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Can Plans Rely on Virtual Notarization?

Practice Management

In response to the logistical challenges created by the Coronavirus pandemic, some states are taking steps to authorize virtual notarization.  

Given the unprecedented circumstances and the various notary-based requirements to conduct business transactions in person, these developments could be particularly important for retirement plan administrators. 

Spousal Consent

One such example is the requirement under the Internal Revenue Code that spousal consent to waive a qualified joint and survivor annuity benefit must be “witnessed” by a plan representative or notary in person. Under IRS regulations issued in 2006, this requirement was clarified to specify that the spouse’s signature must be “witnessed in the physical presence” of a plan representative or notary public.

An alert by Morgan Lewis explains that the IRS regulations do provide that electronic notarization is permitted so long as the physical presence requirement is satisfied, but the regulations do not define what electronic procedures “may be deemed to satisfy” the physical presence requirement. And while the regulations infer that the IRS may issue guidance indicating what electronic procedures will be deemed to satisfy the requirement, no guidance has been issued to date.

In the meantime, video conference technologies and remote online notarization (RON) services are becoming more commonplace and state laws are taking hold. Several states currently permit RON or, like Massachusetts, have recently enacted laws that are about to take effect. What’s more, various other states have issued temporary relief permitting the use of RON during the COVID-19 crisis.

The Bay State 

Massachusetts is one of the latest to do so, enacting the Virtual Notarization Act on April 27, which allows the state’s notaries to use videoconference technology to notarize documents remotely during the present COVID-19 state of emergency. 

As explained by The Wagner Law Group, the legislation “not only allows for the completion of real estate transactions and other documents that may require notarization before filing with a court or registry, but also the execution of estate planning documents, including trusts, wills, and ‘lifetime documents’ such as health care proxies and durable powers of attorney.”

Under Massachusetts’ new law, the Wagner Law Group explains that the notary, the principal and any participating witnesses must be “physically located” in Massachusetts at the time of the videoconference and must sign the documents by hand. Moreover, the notary must observe each person signing the document, must complete an affidavit and must keep a recording of the videoconference for a period of 10 years. 

The firm further notes that the Act will remain in effect for three business days after the governor of the Commonwealth terminates the March 10, 2020, declaration of a state of emergency. After that, remote notarization will no longer be permitted in Massachusetts, but documents notarized while this law was in effect will remain valid.

Not So Fast…

But before a plan administrator considers accepting a RON service executed pursuant to a state’s RON laws, Morgan Lewis offers a word of caution. 

The firm explains that, even though the plan administrator may conclude that these alternative procedures, properly executed, are reasonable approaches in these unusual times, there are several factors to consider, including whether plan provisions mandating physical presence requirements can be overcome considering the unique circumstances. 

Moreover, plans could face tax qualification risks 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,” Morgan Lewis notes. 

What’s more, the firm notes, 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 without adequate spousal consent. By the same token, a spouse may have second thoughts after providing video spousal consent and later seek to invalidate the election. 

“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,” the firm advises. 

With many states allowing remote online notarization, it should be emphasized that the details on the process may vary. The National Notary Association provides a list with updates on state emergency actions taken on remote notarization and signers’ ID. 

A National Solution?

A national response to the issue could be forthcoming. Sens. Kevin Cramer (R-ND) and Mark Warner (D-VA) on March 18 introduced the Securing and Enabling Commerce Using Remote and Electronic (SECURE) Notarization Act (S. 3533) to permit immediate nationwide use of RONs. In general, the SECURE Notarization Act authorizes every notary in the U.S. to perform RONs, requires tamper-evident technology in electronic notarizations and provides fraud prevention through use of multifactor authentication.

Still, for qualified plans, the regulations generally still require physical presence, so even though a notarization can be done virtually, it’s not clear if plan administrators can use that to get spousal consent to a distribution or to designate a beneficiary.