IRS Notice 2020-42 Provides Temporary Relief From the Physical Presence Requirement for Spousal Consents in 2020 | Practical Law

IRS Notice 2020-42 Provides Temporary Relief From the Physical Presence Requirement for Spousal Consents in 2020 | Practical Law

In response to the COVID-19 pandemic, the Internal Revenue Service (IRS) has issued Notice 2020-42, which provides temporary relief from the physical presence requirement for obtaining spousal consents under qualified retirement plans. Retirement plan elections that must be witnessed by a notary or plan representative during 2020 may be witnessed remotely using live audio-video technology, if certain requirements are met.

IRS Notice 2020-42 Provides Temporary Relief From the Physical Presence Requirement for Spousal Consents in 2020

by Practical Law Employee Benefits & Executive Compensation
Published on 05 Jun 2020 • USA (National/Federal)
In response to the COVID-19 pandemic, the Internal Revenue Service (IRS) has issued Notice 2020-42, which provides temporary relief from the physical presence requirement for obtaining spousal consents under qualified retirement plans. Retirement plan elections that must be witnessed by a notary or plan representative during 2020 may be witnessed remotely using live audio-video technology, if certain requirements are met.
In response to the COVID-19 pandemic, the IRS issued Notice 2020-42, which provides temporary relief 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)). This means that in 2020, 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.

CARES Act

The CARES Act was enacted on March 27, 2020 (see Legal Update, CARES Act Contains Numerous Employee Benefit and Executive Compensation Provisions, Including Changes to COVID-19 Testing Mandate). Several provisions of the CARES Act give retirement plan participants greater access to their benefits, including:
  • Coronavirus-related distributions of up to $100,000 from qualified retirement plans. The distributions are exempt from the 10% early-withdrawal tax under Code Section 72(t) (26 U.S.C. § 72(t)).
  • An increase in the maximum retirement plan loan amount for loans made to affected participants during the 180-day period beginning on March 27, 2020. Participants are eligible for the increased loan if they meet the same requirements as for coronavirus-related distributions. Eligible participants can take a loan that is the lesser of:
    • $100,000; or
    • the greater of 100% (an increase from 50%) of the present value of the participant's benefit or $10,000.

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)).

Remote Electronic Notarizations

Notice 2020-42 refers to remote electronic notarizations, which are conducted remotely over the internet using digital tools and live audio-video technologies.
Recently, the Treasury Department and the IRS have received several requests from stakeholders to permit remote electronic notarization of spousal consents for plan distributions and plan loans during the COVID-19 pandemic. These stakeholders have stated that due to the social distancing measures regarding the COVID-19 pandemic, the physical presence requirement in Treasury Regulation Section 1.401(a)-21(d)(6) makes it difficult or impossible for participants to receive plan distributions or plan loans, including coronavirus-related distributions or plan loans for eligible participants, for which spousal consent is required.

Relief Under Notice 2020-42

For the period from January 1, 2020, through December 31, 2020, Notice 2020-42 provides 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 notarization, 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)).
The IRS believes that allowing these remote electronic procedures for plan elections is an appropriate emergency protective measure during this declared emergency period and is consistent with the social distancing requirements implemented by the states.

Practical Implications

Notice 2020-42 provides important relief for retirement plan sponsors, administrators, and participants in light of the COVID-19 pandemic and ongoing social distancing requirements. If a retirement plan participant elects distributions or loans from the plan, including those allowed by the CARES Act, the spousal consent requirements can be satisfied using remote electronic means, if the requirements of the Notice are met, which will allow participants and administrators to maintain social distancing.
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.