KeepUP™ Blog

H.R. 8696, known as “The Securing a Strong Retirement Act of 2020” or “the SECURE Act 2.0”, introduced in the House of Representatives on October 27, 2020, is a bipartisan bill aimed at further protecting and enhancing retirement savings. There are two key aspects of this bill that if enacted, would change the way individual retirement accounts (IRAs) are treated:

1. The age for required minimum distributions (RMDs) from employer-sponsored defined contribution plans and traditional IRAs would increase to age 75.  This provision would be effective for individuals who would turn age 72 after December 31, 2020.

The impact on IRAs would be similar to the impact under the SECURE ACT of 2019 (SECURE ACT) adding another level of analysis required to calculate the RMD date and the trigger date for escheatment. Under the SECURE ACT, we now consider whether the owner turned 70.5 after 12/31/2019. Under the SECURE Act 2.0, we would also have to consider whether an owner has turned 72 after 12/31/2020.

Additionally, certain states that have recently revised their unclaimed property statutes specifically reference “age 70.5” as a possible trigger date for escheatment of IRA accounts (except for Vermont which references “age 72”), which is not in line with the SECURE ACT.   The SECURE ACT 2.0 further underscores the present need for all states to ensure their retirement account provisions align with federal law. 

Customer relationships are the foundation of a company’s success, but if customer assets are escheated to the states as unclaimed property, those relationships could be at risk.  Studies by Bain & Company show that acquiring a new customer can cost five times more than retaining an existing customer and increasing customer retention by 5% can significantly increase a company’s profits.

Millions of dollars are escheated annually. This results in angry customers and lost profits, especially when it is their retirement or savings account. It is therefore important to understand the steps a company can take to reduce the risk of escheatment and increase its’ customer retention rate.

Escheatment occurs when accounts are deemed dormant, which occurs when there has been no “owner-generated” activity on the account for a specified period of time (the dormancy period). If the account owner does not affirmatively act to remove the dormant status of an account, by law, the account must be escheated to the state of the owner’s address once the dormancy period for that type of property has expired. Generally speaking, dormancy periods range from 3 to 5 years.

A 3-year dormancy period may seem like sufficient time in which to reestablish contact with an account owner. However, the time-frame for action is actually shorter, as companies generally do not begin to initiate proactive communication with dormant account owners until the account has been inactive for at least 24 months. Leaving the account inactive until the performance of statutory due diligence (which occurs between 2 and 12 months before escheatment), generally results in up to 80% of those accounts being escheated.

The passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has created   additional challenges for those managing their organizations’ unclaimed property compliance program when determining dormancy on potentially reportable retirement accounts.

The 800-plus page CARES Act includes a provision for Required Minimum Distribution (RMD) relief for retirees and beneficiaries in 2020. (See Section 2203. Temporary Waiver of Required Minimum Distribution Rules For Certain Retirement Plans and Accounts). This could translate to a one- year delay of dormancy for many account holders who would have been required to take their first RMD in 2020. The CARES Act also impacts beneficiaries of deceased account holders whose accounts were being drawn down under the “5 year rule,” effectively delaying dormancy another year due to the waiver of RMD requirements in 2020.

Coupled with the upward revision in RMD age, from 70.5 to 72, by the 2019 Setting Every Community Up for Retirement Enhancement Act (SECURE Act), the first few months of 2020 have seen quite a bit of movement for retirement accounts legislatively. The Act also has adjusted the RMD Death provision to a “10 year rule” for most non-spouse beneficiaries.

Annual unclaimed property reporting has many distinct steps.  These include, maintaining up-to-date compliance rules, compilation of potentially reportable transactions, identification of exemptions and deductions, mailing of due diligence notification letters, and reporting and remitting funds to the various jurisdictions.     

Once a holder has analyzed its’ data to determine potentially reportable items, the next step is the performance of due diligence, which includes determining which accounts require a statutory due diligence mailing, when the states require the mailing of the letters and the content of the letter.

States generally require a notice to be sent to the last known address of the owner of the funds as indicated in the holder’s records before the property can be escheated to the states. This gives the owner one last opportunity to claim their funds before they are turned over to the state. Over the years, states have placed greater emphasis on due diligence and various components of the process, including:

It has been a few years since we blogged about escrows which usually requires a refreshed look at the industry. However, not much has changed in terms of unclaimed property laws surrounding those outside of RUUPA (the Revised Uniform Unclaimed Property Act, which was finalized in late 2016) that changed the dormancy on some escrow account types.  Let’s take a deeper dive into the causes of escrow balances becoming unclaimed and some things that can be done upstream in the life cycle of the account aging and becoming dormant.

RESPA (Real Estate Settlement Procedures Act) was established in 1974.  There have been some revisions with Dodd Frank in 2013 but it basically has kept the verbiage that is causing so many cases of unclaimed escrow refund checks.  The act states that within 30 days of an escrow overage analysis, the mortgage company must send a refund check if the overage is $50 or greater.  Under $50, companies are allowed to maintain the balance in escrow.  So rather than applying any overage to the mortgage or holding it in escrow while reducing the monthly payment, checks are mailed out to unsuspecting owners. 

The good news is that as these payments exceed $50, most would require the mailing of a statutorily mandated due diligence/last contact letter. Unfortunately, owners receive these letters between two and five years after the check was issued and most owners ignore the letter. This results in a substantial sum of money being sent to the states as unclaimed property.

Below are a few tips for holders that manage escrow accounts to reduce the amount of unclaimed escrow refunds:

Retail banks have a few common property types that share unclaimed property headaches.  Some are easier than others but all require a good set of policies and procedures to properly track the aging of the accounts.  The common types to look at are:

                Checking Accounts

                                    Savings Accounts

                               Certificate of Deposits (CD's)

Checking/Savings Accounts

Checking/Savings accounts are aged based on the last owner-directed activity or last owner contact date of the account.  Once these accounts age 3 to 5 years, they will need to follow the same protocols as used for all other property types and receive a due diligence communication to attempt to locate the owner prior to escheatment.  Many banks set policies to ensure property contact is being established and in some cases, they even close the account and issue a check if a certain period of time passes. The escheatment itself would only have an additional requirement if it was an interest-bearing account.  In this case, the rate would need to be included in the file going to the state as some states require accrued interest to be paid out on claims.

Holders know that they must follow jurisdictional requirements when submitting unclaimed property reports. States require, where available, standard property owner information such as owner name, address, type of property, property amount and so on. However, there are a handful of states that also require Non-Public Personal Information (NPPI), specifically Social Security Numbers (SSN’s), be included in the report.

Holders know the sensitive nature of SSN’s and may be reluctant to include them as part of the escheat report.  The most common reason holders give for their concern is that it is against company policy to send SSN’s (NPPI) externally.

This is a very valid concern; however, it’s important to note that most states now have upload capabilities and all meet security standards to manage and protect SSN’s provided to them.   

The current talk surrounding escheat compliance is either about RUUPA or Delaware reform.  Let’s take a quick break from that and imagine the unclaimed property landscape and what it may look like the next time the ULC gets together, by  focusing on a few common unclaimed property categories: checks, securities, and gift cards.  The laws have always adapted to the way commerce operates so we will explore each category and their trends before we take a shot at predicting the future.

Checks

Checks are still being issued today but are far less common than when the Unclaimed Property Act of 1995 was written. If you ask a millennial the last time they have written a check versus using PayPal, Venmo, or some other form of electronic payment you may be shocked when they say they don’t even have a checkbook.  Businesses are heading the same way.  Business transactions and even the government (who seem to lag 20 years behind) are moving towards electronic payments.  So, we can only assume that checks will be as prevalent as 3½-inch floppy disks in the unclaimed world of the future.

Securities

Securities markets are trading at or near all-time highs and this industry is constantly evolving.  Physical stock certificates are being phased out for book entry shares.  You won’t find these kept in bank branch safe deposit boxes much longer. Will banks even offer safe deposit boxes as they continue downsizing their footprint?

Mutual funds can impose significant challenges to the unclaimed property reporting process. The current statutory environment has numerous state-by-state variations, so understanding the various rules is vital to ensure appropriate compliance.   There is some good news.  The ULC has addressed many concerns in the 2016 Revised Uniform Unclaimed Property Act or "RUUPA" with a uniform approach to contact and aging of the accounts. It states that the dormancy clock commences with the date in which a correspondence was returned from the post office. It also clarifies the term "contact" which seems to be a moving target with the state statutes. Unfortunately, many of the states will not adopt the RUUPA word for word so through the maze we go.