Retirement Plan Relief: Participants and Spouses Can Execute Requests for Distributions Remotely
Authors:
Sydney M. Gillis
Patricia M. McGrath, Esq.
July 20, 2020
Introduction
On June 3, 2020, the Internal Revenue Service (“IRS”) issued Notice 2020-42. This notice provides temporary relief from the need for qualified retirement plans, such as 401(k) plans, to require in-person witnessing or notarization for qualifying participant elections and spousal consent to certain distributions and loans. The temporary relief is effective retroactive to January 1, 2020 and continuing through December 31, 2020. With the onset of the coronavirus (COVID-19) and the resulting social distancing, Notice 2020-42 relieves those looking to make distribution elections of the difficult task of doing so in person.
Background
Social distancing introduced as a result of COVID-19 has presented significant challenges, including satisfying physical presence standards for notarizing and witnessing document signatures. While the physical presence requirement means that the notary public or witness can ensure the signer’s identity, in the current climate, this requirement is not always possible to meet.
New Hampshire responded to this need for remote signings in March. On March 23, Governor Sununu signed Emergency Order #11 pursuant to Executive Order 2020-04 (“Emergency Order #11”). Emergency Order #11 allows for a safe and secure method of executing legal documents in the time of COVID-19 by enabling remote online notarization. Under the most recent extension of the State of Emergency, Emergency Order #11 is in force until August 7th. For more information on New Hampshire’s modified notary rules, see our e-alert by following this link. For those located outside of New Hampshire who are looking to utilize remote notarization, keep an eye on updates regarding your local remote notarization laws. For example, Massachusetts enacted a new statute to address this issue, which can be found here.
These state actions serve as the baseline for the new federal guidance under Notice 2020-42.
Notice 2020-42 & Participant or Spousal Consent
In terms of certain retirement plan elections, the IRS requires that the signature of an individual making the election be witnessed in the physical presence of the notary public or plan representative. Retirement plan elections may also require spousal consent which can be necessary for the participant to obtain distributions or loans. This spousal consent calls for the same physical-presence requirement. The retirement plan will indicate whether the spousal consent is required to be either notarized by a notary public or witnessed by a plan representative.
With Notice 2020-42, the physical presence of a notary or plan representative typically required for participant elections, including spousal consent, is temporarily waived so long as certain conditions are met. These conditions vary depending on whether the participant election or spousal consent is witnessed remotely by a notary public or by a plan representative.
For an election or consent witnessed by a notary public, the physical presence requirement is satisfied by the use of an electronic system, so long as the remote notarization takes place over live audio-video technology (such as Zoom or Skype), and otherwise satisfies the applicable conditions of participant elections and local notary law. Since the use of the electronic system must also comply with state law requirements applying to the notary, if an individual wishes to make an election under the temporary relief, their state must allow for remote notarization. NOTE: the New Hampshire remote notary guidance requires that the notary public record the remote event, and comply with certain details as to the content of the recording. Parties should confirm in advance that the technology permits recording.
Alternatively, where participant elections, including spousal consent, are witnessed by a plan representative, so that the notary public rules do not apply, Notice 2020-42 presents a different set of requirements. In this situation, the physical presence requirement is satisfied for electronic systems using live audio-video technology, so long as the electronic system also satisfies the following conditions:
1) Identification. The signing party presents a valid photo ID to the plan representative during the audio-video conference (not before or after);
2) Direct Interaction. The conference allows for direct interaction between the individual and the plan representative (meaning that the interaction must be live);
3) Direct Correspondence. The signing party must send a legible copy of the signed document, either electronically or by fax, directly to the plan representative on the same date it was signed; and
4) Acknowledgment. After receiving the signed document, the plan representative must acknowledge that the representative has witnessed the signature in accordance with the requirements of Notice 2020-42. The representative is then required to send the signed document (with the acknowledgement) back to the signing party
Requirements Regarding Use of an Electronic Medium
Along with the conditions of Notice 2020-42, the IRS requires that individuals taking part in elections witnessed by plan representatives meet certain baseline standards when using an electronic medium. These requirements are not new. They apply generally to any electronic process employed by qualified retirement plans, such as via email:
(1) Access. The individual must be effectively able to access the electronic medium used to make the participant election;
(2) Authentication. The electronic system must be reasonably designed to preclude any person other than the appropriate individual from making the participant election;
(3) Opportunity to Review. The electronic system must provide the individual making the participant election with a reasonable opportunity to review, confirm, modify, or rescind the terms of the election before it becomes effective; and
(4) Confirmation. The individual making the participant election, within a reasonable time, must receive confirmation of the election through either a written paper document or an electronic medium under a system that satisfies the applicable notice requirements.
Next Steps
Retirement plan sponsors and administrators will want to put a protocol in place to direct their participation in the remote online signature process. That way, the plan can ensure that the remote notarization or witnessing will comply with the guidance under Notice 2020-42.
Remember, in the wake of COVID-19, several states have already implemented legislation allowing for remote notarization, including New Hampshire. Notice 2020-42 allows plans to take advantage of those new rules. Alternatively, plans can choose to utilize the separate remote-witnessing option under this new guidance.
Email Updates: