Escheatment: An Unfamiliar Word
Have you heard those commercials that say the state may have unclaimed money in your name and all you need to do to receive it is file a claim? Sounds like a scam doesn’t it? However, it might be true! It all has to do with a word most individuals and businesses have never heard of: Escheat or the act of Escheatment.
Escheatment: How Uncashed Checks Can Become a Liability
Each state has its own laws to govern unclaimed property which determines what happens to items such as uncashed checks. Despite popular belief, unspent funds do not revert to the issuer after expiration. Instead, they continue to belong to the intended recipient. These laws spell out when, how and under what circumstances a business must turn over unclaimed property to each state in place of its intended recipient.
Uncashed checks are considered unclaimed property in ALL states and fall under Escheat laws. These can become a significant liability that can result in large penalties for unsuspecting issuers.
To give you a sense of magnitude there was $7.763 billion worth of unclaimed property collected by states in 2015 according to the NAUPA (National Association of Unclaimed Property Administrators) and incentive checks were a big part of this.
Know the State Laws that Address Escheatment
There is no uniform system of unclaimed property laws. In fact, many of the 50 states have different rules and regulations supporting escheatment. State laws vary on fundamental issues like what property to escheat and how long the property must go unclaimed or unused (i.e. two years to five years is the general range). The notification process on how often you need to try and contact the property owner and how clean you have to keep your data also varies by state. Usually, the process for reporting unclaimed property and the penalties for not timely reporting unclaimed property are different as well.
While accounting departments in corporate America might curse escheatment, state governments love it, as it makes their balance sheet look better. Most states have long look-back periods giving them many years to pursue unclaimed property. This means those unclaimed checks can be a surprising financial benefit for a state. This causes state governments to be very aggressive as it relates to unclaimed property.
To help manage states and their quest for unclaimed property, The Supreme Court laid out a priority scheme for escheatment. If a business knows the last known address of the owner of the property (i.e. the buyer in this instance, not the person to whom the buyer gifted it), then the buyer’s state’s laws apply, and that state is the proper state for escheatment. If the address is not known, then the business’s place of incorporation, or in some cases, principal place of business is used.
Some states have attempted to work around the Supreme Court ruling by enacting a presumption, putting the place of the transaction before the other rules. This was further complicated by the 3rd Court of Appeals which held any such place-of-transaction presumption is invalid and that only the Supreme Court’s priority scheme applies. This ruling applies only to New Jersey, Pennsylvania, Delaware and the Virgin Islands.
Failure to Report Unclaimed Amounts Can Cost You
What happens if a business fails to escheat unclaimed amounts? The penalties for a failure to report can be severe. There are penalties for failing to report, and there can also be interest penalties. It’s very much like not filing your taxes.
There is nothing business-friendly about escheat laws. The current situation is complicated and confusing. It creates significant compliance issues and puts businesses at risk of big penalties and interest. This is long term exposure and should not be taken lightly.
Impact on Incentive Programs
If you are managing an incentive program, what does all of this mean to you? You should carefully consider your payment options when planning a program. You should also look for a vendor that knows the ins/outs of unclaimed property laws, as they’ll be your best guide.
Protecting your Business
Moreover, it’s imperative that you align forces with a payment partner that is well versed in the various payment options that will preserve your bottom-line. For instance, your partner should be aware of the best alternative to issuing checks comes in the form of prepaid cards (physical and/or virtual cards). The benefits of this option will lead to minimal administrative costs, custom branding opportunities to maintain a consistent brand look and feel, and quick issuance times via virtual cards to satisfy the customer. Most importantly, your customers will reap the benefits of choice between receiving an actual physical card or a virtual card (online) to suit their needs.