When the recipient of a payout doesn’t usetheir funds, what happens next? In some cases, the payout must be reported to the state following a process known as escheatment. In this primer, we’ll walk you through the basics of escheatment: its definition, what the processentails, and the importance of complying with state laws governing unclaimed property. Remember to seek counsel from legal and compliance experts when determining your responsibilities surrounding unclaimed property—or consider partnering with Onbe to take the burden of escheatment off your hands.
What is escheatment?
Escheatment is the act of transferring unclaimed property to the state when theowner cannot be located or is deceased without legal heirs. One in seven individuals has some form of unclaimed property, according to the National Association of State Treasurers. The purpose of escheatment is to ensure that these funds or assets do not go unused indefinitely. If the property cannot be restored to its rightful owner within a specified time frame, it enters the state’s possession and may be used for the public good.
What is the U.S. escheatment law?
55 jurisdictions in the United States have laws that require unclaimed property reporting. While each jurisdiction has its own laws, the escheatment process is similar:
- Identify unclaimed assets. Certain types of property must be escheated to the state if it has been abandoned or left unclaimedfor a specified period of time. Bank accounts, uncashed paychecks, insurance policies, refunds, stocks, bonds and dividends are a few examples of personal property that typically need to be escheated.
- Attempt to locate the owner. Businesses and financial institutions must make a good-faith attempt to locate the owner of the unclaimed property and inform them that their funds will soon be escheated.To meet this due diligence (sometimes known as diligent effort) requirement, the holder of the payment must send notice to the owner’s address on file within a specific period of time before the account becomes reportable.
- Report the unclaimed property. After a period of inactivity or dormancy determined by the individual state (usually between one and five years),unclaimed assets must be reported to the state government. The requirements vary by state law but typically involve submitting a report detailing the unclaimed property and attempts to locate the rightful owner.
- The property enters state custody. Once reported, the property becomes the responsibility of the state treasurer or a similar agency. The state may make the property available to be claimed by its rightful owner for a specific period of time, after which the unclaimed property or its value may be used for various public purposes.
What are examples of escheatment?
A bank account is the most common type of asset that is escheated to the state. When an account has not had any activity from the account owner for a specified period, it is known as a dormant account. Banks and financial institutions are responsible for reporting dormant accounts to the state.
An unclaimed insurance policy payout is another example of property that needs to be escheated. If the beneficiaries of the insurance policy fail to claim the benefits within a specified time frame and cannot be located by the insurance company, the claim payout must be reported. State law varies, but typically, the proceeds plus any accumulated interest must be transferredto the state.
Consumer refunds, such as for an auto lease or loan overpayment, utilities, or healthcare are also typically escheatable. For instance, say that a patient pays for healthcare services upfront and is owed a refund following adjustment by the insurance company.Often, the healthcare organization will send a check to the patient’s address on file. If the check goes uncashed and thepatient cannot be located, the healthcare organization must escheat the unclaimed funds.
What kinds of payments are not escheatable?
Payments that typically are not escheatable may include incentives, rebates, rewards and other types of promotional payouts. Often, these payments have an expiration date or other terms and conditions, and the payer is notliable for escheating the funds if they go unused. Because escheatment laws are complex and vary by state, businesses are advised to seek appropriatecounsel to determine their escheatment obligation.
What are the penalties for failing to report unclaimed property?
By some estimates, anywhere from 65% to 90% of companies do not properly report unclaimed property. Penalties for non-compliance can vary depending on the jurisdiction, but monetary fines are common and can be quite steep, depending on factors such as the amount of unclaimed property involved, the duration of non-compliance, and the state’s laws and regulations. Interest also may accrue on unclaimed property over time, compounding the financial consequences of non-compliance. To avoid these and other potential penalties, it is critical to understand and comply with anyunclaimed property reporting requirements that may impact your business.
What challenges do businesses face when handling escheatment?
Businesses face considerable challenges when managing and reporting unclaimed property. One of the biggest issues is complexity: escheatment laws and regulations are often byzantine and vary from state to state. For businesses operating in multiple states or countries, navigatingescheatment laws across different jurisdictions adds even more complexity. Because mistakes can be costly, businesses face the risk of being non-compliant without their knowledge.
Maintaining accurate and up-to-date records of unclaimed property can also be challenging. Proper record keeping is essential for identifying and reporting unclaimed property accurately—and critical when preparing for anaudit.
Finally, with regulatory scrutiny on the rise in some states and industries, businesses may feel the need to devote more resources to complying with escheatment requirements. From tracking down property owners to completing the lengthy reporting process, escheatment can be a costly and labor-intensive undertaking.
How can businesses reduce their escheatment burden?
Businesses can reduce their escheatment burden by using a full-service disbursem*nts provider. Partnering with a payment company such as Onbe can be useful in two primary ways. First, replacing or enhancing a check-based disbursem*nt program with a more streamlined digital solution can help to improve the delivery rate of payouts. Even if you no longer have a recipient’s correct address on file to send a physical payment, they may still be able to receive the payout digitally. With instant virtual payouts, recipients can easily spend their funds without first having to cash or deposit a check. Making the experience more convenient helps reduce the number of payouts that go unclaimed.
Secondly, Onbe takes the burden of escheatment off your hands, relieving your team of risk and administrative labor. Onbe maintains 100% of the responsibility for unclaimed accounts and adheres to all state and federal requirements. Learn more about our compliance, security and fraud prevention capabilities, including our escheatment solution.
