic Disclosure By Employee Benefit Plans

Partially in response to Executive Order 13563, The Employee Benefits Security Administration (EBSA) released the Request for Information Regarding Electronic Disclosure by Employee Benefit Plans on April 7, 2011. The purpose of this RFI was to:

solicit views, suggestions and comments from plan participants and beneficiaries, employers and other plan sponsors, administrators, service providers, health insurance issuers, and members of the financial community, as well as the general public on whether, and possibly how, to expand or modify the Department's current electronic disclosure safe harbor.

The RFI noted that despite the potential cost and efficiency savings of electronic disclosure as compared to traditional paper communication, some of America's workers may either not have access to the Internet or may prefer the traditional paper method of communication. For these reasons, the RFI requested responses to a variety of questions related to the DOL electronic disclosure safe harbor.

EBSA received 77 comments in response to the RFI, primarily from individuals or entities associated with employers or plans, such as employers, plan administrators, law firms, and business organizations, rather than from plan participants and beneficiaries. The vast majority of the comments advocated an expansion to the current DOL electronic disclosure safe harbor, and proposed a variety of changes. Some recommended making electronic disclosure the default method of communication, with recipients who prefer to receive paper copies opting out of, rather than into, electronic disclosure. Other comments suggested a “read-receipt” method whereby if the recipient does not read the electronic communication in a certain amount of time the plan must send the communication via traditional paper delivery. By a significant margin, the most common proposal was that made by the ERISA Advisory Council ' for the DOL to adopt the “reasonable access” standard of the IRS because in addition to making the benefits of electronic disclosure more widespread, this change would alleviate confusion and streamline compliance with ERISA and the Internal Revenue Code by creating a single electronic disclosure standard.

A few comments opposed expanding the electronic disclosure safe harbor. The American Association of Retired People (AARP) suggested maintaining the current DOL safe harbor for general plan disclosures and adopting an even higher standard for documents of heightened importance. Most of the other comments against expansion came primarily from individuals who simply do not want to receive their plan communications electronically. In all likelihood, electronic disclosure will not be forced upon any individual, as there is general agreement that recipients of plan information should always retain the right to opt out of electronic disclosures and receive traditional paper communications.

DOL Transitional Guidance on Electronic Delivery

Most recently, on Sept. 13 of this year, the DOL issued Technical Release 2011-03, entitled “Interim Policy on Electronic Disclosure Under 29 CFR 2550.404a-5.” This guidance addressed fiduciary requirements for disclosure in participant directed individual account plans. The DOL stated that it is currently reviewing the E-Disclosure RFI comments to determine whether, and possibly how, it will modify the current electronic disclosure rules. The guidance also contained a temporary enforcement policy for disclosures under 29 CFR 2550.404a-5 which are applicable until the DOL issues further electronic disclosure guidance. Under this policy, the DOL will not take any enforcement action against a plan administrator who furnishes the relevant disclosures electronically, as long as the plan administrator meets the conditions in the Technical Release. These include the standard requirements that the plan administrator take appropriate and necessary measures to ensure that the electronic delivery system results in actual receipt of transmitted information and protects the confidentiality of personal information. Additionally, the recipient must voluntarily provide an e-mail address, and the administrator must provide to the recipient an Initial Notice, an Annual Notice, and in some cases a Transition Group Initial Notice.

Prediction for Future DOL Electronic Disclosure Regulation

In a recent interview, Assistant Secretary of Labor Phyllis Borzi noted the complexity of this issue, stating that “[i]n light of these competing interests, the Department plans to carefully review the public comments to the RFI before making any decisions” regarding changes to the DOL electronic disclosure regulations. Despite this hesitation, it is clear that there is currently significant momentum for an update to the DOL electronic disclosure regulations. Indeed, the recent transitional guidance is another indication that the DOL is moving in the direction of permitting plan administrators to meet their disclosure obligations under ERISA through electronic delivery.

In sum, it seems likely that the DOL will soon expand its electronic disclosure safe harbor, and the most probable change is for the DOL to adopt the IRS' broader “reasonable access” standard. If the DOL were to take this course of action, it would need to define “reasonable access” and provide guidance as to how plans should verify such access. In developing this information, the DOL could look to how the IRS currently administers its electronic disclosure safe harbor.

Regardless of the changes the DOL makes, it is unlikely that recipients will lose the individual right to receive their information via traditional paper delivery anytime soon. Nevertheless, it seems clear that expansion of electronic disclosure is imminent, so all involved with employee benefit plans, from plan administrators to plan sponsors to plan participants and beneficiaries, would be wise to keep a close watch on these issues going forward.

Neal Schelberg is a Partner in the Labor & Employment Law Department at Proskauer Rose LLP, and is a member of the Employee Benefits, Executive Compensation & ERISA Litigation Group, resident in the firm's New York office. Ted Tywang, a law student at Columbia Law School, was a Summer Associate at Proskauer.

Employee benefit plans have many reporting, disclosure, filing, record retention and participant interaction obligations under ERISA and the Internal Revenue Code, the scope and breadth of which have only increased in recent years. By most accounts, utilizing new technology for paperless plan administration dramatically reduces the costs and burdens of complying with these requirements and is more environmentally friendly than traditional hard copy administration. It is hardly surprising, then, that employee benefit plans' use of, and interest in, electronic media has exploded over the past decade. According to a 2009 survey conducted by the Profit Sharing/401k Council of America, over 90% of all plans surveyed offered balance inquiries and investment changes online. Further, more than three-quarters of the plans allowed for plan inquiries via the Internet, more than two-thirds gave participants the opportunity to make contribution changes online, and well over half offered online enrollments. And these numbers have likely increased since this survey.

There are numerous methods by which employee benefit plans can furnish information electronically to participants and beneficiaries. The most common method is through a continuous access website, often requiring secure login, to which plans post documents and information. For content generally available to the public, plans may use a public continuous access website or a variety of other methods, including plain text emails or attachments. Some plans utilize a private computer network known as an intranet to communicate with participants and beneficiaries. Despite the numerous advantages of these methods, plans are only able to utilize them to the extent permitted by the U.S. Department of Labor (DOL )and the Internal Revenue Service (IRS) regulations.

Electronic Disclosure Under ERISA

In 1977, the DOL promulgated general standards governing the delivery of all information required under Title I of ERISA. These standards require that plan administrators use “measures reasonably calculated to ensure actual receipt of the material” by the individual. In 2002, the DOL updated this provision by adding a safe harbor for the use of electronic media to satisfy the general disclosure requirements. This safe harbor, set forth at 29 C.F.R. ' 2520.140b-1(c), remains the standard today and generally applies to disclosures required by Parts 1 and 4 of Title I of ERISA, such as the summary plan description, a summary of material modifications, the summary annual report, blackout notices and qualified default investment alternative notices. The requirements that plans must meet in order to fulfill the safe harbor are:

• The plan administrator must take appropriate and necessary measures reasonably calculated to ensure that the system results in actual receipt of transmitted information and protects the confidentiality of personal information;
• The electronically delivered documents must be prepared and furnished in a manner consistent with the style, format and content requirements applicable to the particular document;
• Notice must be provided to each recipient, in electronic or non-electronic form, at the time a document is furnished electronically, that apprises the individual of the significance of the document and of the right to request and obtain a paper version of the document; and
• Upon request, the recipient must be furnished a paper version of the electronically delivered documents.

Significantly, this safe harbor only applies to two categories of recipients: those who have access to the electronic documents at work as part of their job, and those who consent to receive information electronically. The first category consists of recipients who can effectively access the electronic documents in a location where they are reasonably expected to perform their employee duties and whose access to the electronic documents is an integral part of those duties. The second category consists of recipients who have affirmatively consented to receive electronic information in a manner reasonably demonstrating the recipient's ability to access information in the electronic form used to provide the information, and who have provided an electronic address for receipt. Prior to consenting, the recipient must be provided, in electronic or non-electronic form, a clear and conspicuous statement indicating:

• The types of documents to which consent would apply;
• That consent can be withdrawn at any time free of charge;
• The procedures for withdrawing consent and for updating the recipient's address for receipt of electronic communications;
• The right to request and obtain a paper version of an electronically furnished document, and whether the paper version will be provided free of charge; and
• Any hardware and software requirements for accessing and retaining the documents.

Following consent, if a change in the hardware or software requirements creates a material risk that the individual will be unable to access or retain electronically furnished documents, the plan must provide the recipient with a statement of the revised requirements and the right to withdraw consent without charge.

Electronic Disclosure Under The Internal Revenue Code

In 2006, the IRS published regulations governing the use of electronic communications. These regulations generally apply to disclosures relating to qualified plans under the Internal Revenue Code and contain an electronic disclosure safe harbor that, while similar to its DOL counterpart, is also significantly broader. Under the IRS safe harbor there are two permissible electronic communication methods. The first is “consumer consent” ' a plan may use electronic communication after the recipient consents to electronic delivery. Consent must reasonably demonstrate the recipient's ability to access the information in electronic form. Prior to consenting, the recipient must receive a disclosure statement indicating substantially the same information as the “clear and conspicuous statement” required by the DOL.

The second method requires that the recipient have “the effective ability to access” the electronic medium used to provide the information. Additionally, the recipient must be advised that he or she may, free of charge, request and receive the information via paper copy. The IRS safe harbor, merely requiring electronic access anywhere, is much broader than that of the DOL, which requires access at work that is an integral part of the recipient's work duties. Significantly, the IRS regulations do not apply to any communication over which the DOL or the Pension Benefit Guaranty Corporation (PBGC) has interpretive authority under ERISA.

Recent Momentum for An Update to the DOL
Electronic Disclosure Safe Harbor

Several recent developments have created momentum for a broadening of the DOL electronic disclosure safe harbor, including three ERISA Advisory Council reports, a 2011 Presidential Executive Order, the majority of the comments in response to the recent DOL Request for Information on the subject, and the even more recent DOL Transitional Guidance on Electronic Delivery.

ERISA Advisory Council Reports

The ERISA Advisory Council (Council), established pursuant to ERISA, consists of 15 members appointed by the Secretary of Labor from a wide range of areas related to employee benefit plans. The Council advises the Secretary of Labor and makes recommendations regarding the Secretary's functions under ERISA. Three separate ERISA Advisory Council reports (in 2006, 2007, and 2009) considered the DOL electronic disclosure safe harbor, and each one recommended that the DOL relax its “integral part of the employee's duties” standard by adopting the IRS' broader “reasonable access” standard. The reports cited several reasons for this recommendation, including the growth of Web-based communication and its use by plan participants, as well as the many advantages of electronic disclosure such as cost efficiencies, improved plan recordkeeping, and simplification of plan administration and participant access. The 2009 report also concluded that the differing electronic disclosure regimes “have caused substantial confusion among plan administrators” that would be eliminated if the DOL were to adopt the IRS safe harbor.

Executive Order 13563 Improving Regulation and
Regulatory Review

In early 2011, President Obama issued Executive Order 13563 entitled “Improving Regulation and Regulatory Review,” which emphasized the importance of identifying and using the best, most innovative and least burdensome tools for achieving regulatory ends, and affirmed the role of the regulatory system in protecting the environment. Significantly, the Executive Order stated that “[s]ome sectors and industries face a significant number of regulatory requirements, some of which may be redundant, inconsistent, or overlapping,” and argued that
“[g]reater coordination across agencies could reduce these requirements, thus reducing costs and simplifying and harmonizing rules.” This characterization applies explicitly to the differing DOL and IRS electronic disclosure regimes for employee benefit plans.

DOL Request for Information (RFI) Regarding Electronic Disclosure By Employee Benefit Plans

Partially in response to Executive Order 13563, The Employee Benefits Security Administration (EBSA) released the Request for Information Regarding Electronic Disclosure by Employee Benefit Plans on April 7, 2011. The purpose of this RFI was to:

solicit views, suggestions and comments from plan participants and beneficiaries, employers and other plan sponsors, administrators, service providers, health insurance issuers, and members of the financial community, as well as the general public on whether, and possibly how, to expand or modify the Department's current electronic disclosure safe harbor.

The RFI noted that despite the potential cost and efficiency savings of electronic disclosure as compared to traditional paper communication, some of America's workers may either not have access to the Internet or may prefer the traditional paper method of communication. For these reasons, the RFI requested responses to a variety of questions related to the DOL electronic disclosure safe harbor.

EBSA received 77 comments in response to the RFI, primarily from individuals or entities associated with employers or plans, such as employers, plan administrators, law firms, and business organizations, rather than from plan participants and beneficiaries. The vast majority of the comments advocated an expansion to the current DOL electronic disclosure safe harbor, and proposed a variety of changes. Some recommended making electronic disclosure the default method of communication, with recipients who prefer to receive paper copies opting out of, rather than into, electronic disclosure. Other comments suggested a “read-receipt” method whereby if the recipient does not read the electronic communication in a certain amount of time the plan must send the communication via traditional paper delivery. By a significant margin, the most common proposal was that made by the ERISA Advisory Council ' for the DOL to adopt the “reasonable access” standard of the IRS because in addition to making the benefits of electronic disclosure more widespread, this change would alleviate confusion and streamline compliance with ERISA and the Internal Revenue Code by creating a single electronic disclosure standard.

A few comments opposed expanding the electronic disclosure safe harbor. The American Association of Retired People (AARP) suggested maintaining the current DOL safe harbor for general plan disclosures and adopting an even higher standard for documents of heightened importance. Most of the other comments against expansion came primarily from individuals who simply do not want to receive their plan communications electronically. In all likelihood, electronic disclosure will not be forced upon any individual, as there is general agreement that recipients of plan information should always retain the right to opt out of electronic disclosures and receive traditional paper communications.

DOL Transitional Guidance on Electronic Delivery

Most recently, on Sept. 13 of this year, the DOL issued Technical Release 2011-03, entitled “Interim Policy on Electronic Disclosure Under 29 CFR 2550.404a-5.” This guidance addressed fiduciary requirements for disclosure in participant directed individual account plans. The DOL stated that it is currently reviewing the E-Disclosure RFI comments to determine whether, and possibly how, it will modify the current electronic disclosure rules. The guidance also contained a temporary enforcement policy for disclosures under 29 CFR 2550.404a-5 which are applicable until the DOL issues further electronic disclosure guidance. Under this policy, the DOL will not take any enforcement action against a plan administrator who furnishes the relevant disclosures electronically, as long as the plan administrator meets the conditions in the Technical Release. These include the standard requirements that the plan administrator take appropriate and necessary measures to ensure that the electronic delivery system results in actual receipt of transmitted information and protects the confidentiality of personal information. Additionally, the recipient must voluntarily provide an e-mail address, and the administrator must provide to the recipient an Initial Notice, an Annual Notice, and in some cases a Transition Group Initial Notice.

Prediction for Future DOL Electronic Disclosure Regulation

In a recent interview, Assistant Secretary of Labor Phyllis Borzi noted the complexity of this issue, stating that “[i]n light of these competing interests, the Department plans to carefully review the public comments to the RFI before making any decisions” regarding changes to the DOL electronic disclosure regulations. Despite this hesitation, it is clear that there is currently significant momentum for an update to the DOL electronic disclosure regulations. Indeed, the recent transitional guidance is another indication that the DOL is moving in the direction of permitting plan administrators to meet their disclosure obligations under ERISA through electronic delivery.

In sum, it seems likely that the DOL will soon expand its electronic disclosure safe harbor, and the most probable change is for the DOL to adopt the IRS' broader “reasonable access” standard. If the DOL were to take this course of action, it would need to define “reasonable access” and provide guidance as to how plans should verify such access. In developing this information, the DOL could look to how the IRS currently administers its electronic disclosure safe harbor.

Regardless of the changes the DOL makes, it is unlikely that recipients will lose the individual right to receive their information via traditional paper delivery anytime soon. Nevertheless, it seems clear that expansion of electronic disclosure is imminent, so all involved with employee benefit plans, from plan administrators to plan sponsors to plan participants and beneficiaries, would be wise to keep a close watch on these issues going forward.

Neal Schelberg is a Partner in the Labor & Employment Law Department at Proskauer Rose LLP, and is a member of the Employee Benefits, Executive Compensation & ERISA Litigation Group, resident in the firm's New York office. Ted Tywang, a law student at Columbia Law School, was a Summer Associate at Proskauer.