TheE-Sign Act was designed to remove legal barriers to electronic commerce. Forexample, it is expected to encourage the online business-to-business purchaseand sale of goods and services. In addition, consumers will be able to goonline to buy insurance, get a mortgage, or open a brokerage account withoutwaiting for hard copy paperwork to be mailed back and forth.
TheAct does not expressly address employee benefit issues. Consequently, it is tooearly to fully understand its implications for employee benefit plans. Plansponsors and plan administrators might be able to develop new and moreefficient electronic notices, benefit and loan applications, verificationprocedures and record keeping.
However,further guidance will be required from the Departments of Labor (DOL) andHealth and Human Services (HHS) and the Internal Revenue Service (IRS). Thisbulletin discusses the E-Sign Act and the potential for change in benefitadministration.
Uponhearing about the new law, the question most commonly asked is "what is anelectronic signature?" According to the E-Sign Act, an "electronicsignature" is an "electronic sound, symbol, or process, attached toor logically associated with a contract or other record and executed or adoptedby a person with the intent to sign the record."
Practicallyspeaking, an electronic signature can be any electronic verification systemthat the parties agree to use. The act does not state what an electronicsignature looks like or what technology must be used to create the signature.
Variouselectronic signature formats are being developed today, ranging from scanningin a handwritten signature to computer recognition of a retinal scan. Anothertype of electronic signature is a "smart card" that is swiped on areader attached to a personal computer and used with a password. (The Presidentused such a card to sign the E-Sign Act, as well as a felt-tip pen.)
Oneelectronic signature system that may become widely used is a public keyinfrastructure or (PKI.). A PKI is a digital system that allows individuals to"sign" a document using a series of numbers or "keys." Theparty receiving the signature will be able to unlock the numbers or keys with a"public key" to verify the validity of the signature. There is nosingle PKI at this time, but a number of companies are developing PKI products.
Whilethe technology continues to evolve, some businesses are already using electronicsignatures. In addition, many government agencies have developed electronicfiling systems for which an electronic signature is required. For example, plansponsors that want to file their Form 5500 or 5500-EZ electronically may do so.In order to take advantage of electronic filing, the individual who will signthe filing must apply for an electronic signature by submitting a
Applicability and Limitations
TheE-Sign Act applies to transactions in or affecting interstate or foreigncommerce. Employee benefit plans are not specifically mentioned in the law. However, the law's broad languageappears to include many benefits-related transactions, and the Senate debate onthe act includes statements indicating that certain legislators intended theact to apply to employee benefit plans.
Inaddition, while the law specifically applies to the business of insurance, itstates that it does not apply to the cancellation or termination of healthinsurance, health benefits or life insurance benefits (excluding annuities).
TheE-Sign Act also does not apply to the creation and execution of wills,codicils, or testamentary trusts; adoption, divorce or other family lawmatters; or certain provisions of the Uniform Commercial Code (UCC). Finally,the law would not affect court-required notices, notices of utilitycancellations, notices of property foreclosures or evictions, consumer recall noticesor documents accompanying the transportation of hazardous material.
TheE-Sign Act provides the following:
- Signatures and contracts cannot be denied legal validity because theyare in electronic form.
- If consumers have a specific legal right to receive information inwriting, an electronic version of the information can only be provided undercertain circumstances. For example, if a consumer is guaranteed informationregarding mortgage fees, the lender may only send the information viaelectronic means if the following general criteria are satisfied:
- The consumer must consent to an electronic version.
- Before consenting, consumers must be provided with astatement informing them that they have the right to have the informationprovided on paper and they may withdraw their consent.
- The consumer must be provided with a statement of thehardware and software requirements for the electronic record.
- If the hardware and software requirements change, theconsumer must be informed of the revised requirements and allowed to withdrawconsent.
TheE-Sign Act also affects how electronic records and contracts are stored. If a contract or other record is required bylaw to be retained, an electronic record can be retained instead of a paperrecord. The electronic record must meet the following "record retention"requirements:
- Accurately reflect theinformation set forth in the contract or record,
- Remain accessible to allpersons entitled to access the information in a form that is capable ofbeing accurately reproduced.
Ifa law or regulation requires that original documents be provided, available orretained, an electronic record or contract may satisfy this requirement if itmeets the record retention requirements set forth above.
Similarly,if a law or regulation requires that a check be retained, that requirement issatisfied by retention of an electronic record of the information on the frontand back of the check in accordance with the record retention requirements.
Theaccessibility requirement will necessitate periodic upgrades of the electronicfile cabinets, as technology evolves.
TheE-Sign Act preempts state laws that might otherwise require hardcopy and manualsignatures (e.g., statutes of fraud).In addition, many states have passed laws that set requirements for what typeof electronic signatures must be given the same legal effect as theirpen-and-ink counterparts.
Ingeneral, the E-Sign Act preempts these state laws. Certain other state laws arenot preempted by the act, including: (1) laws that adopt standards forelectronic transactions set forth in proposed uniform state laws, and (2) lawsthat are consistent with the Act and are technologically neutral. Thepreemption provisions of the act are complicated and it is likely thatlitigation will arise concerning whether any particular state law is preemptedby the act.
Federalagencies will be responsible for issuing regulations as to how the E-Sign Actaffects matters within their jurisdiction. Those regulations generally must notadd to the requirements of the new law. Document filing standards andrequirements imposed currently by federal laws are generally not affected bythe law except that they may now be satisfied electronically.
Theelectronic signature provisions of the E-Sign Act will take effect on October1, 2000. The electronic record retention provisions will take effect on March1, 2001. There are no delayed effective dates for collectively bargained plans.
Itis unclear how employee benefit plans will be affected. Pending furtherclarification, issues that may arise under the E-Sign Act are discussed below,grouped according to whether there will be no change as a result of the act,change will be likely or further guidance is need.
- COBRA Notices and HIPAA Certificates of Creditable Coverage. The E-Sign Act does not permit noticeof cancellation or termination of health insurance or benefits via electronicmeans. Therefore, a plan sponsor could not use electronic notices to satisfyits obligations under the Consolidated Omnibus Budget Reconciliation Act(COBRA) or the Health Insurance Portability and Accountability Act (HIPAA) toprovide certain information to participants and their families upon terminationof coverage.
- Family Law Exception. TheAct does not apply to adoption, divorce, or other family law matters. However,it is not clear whether the exception for family law matters would extend toQualified Medical Child Support Orders (QMCSO) or Qualified Domestic RelationsOrders (QDRO). In the absence of further guidance or specific local rules thatpermit electronic court orders, plan sponsors should continue to requirehardcopy court documents verifying child support and divorce matters.
- Open Enrollment Materials and Benefit Applications. Plan sponsors may currently use eitherwritten or electronic systems to process health plan open enrollments. Althoughnot addressed in the act, plan sponsors may want to review with counsel whetherelectronic participant signatures may be used for pension benefit applicationsand payroll deduction authorizations for cafeteria plans.
Business-to-Business Transactions. Plan sponsors may want totake advantage of the E-Sign Act to improve the efficiency of theirbusiness-to-business transactions. Some plan sponsors may conduct businesstransactions with third party administrators, insurers, health maintenanceorganizations, and other service providers that may be conducted moreefficiently online.
As an example, agreements between plan sponsors and serviceproviders could be executed online and stored electronically, allowing easieraccess by the sponsor to the terms and conditions of the arrangement. Plansponsors may also face challenges with respect to protecting the security ofthis electronic business information.
Paperless Plan Administration. In 1998 and 1999, the Internal Revenue Service (IRS) issuedproposed regulations on the use of electronic technology in the administrationand communication of health and welfare and pension plans.
The IRS proposed to permit a plan to electronically provide:(1) notices of distribution options and the right, if any, to defer adistribution; (2) rollover notices; and (3) voluntary tax withholding notices.The IRS proposed regulations also would permit a plan to receive electronicallya participant's consent to a plan distribution.
However, any rejection of a qualified joint and survivorannuity or any election of an optional form of payment or beneficiarydesignation which requires consent of the participant's spouse could not be madethrough electronic media. The E-Sign Act may prompt a change in agency'sposition on this and such other matters as electronic administration ofparticipant loans from defined contribution plans.
In fact, in the preamble to guidance on participant loansfrom qualified plans, issued July 28, 2000, the IRS asked for comments on theimpact of the E-Sign Act on plan loan transactions by October 30, 2000.
In addition, the DOL proposed standards to be used to permitelectronic distribution of various communications material, including summaryplan descriptions (SPDs) and summaries of material modification (SMMs).
The IRS and DOL regulations did not prescribe an electronicmedium, but established criteria that the medium must meet in order to bereliable. The criteria are generally more detailed and restrictive than theprovisions of the E-Sign Act. The agencies will need to address the impact ofthe E-Sign Act when issuing final regulations.
Life and Disability Beneficiary Designations. The law does not apply to thecancellation or termination of health insurance or benefits or life insurancebenefits (excluding annuities). It is not clear whether this phrase means thatthe law does not apply to life insurance benefits at all or merely tocancellation or termination of life insurance benefits.
Additionally, state laws generally govern insured life anddisability plans. Whether state rules regarding such items as beneficiarydesignation form completion would be affected by the E-Sign Act is unclear. Plansponsors may want to contact their life or disability carrier and ask forinformation as to whether beneficiary designation forms may be completedelectronically or online.
ERISA Record Retention Requirements. ERISA mandates that records be maintained for a certain amount oftime to satisfy both reporting and disclosure purposes and to determine thepension benefits to which participants and beneficiaries are or may becomeentitled. The DOL issued proposed regulations in 1999 that would provide guidelinesfor using electronic media to satisfy these record-keeping requirements.
The proposal did not recommend a certain type of system ordesign, but established a framework within which plan administrators couldconstruct an electronic record keeping system.
The electronic recordretention requirements in the E-Sign Act are much less stringent than thoseproposed by the DOL. For example, the DOL required an adequate recordmanagement policy and reasonable controls to ensure the integrity, accuracy,authenticity and reliability of the records kept in electronic form.
The Act does not includethese types of requirements. In addition, the DOL would prohibit destruction of an original document that had legal significance(e.g., notarized documents, insurancecontracts, stock certificates and documents executed under seal). Plan sponsorsshould follow the DOL regulations until further guidance is issued.
HIPAA Administrative Simplification. The Administrative Simplification provisions of HIPAA requireHHS's Health Care Financing Administration (HCFA) to issue proposed uniformstandards for electronic processing of health and health insurance information.
Specifically, HCFA must issue transaction standards for Electronic Data Interchange (EDI), medicalcode sets, security systems, medical privacy, electronic signatures and uniqueidentifiers for employers, plans, health care providers and individuals. Whilesome of these regulations have been proposed, as of this writing none have beenfinalized. It is not clear whether these regulations will be affected by theE-Sign Act requirements.
In addition, HIPAA requires HCFA to issue standards forelectronic signatures if parties wish to use them. HCFA will have to address theimpact of the E-Sign Act when issuing final regulations on electronicsignatures.
Claim Forms. Healthand welfare plans generally require claim forms to be signed by a participant,either annually or with each claim submission. Health plans may also requireparticipant signatures on forms agreeing to subrogation of benefits. Use ofelectronic signatures may be able to simplify claim submission and subrogationprocedures. However, plan sponsor maywish to wait to adopt procedures for electronic signature until HCFA announcesits proposals for electronic claims processing and electronic signatures formedical claims.
Even though it is in its infancy, the E-Sign Act is likely to increasee-commerce and, consequently, increase demands on plan sponsors to becometechnologically sophisticated. Thereare few clear mandates from the act, but plan sponsors may be able to use theact to improve their internal business-to-business transactions.
Prior to publication of formal guidance, plan sponsors may want to beconservative about going forward with electronic transactions that do notcomply with DOL and IRS proposed rules already issued. To the extent thatcurrent federal regulations require that participant and beneficiary signaturesbe obtained in a certain manner, a safe approach would be for plan sponsors tocontinue to observe those rules.
SOURCE: Reprinted with permission fromThe Segal Company's August 2000 Bulletin.Copyright © 2000 by The Segal Company. All rights reserved. As with allmatters concerning the interpretation of law, plan sponsors should rely on theadvice of their attorneys when determining the possible impact on their plansof the Electronic Signatures in Global and National Commerce Act. The SegalCompany is prepared to take assignments to assist plan sponsors and theirattorneys in reviewing plan procedures in light of this new law.