401K: Physical Presence Relief for Elections and Consents
On June 24, 2021, the IRS issued Notice 2021-40 (“Notice”) which further extends the temporary relief from the “physical presence requirement” (see below) previously granted to certain 401(k) plan elections and consents, and hinted that permanent relief from the requirement might be forthcoming.
Specifically, the Notice provides a 12-month extension, through June 30, 2022, of the special rules provided in previous notices easing the general requirement that participant elections and consents be witnessed by a plan representative or a notary public. In addition, the Notice requests comments on whether the IRS should permanently modify and relax the physical presence requirement.
DISCLAIMER: This article is intended as a general overview of the Notice as it pertains to 401(k) plans and is not meant to address the details of plan distributions, elections and consents, previous IRS notices, the CARES Act or related official guidance, or any provision of any of the foregoing not relating directly to 401(k) plans (such as provisions relating to individual retirement accounts (“IRAs”), other retirement plans, or health and welfare plans). As always, be sure to consult with your own ERISA attorney or other professional advisor for individualized advice with respect to your plan’s unique situation.
Background: Distributions, Elections and Consents. Participants in retirement plans, including 401(k) plans, generally must consent to distributions for their own, or their spouses’, plan accounts, or to elections of specific forms of benefits. (see our article entitled “401(k) Plan Distributions and Vesting”) For example, a 401(k) plan generally cannot force a participant to take a distribution of his or her account balance, and a spouse generally must consent to his or her spouse’s beneficiary designation of someone other than such spouse.
Physical Presence Requirement. Under the Internal Revenue Code and related regulations, the signature of the individual making the election or consent generally must be witnessed in the physical presence of either a plan representative or notary public (the “physical presence requirement”). Under the regulations, this is the default rule which applies in all cases where an exception or specific relief has not been granted.
CARES Act and Related COVID-19 Guidance. In response to the global COVID-19 pandemic, Congress passed sweeping legislation in the form of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) (see our article entitled “Congress Passes CARES Act in Response to COVID-19 Crisis, Contains 401(k) Ease-of-Access and Other Provisions”). The IRS followed up with numerous pieces of interpretive guidance, much of it in the form of official notices. For a broad survey of the CARES Act and later guidance applicable to 401(k) plans, see our resource entitled “Coronavirus (COVID-19) Regulations & 401(k) Considerations Regulations.”
Relief from the Physical Presence Requirement. As part of the COVID-19-related guidance referred to above — and in recognition of the potential hardship the pandemic might have on the ability of plan participants, spouses and other beneficiaries to be physically present with a plan administrator or notary public — the IRS issued several official notices, as set forth below, which specially address the physical presence requirement:
Notice 2020-42. On June 3, 2020, the IRS issued Notice 2020-42 which, although primarily intended to facilitate CARES Act expanded distributions and loans (see “Congress Passes CARES Act in Response to COVID-19 Crisis, Contains 401(k) Ease-of-Access and Other Provisions” for details), explicitly also applies to any participant election that otherwise requires the signature of an individual to be witnessed in the physical presence of a plan representative or notary public (for example, a spouse’s consent to a participant’s designation of a non-spouse beneficiary). Specifically, Notice 2020-42 authorizes the use of live audio-video technology, if certain prescribed requirements are met.
Conditions for Use of Live Audio-Video Technology. Participant elections and consents may be accomplished by means of live audio-video technology under the following terms and conditions:
Elections and Consents Witnessed by Plan Representative:
- 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 prior to or after the witnessing;
- The live audio-video conference must allow for direct interaction between the individual and the plan representative (i.e., a pre-recorded video of the person signing does not meet this requirement);
- The individual must transmit by fax or 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 in accordance with the requirements of Notice 2020-42, and transmit the signed document (including the acknowledgement) back to the individual, in accordance with existing regulatory requirements.
Elections and Consents Witnessed by Notary Public:
- The notarization otherwise satisfies the requirements of participant elections under the applicable Treasury Regulations; and
- The notarization is consistent with state law requirements that apply to the notary public.
Notice 2021-3. On December 22, 2020, the IRS issued Notice 2021-3, which extended the temporary relief set forth in Notice 2020-42 – which otherwise was set to expire on December 31, 2020 — through June 30, 2021. The terms and conditions required to qualify for use of live audio-video technology (for both signatures witnessed by plan administrators and those witnessed by a notary public) were identical to the terms and conditions previously set forth in Notice 2020-42.
Notice 2021-40. As stated at the beginning of this article, the newly released Notice 2021-40 further extends the temporary relief for an additional year — through June 30, 2022. Here again, the terms and conditions required to continue to qualify for use of live audio-video technology are identical to those previously set forth in the original Notice 2020-42.
Request for Comments – How to Submit. The Treasury Department and IRS are actively accepting comments as to whether official guidance should be issued that would make the above modifications to the physical presence requirement permanent. In particular, the agencies are grappling with issues such as the potential for coercion or fraud, the extent to which the workplace is returning to pre-Covid norms, the importance of participant safeguards, and similar concerns that are identified in the Notice.
OBSERVATION: It appears the IRS might be indicating that, from their perspective, they consider the modifications a workable, up-to-date, alternative means of satisfying the election and consent requirements, provided there are no serious potential negatives – an issue on which they hope plan administrators and practitioners can help shed light on.
Written comments should be submitted by no later than September 30, 2021 and should include a specific reference to Notice 2021-40. Comments may be submitted electronically (strongly encouraged) via the Federal eRulemaking Portal at www.regulations.gov. Type “IRS-2021-40” in the search field on the www.regulations.gov homepage to find this Notice and to submit comments.
Alternatively, comments may be mailed to:
Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2021-40)
P.O. Box 7604
Ben Franklin Station
The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.