IRS Notice 2021-40 Extends Temporary Relief from the Physical Presence Requirement for Spousal Consents Through June 2022 | Practical Law

IRS Notice 2021-40 Extends Temporary Relief from the Physical Presence Requirement for Spousal Consents Through June 2022 | Practical Law

In response to the COVID-19 pandemic, the Internal Revenue Service (IRS) has issued Notice 2021-40, which extends the temporary relief provided in Notice 2021-03 from the physical presence requirement for obtaining spousal consents under qualified retirement plans. From July 1, 2021, through June 30, 2022, retirement plan elections that must be witnessed by a notary or plan representative may be witnessed remotely using live audio-video technology, if certain requirements are met.

IRS Notice 2021-40 Extends Temporary Relief from the Physical Presence Requirement for Spousal Consents Through June 2022

by Practical Law Employee Benefits & Executive Compensation
Published on 29 Jun 2021 • USA (National/Federal)
In response to the COVID-19 pandemic, the Internal Revenue Service (IRS) has issued Notice 2021-40, which extends the temporary relief provided in Notice 2021-03 from the physical presence requirement for obtaining spousal consents under qualified retirement plans. From July 1, 2021, through June 30, 2022, retirement plan elections that must be witnessed by a notary or plan representative may be witnessed remotely using live audio-video technology, if certain requirements are met.
On June 24, 2021, due to the ongoing public health emergency caused by COVID-19, the IRS issued Notice 2021-40, which extends the temporary relief provided in Notice 2021-03 from the physical presence requirement under Treasury Regulation Section 1.401(a)-21(d)(6) for elections made by retirement plan participants that are required to be witnessed by a notary public or a plan representative (26 C.F.R. § 1.401(a)-21(d)(6); see Legal Update, IRS Notice 2021-03 Provides Temporary Relief From the Physical Presence Requirement for Spousal Consents Through June 2021). Under Notice 2021-40, from July 1, 2021, through June 30, 2022, participant elections that are required to be witnessed may be witnessed remotely by a notary public or plan representative using live audio-video technology, if certain requirements are met. The IRS invites public comments relating to making the changes to the physical presence requirement permanent.

Requirements for Participant Elections

Treasury Regulation Section 1.401(a)-21(d) provides several requirements for retirement plan participant elections, including accessibility, authentication, review, and confirmation requirements (26 C.F.R. § 1.401(a)-21(d)(2)-(5)).

Physical Presence Requirement

Certain participant elections are also required to be witnessed by a plan representative or a notary public. For example, Internal Revenue Code Section 417 requires spousal consent to a waiver of a qualified joint and survivor annuity (QJSA), and it also requires that the spousal consent be witnessed by a plan representative or a notary public (26 U.S.C. § 417; see Standard Document, Qualified Joint and Survivor Annuity (QJSA) Notice: Spouse's Right to Consent to the Waiver of the QJSA).
Normally, the signature of the individual making such an election must be witnessed in the physical presence of a plan representative or a notary public (26 C.F.R. § 1.401(a)-21(d)(6)(i)).
Furthermore, an electronic notarization may acknowledge a signature (in accordance with Section 101(g) of the Electronic Signatures in Global and National Commerce (E-SIGN) Act, Pub. L. 106-229 (2000) and applicable state law) if the signature of the individual is witnessed in the physical presence of a notary public (26 C.F.R. § 1.401(a)-21(d)(6)(ii)).
However, the Treasury Regulations also provide that the IRS may allow an electronic system to satisfy the physical presence requirement in Section 1.401(a)-21(d)(6)(i), but only if the procedures for the electronic system have the same safeguards for participant elections that are provided through the physical presence requirement (26 C.F.R. § 1.401(a)-21(d)(6)(iii)).

Temporary Relief from Physical Presence Requirement

In June 2020, in response to the ongoing public health emergency caused by COVID-19, the IRS issued Notice 2020-42, which provided temporary relief from the physical presence requirement in Treasury Regulation Section 1.401(a)-21(d)(6) for any participant election witnessed by a:
  • Notary public of a state that permits remote electronic notarizations (which are conducted remotely over the internet using digital tools and live audio-video technologies), if executed via live audio-video technology that otherwise satisfies the requirements of participant elections under Treasury Regulation Section 1.401(a)-21(d)(6) and is consistent with applicable state law requirements.
  • Plan representative via live audio-video technology, if the following requirements are met:
    • the individual signing the participant election must present a valid photo ID to the plan representative during the live audio-video conference, and may not merely transmit a copy of the photo ID before or after the witnessing;
    • the live audio-video conference must allow for direct interaction between the individual and the plan representative (a pre-recorded video of the person signing is not sufficient);
    • the individual must transmit by fax or other electronic means a legible copy of the signed document directly to the plan representative on the same date it was signed; and
    • after receiving the signed document, the plan representative must acknowledge that the signature has been witnessed by the plan representative according to the requirements of this notice and send the signed document and the acknowledgement back to the individual under a system that satisfies the applicable notice requirements under Treasury Regulation Section 1.401(a)-21(c) (26 C.F.R. § 1.401(a)-21(c)).
(See Legal Update, IRS Notice 2020-42 Provides Temporary Relief From the Physical Presence Requirement for Spousal Consents in 2020.)
The relief from the physical presence requirement provided by Notice 2020-42 applied to the period from January 1, 2020, through December 31, 2020.
Notice 2021-03 extended, for the period from January 1, 2021, through June 30, 2021, the temporary relief provided in Notice 2020-42 (see Legal Update, IRS Notice 2021-03 Provides Temporary Relief From the Physical Presence Requirement for Spousal Consents Through June 2021). Notice 2021-03 also explained that during the relief period, a participant is still able to have a participant election witnessed in the physical presence of a notary and have that election accepted by a plan under Treasury Regulation Section 1.401(a)-21(d)(6)(i).

Notice 2021-40 Extends Relief Under Notice 2021-03

Notice 2021-40 extends, for the period from July 1, 2021, through June 30, 2022, the temporary relief provided in Notice 2021-03 from the physical presence requirement in Treasury Regulation Section 1.401(a)-21(d)(6), if the requirements of Notice 2021-03 are satisfied.
Notice 2021-40 also includes a comment request. The IRS requests comments on:
  • How relief from the physical presence requirement has affected costs and burdens for participants, spouses, and plans, and whether any costs or burdens support permanent changes to the physical presence requirement.
  • Whether there is evidence that the temporary absence of the physical presence requirement has resulted in fraud, spousal coercion, or other abuse, and whether permanent changes to the requirement would result in increased fraud, spousal coercion, or other abuse.
  • How participant elections are, or are expected to be, witnessed after the COVID-19 pandemic.
  • If permanent changes are made to the physical presence requirement:
    • what procedural safeguards will be necessary; and
    • whether there should be different procedures for elections witnessed by plan representatives versus elections witnessed by notaries.
Comments are due by September 30, 2021.

Practical Implications

Since issuing Notice 2021-03, the IRS received requests to make the relief permanent. Other commenters asked for more time to submit comments concerning potential fraud, spousal coercion, or other abuse. In light of these comments, the IRS is further extending the relief and seeking comments on specific topics related to making permanent changes to the physical presence requirement.
For additional information on the issues facing retirement plans resulting from COVID-19, see Article, Retirement Plan Issues for Plan Sponsors to Consider for COVID-19.