The Treasury Department and the Internal Revenue Service (IRS) temporarily allowed, in light of COVID-19 pandemic restrictions, electronic alternatives to physical presence requirements for retirement plan participants’ elections that required spousal consent. The two allowed alternatives were remote witnessing by notaries public and (if remote notarization wasn’t available or convenient) remote witnessing by a retirement plan representative. IRS extended the relief over the pandemic years and has proposed making remote witnessing a permanent option. This blog covers the proposed rule, opposing viewpoints from stakeholders, and congressional action to address the state patchwork of notary laws via legislation that would authorize nationwide remote online notarization and establish guidelines for remote witnessing to prevent fraudulent activity.
The IRS proposed rule titled “Use of an Electronic Medium to Make Participant Elections and Spousal Consents” would make remote notarization permanent. Comments on the proposal were due March 30. But, to back up—Since 2020 (as temporary measures were extended), IRS was seeking comments on whether relief from the physical presence requirement should be made permanent and, if made permanent, what, if any, procedural safeguards would be necessary to reduce the risk of fraud, spousal coercion or other abuse in the absence of a physical presence requirement. IRS addressed those comments, both in support of and in opposition to remote witnessing, in the proposed rule.
- While remote witnessing is convenient and efficient, there may be a higher risk of a participant defrauding their spouse that plans could be liable for.
- Plans must continue to accept elections witnessed in person before a notary (per state notarization laws) under the proposed rule. Legislation that would allow nationwide remote online notarization has passed the House.
- Plans wouldn’t be required to permit remote witnessing under the proposed rule.
- The proposed rule clarifies that the five existing special rules for electronic participant elections would apply to spousal consents.
Participant Distributions and Loans
Spousal consent rules apply to plans that are subject to the qualified joint and survivor annuity (QJSA) and qualified preretirement survivor annuity (QPSA) requirements of Internal Revenue Code section 417.In general, these spousal consent rules require that a participant’s spouse consent to the participant’s election to take certain plan distributions or loans and that such consent be witnessed by a plan representative or a notary public. For defined benefit plans, a spouse must consent to waive their automatic right to receive at least 50% of a survivor pension upon the death of the participant. A spouse must be the named beneficiary on a defined contribution plan or consent to someone else being the named beneficiary.
Support for Remote Witnessing
Remote online notarization is convenient and efficient for plan administration and saves everyone time and money. In response to concerns about potential fraud, commenters pointed to state notarization laws allowing remote witnessing with strict guidelines in place. Remote witnessing enhances access for people with limited mobility or health issues as well as for people who aren’t in the same physical location, commenters said. During the temporary relief period, plan sponsors didn’t report evidence of fraud or spousal coercion, commenters added.
Concerns About Remote Witnessing
Electronic witnessing in the general course of business wasn’t an issue for commenters. The concern is about spousal pension waivers where a survivor pension or 401(k) assets could be the most significant source of income for the spouse upon the death of the participant. Commenters that oppose remote witnessing said lack of plan sponsor evidence of fraud doesn’t mean that fraud isn’t happening. There’s no duty to disclose fraud and it usually takes many years for evidence of fraud to surface, investigate and resolve, commenters said. In-person witnessing with a wet signature provides better protection from forgery, is a better method to authenticate the signer’s identity, and better prevents coercion and undue influence, commenters added. A notary ensures that the signer understands the import of the document and is signing willingly, which is best ensured by in-person interaction, commenters said.
Currently, a retirement plan is liable to make the spouse whole if the plan failed to obtain written spousal consent to waive survivor pension rights (e.g., accepted a forged signature or records incorrectly stated that the participant wasn’t married). The failure to provide proper spousal consent is an operational qualification error that would cause the plan to lose its tax-qualified status, per IRS guidance on fixing common plan mistakes.
Further liability for failures
Some commenters said that more spousal protections are needed because remote witnessing creates new opportunities for fraud and coercion. Suggested safeguards include the following.
- Plans should be strictly liable for any failures that later surface (whether negligent or purposeful).
- There should be limits on the amount of the benefit that can be alienated using remote witnessing.
- Remote online notarization platforms should be prohibited from disclaiming liability for failures by a remote notary.
Proposed Requirements for Remote Witnessing of Spousal Consent
Under the proposed rule, remote witnessing by a notary public or plan representative is permitted, with the following requirements to satisfy “physical presence.”
- Remote notarization is executed via live audio-video and is consistent with state notary laws.
- For a plan representative to witness the spousal consent, the requirements include:
- A live audio-video method with direct interaction between the plan representative and the spouse
- The signer presents their ID on camera
- The same day, the signer emails a copy of the signed document to the plan representative
- The plan representative acknowledges the signed document back to the spouse using an electronic system that allows for effective access and provides notice that a paper copy is available without charge
- The recording of the video chat is retained under general record retention rules.
The SECURE Notarization Act of 2023
Bipartisan legislation would authorize state notaries public to perform nationwide remote online notarization and would establish guidelines for remote witnessing to prevent fraudulent activity, including guidelines for the creation and retention of video and audio recordings, the use of communication technologies (i.e., video chat) and standardized records retention. The Securing and Enabling Commerce Using Remote and Electronic (SECURE) Notarization Act of 2023 (HR 1059) passed the House on February 27, 2023. The companion bill is S 1212. Additionally, the bill requires U.S. courts and states to recognize notarizations—including remote notarizations of electronic records and notarizations of remotely-located individuals—that occur in or affect interstate commerce and are performed by a notary public commissioned under the laws of other states. The SECURE Notarization Act would allow signers located outside of the U.S. to securely notarize. Use of fraud prevention mechanisms like tamper-evident technologies and multifactor authentication would be required.
Proposed Applicability Date
While we wait to see if momentum builds in Congress, IRS has indicated that retirement plans may rely upon the remote witnessing rules set forth in the proposed regulation. The proposed applicability date is six months after IRS publishes a final rule. To prepare, organizations should ensure that their remote notarization process complies with state laws and consult their plan professionals for legal advice.
Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.