Notice 2021-40: IRS further extends temporary relief from spousal consent “physical presence” requirement

On June 25, 2020, IRS issued Notice 2021-40, extending Covid-related temporary relief from the requirement that a spousal consent to a plan distribution be witnessed in the “physical presence” of a notary or plan representative.

In what follows, we briefly review the Notice, what the temporary rules are, and the possibility that they might be made permanent.

Background

Under applicable IRS regulations, participants may make elections electronically if certain conditions are met. Generally, those conditions are that (1) the individual has effective access to the relevant electronic system, (2) the system is designed to prevent a person other than the appropriate individual from making the election, (3) the system provides opportunity to review, confirm, modify, or rescind the election before it’s effective, and (4) the electing individual receives confirmation within a reasonable time.

Where a participant election, such as a spousal consent to a plan distribution or loan, must be witnessed by a plan representative or a notary public, “the signature of the individual making the participant election must be witnessed in the physical presence of a plan representative or a notary public.” (Emphasis added.)

In 2020, as a result of social distancing guidelines introduced in response to the Covid crisis, IRS published Notice 2020-42, providing temporary relief from the physical presence requirement, for 2020, both for “remote electronic notarizations” and for consents witnessed by plan representatives.

That relief was extended to June 30, 2021, by Notice 2021-3 and is now further extended, to June 30, 2022, by Notice 2021-40. (Referred to collectively hereafter as “the Notices.”)

Terms of relief

Remote electronic notarization: The Notices provide that, in the case of a remote electronic notarization, the physical presence requirement can be satisfied if it is “executed via live audio-video technology that otherwise satisfies the requirements of participant elections under [applicable regulations] and is consistent with state law requirements that apply to the notary public.”

Witnessed by a plan representative: In the case of an election witnessed by a plan representative, the physical presence requirement can be satisfied if the plan uses an electronic system using live audio-video technology and:

The signing individual presents a valid photo ID during the live audio-video conference. 

The live audio-video conference allows for direct interaction between the individual and the plan representative.

The individual transmits by fax or electronically “a legible copy of the signed document directly to the plan representative on the same date it was signed.” 

The plan representative acknowledges witnessing the signature and sends the signed document/acknowledgement back to the individual in accordance with applicable IRS electronic communications regulations.

These rules will be especially useful in states that do not permit remote notarization.

Will the temporary rules be made permanent?

IRS has received comments from “stakeholders” asking that this temporary relief be made permanent and in this Notice is requesting general comments on that issue. After reviewing those comments, IRS will determine whether to issue a proposed regulation for comment adopting the temporary “electronic presence” rule as permanent or to announce that it after the temporary relief plans must return to the rules under the current regulation, requiring actual physical presence.

Issues IRS intends to consider include:

How the temporary relief has affected costs/burdens both for participants/spouses and for plan sponsors) and whether savings from the temporary relief justifies making it permanent.

Whether the temporary removal of the physical presence requirement has resulted in “fraud, spousal coercion, or other abuse,” and how making the relief permanent my increase those risks.

How witnessing is proceeding “as the COVID-19 pandemic abates,” e.g., is there a return to in-person notarization? 

What safeguards might be added to an electronic presence rule.

Whether the procedures for “electronic” witness-by-plan representative should be different from the procedures for “electronic” witness-by-notary.

***

We will continue to follow this issue.