IRS Issues Proposed Rules on Electronic Participant Elections and Spousal Consents

Practical Law Legal Update w-038-0606 (Approx. 6 pages)

IRS Issues Proposed Rules on Electronic Participant Elections and Spousal Consents

by Practical Law Employee Benefits & Executive Compensation

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, if certain requirements were met.
Plan representative via live audio-video technology, if certain requirements were met.

(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. In subsequent guidance, the IRS extended this relief through December 31, 2022 (Notice 2021-03 (Dec. 24, 2020), Notice 2021-40 (June 26, 2021), and Notice 2022-27 (May 13, 2022); see Legal Updates, IRS Notice 2021-03 Provides Temporary Relief From the Physical Presence Requirement for Spousal Consents Through June 2021, IRS Notice 2021-40 Extends Temporary Relief from the Physical Presence Requirement for Spousal Consents Through June 2022, and IRS Notice 2022-27 Extends Temporary Relief from the Physical Presence Requirement for Spousal Consents Through December 2022).

Proposed Regulations

The proposed regulations would retain the physical presence requirement for spousal consents but provide two alternatives allowing remote witnessing of spousal consents. The proposed regulations would also clarify that the existing rules for electronic participant elections in the Treasury regulations apply to spousal consents. Comments on the proposed regulations are due by March 30, 2023.

Alternatives to Physical Presence Requirement for Spousal Consents

The proposed regulations would retain the physical presence requirement for spousal consents but provide two alternatives.

Under the first alternative, a plan may accept a spousal consent witnessed remotely 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 the consent:

Is executed via live audio-video technology.
Satisfies the requirements of participant elections under Treasury Regulation Section 1.401(a)-21(d)(6).
Is consistent with applicable state law requirements.

This alternative is substantially similar to the temporary relief previously provided by the IRS. In response to comments on the temporary relief, the proposed regulations add a requirement that plans that accept spousal consents witnessed remotely by a notary public also accept spousal consents witnessed in person by a notary.

Under a second alternative, plans may accept a spousal consent witnessed by a 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.
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 plan representative must make a recording of the audio-video conference in which the spousal consent was signed, and the plan must retain the recording consistent with the recordkeeping requirements of Code Section 6001 (26 U.S.C. § 6001).

This alternative is substantially similar to the temporary relief provided by the IRS in its prior notices. In response to comments on the temporary relief, the IRS added the recordkeeping requirement to the proposed regulations.

Clarifications to Existing Electronic Participant Election Rules

The proposed regulations would also clarify that the existing rules for electronic participant elections in the Treasury regulations apply to spousal consents (26 C.F.R. § 1.401(a)–21(d)). The existing rules include requiring the:

Electronic medium used to make a participant election or spousal consent to be a medium that is effectively accessible by the person making the election or consent.
Electronic system being used to be reasonably designed to preclude any person other than the appropriate individual from making the participant election or spousal consent.
Electronic system to provide the person making the election or spousal consent a reasonable opportunity to review, modify, or rescind the election or consent before it goes into effect.
Person making the election or spousal consent to receive a written or electronic confirmation of the election or spousal consent within a reasonable time.
Witnessing of the spousal consent to satisfy the requirements of Treasury Regulation Section 1.401(a)-21(d)(6), if applicable.

In response to comments on the temporary relief, the proposed regulations would:

Add a separate definition for "spousal consent."
Add language concerning spousal consents to Treasury Regulation Section 1.401(a)-21(d)(6).
Modify the example in Treasury Regulation Section 1.401(a)-21(f) to demonstrate how the rules apply to spousal consents.

IRS Issues Proposed Rules on Electronic Participant Elections and Spousal Consents | Practical Law