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Internal Revenue Service (IRS) regulations require that spousal consent to the waiver of a qualified joint and survivor annuity (QJSA) that is necessary to elect an optional retirement payment form must be signed in the “physical presence” of a plan representative or notary—a requirement that is difficult to satisfy in a time of social distancing due to the coronavirus (COVID‑19) pandemic.

Many plan administrators are loathe to default all married participants into the QJSA or qualified optional survivor annuity (QOSA) simply because the IRS regulations did not contemplate the extraordinary and unprecedented circumstances caused by the pandemic or the development of technology that would protect the interests of the spouse even without a “physical presence” waiver. While available technology may provide plan administrators and sponsors with alternative means for obtaining spousal waivers, it is important for plan administrators to appreciate the issues and consider the risks.

Background Rules and Regulations

As background, the Internal Revenue Code requires that spousal consent to waiving a QJSA form of benefit (including to change the beneficiary) be “witnessed” by a plan representative or notary. IRS regulations issued in 2006 further interpret this requirement to mean that the spouse’s “signature . . . is witnessed in the physical presence of a plan representative or notary public.”

The regulations go on to provide that electronic notarization will be permitted so long as the physical presence requirement is satisfied, but do not define or clarify what electronic procedures may be deemed to satisfy the physical presence requirement. The regulations contemplate that the IRS may issue guidance indicating what electronic procedures will be treated as satisfying the physical presence requirement, but, to date, no guidance has been issued.

Video Interactions and Remote Online Notarization Services

Since the IRS regulations were issued in 2006, video conference/chat technologies and remote online notarization (RON) services have become commonplace, and state laws are catching on. As detailed in another Morgan Lewis LawFlash, a number of states currently permit RON or have recently enacted RON laws that are about to take effect. Still other states have issued relief permitting the use of RON during the current COVID-19 crisis.

Most (if not all) of these RON laws require the use of real‑time audio and video interactions to ensure the identity of the signer and that the signer’s signature is appropriately witnessed and authenticated.

Plan Administrator Considerations for Relying on Alternative Procedures

Given this background, a plan administrator might consider taking the position that the physical presence requirement is satisfied through a valid, state-approved RON service that involves audio/video interactions and other safeguards or through the adoption of video witnessing procedures involving a plan representative. For example, the plan administrator might consider a process whereby the participant and spouse (1) fax/scan their drivers’ licenses to the plan representative immediately before a video meeting; (2) appear on the video meeting, identifying themselves, and again showing their drivers’ licenses to the plan representative; (3) visibly sign the distribution election and spousal consent on video; and (4) immediately fax/scan the signed documents to the plan representative.

Similarly, a plan administrator might consider accepting a RON service executed pursuant to a particular state’s RON laws that involves robust audio/video interactions and other safeguards. The plan administrator may conclude that these alternative procedures, properly executed, are reasonable approaches in these unusual times to satisfying the requirement that the spouse’s “signature . . . is witnessed in the physical presence of a plan representative or notary public.”

The “physical presence” requirements set out by the IRS were designed to protect spouses from fraud and duress when waiving the QJSA and QOSA. Robust video witnessing and RON procedures further these objectives while allowing continued plan administration (and benefit commencements) despite social distancing requirements. Plan document provisions mandating physical presence requirements are not insurmountable.

Although a plan could be amended to acknowledge the extraordinary circumstances and the need for exceptions to strict “physical presence requirements,” such an amendment may not be necessary. In defending its deviation from the plan’s text and adopting prudent, alternative procedures, a plan fiduciary could potentially rely on the US Supreme Court’s analysis in Fifth Third Bancorp v. Dudenhoeffer that “the duty of prudence trumps the instructions of a plan document.”

However, in considering these alternative procedures, a plan administrator should consider the applicable risks, which are twofold:

  • There are tax qualification risks to the plan for arguably failing to obtain spousal consent in a manner that complies with the applicable regulations. While a plan administrator may argue that these alternative procedures could satisfy the physical presence requirement, the IRS (or the plan’s auditors) may disagree and require corrective action. In this event, the plan administrator may be able to utilize the IRS’s voluntary correction procedures (the Employee Plans Compliance Resolution System) to correct the defects.
  • There are “double dipping” risks to the plan if the alternative procedures are ineffective and allow a participant to fraudulently elect an alternative form of benefit (e.g., a lump sum benefit) without adequate spousal consent. In this instance, the plan may still be obligated to provide the QJSA to the spouse. Similarly, a spouse may simply have second thoughts after providing video spousal consent, and later seek to invalidate the election and receive the QJSA on the basis that the original video spousal consent was not valid. To manage these risks, a plan administrator could implement additional safeguards, such as extra disclosures, certifications, and consents whereby the parties indemnify the plan and plan administrator against future claims, and the participant certifies s/he is a fiduciary and holding the distributed benefits in trust for the benefit of the participant’s spouse in the event that the spousal consent were determined to be defective.

In closing, plan administrators are in the difficult position of determining how best to continue plan operations in these times of social distancing. A number of organizations have approached the IRS and requested that the IRS exercise its discretion to issue guidance permitting the use of video technologies and RON services (see the ERISA Industry Committee’s request for guidance), but to date, the IRS has not issued any such relief. In the interim, widely available video technology and RON services present a possible solution, but plan administrators should carefully consider the issues and risks.