05 June 2020

IRS Temporarily Drops “Physical Presence” Requirement for Spousal Consents

On June 3, 2020, the IRS issued Notice 2020-42, which temporarily permits spousal consents to be witnessed remotely amid the COVID-19 pandemic.  This is welcome news for participants and plan sponsors.  The IRS’s current rule – which generally requires spousal consents to be witnessed in the “physical presence” of a notary or plan representative – quickly became a frustrating hurdle for participants during the “shelter-in-place” orders by state and local governments (see our previous client alert here).  Under Notice 2020-42, the IRS is temporarily dropping its “physical presence” requirement between January 1, 2020 and December 31, 2020.

Some background may be helpful.  When a participant in a defined benefit pension plan elects to take a distribution in a form that doesn’t provide a qualified survivor benefit to the spouse, such as a lump sum, the spouse must consent to the distribution.  Most defined contribution plans are structured to avoid this rule, but some plans require spousal consent for certain distributions and loans, for example if the plan was previously a money purchase pension plan.

By statute, the spousal consent must be “witnessed” by either a notary public or plan representative.  The statute does not require that the consent occur in the “physical presence” of anyone.  The IRS added this requirement in 2006 regulations dealing with electronic participant elections.  The IRS has never indicated what “physical presence” means, and it is not clear whether the requirement even applies to participant elections that are handled entirely on paper (rather than electronically).

Notice 2020-42 clarifies that, ordinarily, witnessing a spousal consent “remotely” does not comply with the electronic election rules.  However, between January 1, 2020 and December 31, 2020, the IRS will permit notaries and plan representatives to witness spousal consents remotely under the following conditions:

Spousal Consents Witnessed by a Notary Public

For spousal consents witnessed by a notary public, any live audio-video technology that is consistent with state remote notarization requirements may be used in lieu of the spouse’s “physical presence” before the notary.  The other requirements for electronic notarization continue to apply – including any notarization requirements under applicable state law and Section 101(g) of the federal E-SIGN law.  If notarization occurs in a state that does not permit remote notarization, the relief available under Notice 2020-42 does not apply; however, a plan representative could still witness the consent as described below.

Michigan law currently permits remote notarization.  In Executive Order 2020-41, Governor Whitmer relaxed some of the restrictions in Michigan’s existing remote notarization law.  For example, notaries may witness signatures remotely without necessarily using one of the State of Michigan’s approved software vendors.  This expanded availability of remote notarization in Michigan is currently set to expire on June 30, 2020, which may or may not be extended.

Plan sponsors who decide to permit remote notarization should confirm that the notary’s process complies with applicable state law.

Consents Witnessed by a Plan Representative

For consents witnessed by a plan representative, the parties may use live audio-video technology in lieu of “physical presence” if the following requirements are satisfied:

  1. The individual signing the election must present a valid photo ID to the plan representative during the live audio-video conference – transmitting a copy of the photo ID prior to or after the witnessing is not sufficient;
  2. The live audio-video conference must allow for direct interaction between the individual and the plan representative (for example, a pre-recorded video of the person signing is not sufficient);
  3. The individual must transmit by fax or electronic means a legible copy of the signed document directly to the plan representative on the same date it was signed; and
  4. After receiving the signed document, the plan representative must acknowledge that the signature has been witnessed by the plan representative consistent with the requirements of Notice 2020-42, and transmit the signed document, including the acknowledgement, back to the individual. If this acknowledgment is transmitted electronically, the individual must have the “effective ability” to access the electronic medium, and the plan representative must offer to provide a paper copy of the documents upon request.

As states begin to relax shelter-at-home restrictions, remote notarization becomes less important.  However, the relief provided under Notice 2020-42 is good news for administrators who may have allowed remote participant elections earlier in 2020, provided they complied with the requirements described above.

If you have any questions, please contact the authors or one of the Miller Johnson employee benefits attorneys.