Payroll departments need to establish policies and procedures for reporting unclaimed property in order to avoid penalties and state audits, an unclaimed property specialist said June 22.
Unclaimed property refers primarily to intangible property that the owner has failed to claim from the holder. In the payroll industry, some relevant types of unclaimed property include uncashed checks and pay card accounts, as well as undistributed wire payments, said Heather Steffans, strategic solutions partner for MarketSphere Unclaimed Property.
Since many departments may need to report unclaimed property, payroll departments should coordinate with other parts of their organizations to identify the office or individual responsible for reporting unclaimed property for the entire organization, she said. Unclaimed property is largely regulated by the states, so the responsible party should have an understanding of relevant state laws.
“Noncompliance can result in a penalty and interest for your organization anywhere from 10% to 25% of the property value, and that can also include a daily fine,” Steffans warned. “It’s something that you don’t want to ignore because oftentimes those penalty and interest assessments can far outweigh the actual liability that you may have on your books and records.”
Organizations should report unclaimed property to the state of the property owner’s last-known address, Steffans added. Organizations that do not have the owner’s address information should report instead to their state of domicile, she said at the American Payroll Association’s 2022 Virtual Congress.
Each state has different laws regarding dormancy periods and reporting requirements, Steffans said.
“You want to make sure you apply the applicable state laws,” she said. “Unclaimed property can be difficult because you might have to follow statutes of a state you don’t know much about.”
Holders of unclaimed property must retain the property for the duration of that property’s dormancy period before reporting it, Steffans said. Each state establishes its own dormancy period for certain types of property. For example, payroll checks have a dormancy period of one year in Florida but five years in Delaware, she said.
“Even within the same state, such as Texas, you can hold onto a payroll check for one year but hold onto a vendor check or checking account for three years,” she said. “That’s where the law can become confusing and complex.”
Payroll professionals should be careful when determining the dormancy period for payroll cards, since some states consider payroll cards a bank account and others consider it a payroll check, she warned. Many states have adopted portions of the Revised Uniform Unclaimed Property Act of 2016, a uniform act created by the Uniform Law Commission that gives payroll cards a three-year dormancy period as a bank account instead of a one-year dormancy period for a payroll check or other form of unpaid compensation.
“If the state has adopted this section of RUUPA, you really want to pay attention to their payroll card rules,” she said.
Each state has a different reporting deadline that may vary by industry and property type, Steffans said. Each state’s reporting deadline is either in the spring, summer, or fall.
State reporting requirements vary. For example, some states require preliminary reports in addition to a final report, and some require remittance of unclaimed property via wire transfer instead of a check. Some states also require reports to be submitted on paper, but most have been accepting electronic reports since the coronavirus pandemic, Steffans said.
“You want to make sure you understand the specific reporting process,” Steffans said. “If you are working from home and a state requires a CD or a notary, you want to plan ahead for that to ensure you can get a notary signature on a report, for example.”
Organizations that have not complied with state unclaimed property laws may be able to voluntarily disclose their unclaimed property and avoid penalties, she added. Thirty-three states have a formal voluntary program, and sixteen others have an informal one. California is the only state without any voluntary program and will charge organizations a 12% simple interest on any unclaimed property that is filed late, Steffans said.
“If you can, work towards voluntary compliance,” she said. “You’re going to have to comb through your records. You’re going to be going through a similar process to a state audit but you’re moving the process forward instead of the state.”