By William Harris, CFP®
William Martin was a patternmaker in Boston. He was also my grandfather.
Patternmakers were woodworkers with the precise skills of a carpenter, a woodcarver, a lathe operator and an artist. Before computer-aided design software, cast iron objects were first made from wood. A patternmaker’s sole job was to make a wood model of the object prior to it being cast in iron. In the 1930s to the '60s, a patternmaker made more in wages than doctors and lawyers. My grandfather’s task was to make hydrants out of wood before they were cast into iron. He, like many patternmakers, was a true craftsman.
Living through the great depression, his generation was no stranger to financial tragedy. When my grandfather died (early 1970s), my grandmother was never able to collect on his pension. Back then, you did not need a spouse to sign off on a pension decision with survivor benefits. My grandfather, and many of his generation, thought “thrifty” would be to receive the highest pension payout; survivorship options were rarely considered. Little did my grandfather know, his pension decision would disinherit his spouse from many years of pension payments.
The practice of ignoring the survivor benefits for a spouse became so widespread that Congress had to act. The Retirement Equity Act of 1984 (REA 1984) was signed into law on August 23, 1984 by President Ronald Reagan. REA was a major piece of pension legislation that amended the Employee Retirement Income Security Act (also known as ERISA). President Ronald Reagan signed the law that etched spousal consent into law. However, COVID-19 is changing the rules, temporarily at least.
What do you do if you need spousal consent for a retirement plan distribution or loan physically witnessed in the age of social distancing?
The IRS has come up with an answer.
Retirement plans require witnessed spousal consent for distributions, waivers, and loans, and due to coronavirus and social distancing, this has become a significant challenge for everyone involved.
On June 3, 2020 the IRS released Notice 2020-42 (Notice) which temporarily suspends the requirement that spousal consent must be physically witnessed by a plan representative or notary public.
This temporary Notice covers the period from January 1 - December 31, 2020 and applies to any participant election that requires the signature of an individual to be witnessed in the physical presence of a plan representative or notary.
Specifically, the Notice states:
“..this notice provides temporary relief from the physical presence requirement in Treasury Regulations § 1.401(a)-21(d)(6) for participant elections required to be witnessed by a plan representative or a notary public, including a spousal consent required under § 417 of the Internal Revenue Code.”
The Notice provides much-needed relief for plan sponsors and participants. The retroactive date of the Notice makes it a good idea to have plan fiduciaries review any previous remote consents received against Notice requirements to ensure any prior consent is valid.
Witnessing requirements arise most commonly when a married participant in a private sector defined benefit plan or defined contribution plan elects to receive a lump-sum distribution (including one made under the CARES Act) or for a plan loan.
Spousal consent is also needed when a married participant in a private-sector plan chooses a beneficiary other than their spouse.
We are all learning a lot about new technologies in the age of coronavirus, and it’s important to understand exactly what it meant by the term “remote” in this context.
Remote notarization differs from electronic signature through platforms like eSign or Docusign, for example, as the Notice requires that documents are executed through a live audio-video method (such as Zoom, GoToMeeting, or Skype) so the notary can actually see the person signing the document, speak with them, and inspect the valid ID required to verify the signer’s identity.
The Notice requirements vary depending on whether the consent is witnessed by a notary or by a plan representative as follows:
Notary requirements: Plan elections witnessed by a notary public can be made remotely through live audio-visual technology only if the system complies with state notary requirements.
Plan representative requirements: Plan elections can also be made remotely by a plan representative only when the following requirements are satisfied:
a. Spouses must provide a valid photo ID to the plan representative during the remote meeting;
b. the conference platform needs to allow for live interaction between the spouse and the plan representative;
c. the spouse must fax or email a legible copy of the executed document directly to the plan representative on the same date that it was signed; and
d. after receiving the signed document, the plan representative is required to acknowledge that the spousal signature was witnessed by the plan representative in accordance with the requirements of the Notice specifically, and send the signed document and acknowledgment back to the parties involved.
This Notice is a welcome relief for those who have been unsure what to do about executing key retirement documents under the unprecedented and unforeseen circumstances brought about by the coronavirus.
While IRS Notice 2020-42 gives temporary relief, spousal consents are still crucial. Ronald Reagan was direct on his quote about REA 84. “No longer will one member of a married couple be able to sign away survivor benefits for the other,” Mr. Reagan said, explaining that “a spouse’s written consent now will be required on any decision not to provide survivors’ protection.”
Knowing my grandmother’s story, I always pause when a spousal consent is being considered!
About the author
Bill Harris is a CERTIFIED FINANCIAL PLANNER™ practitioner (CFP) and Retirement Management Advisor (RMA). He is president of WH Cornerstone Investments, a financial advisory firm located in Kingston, MA. Learn more at www.whcornerstone.com.