AP Journal Online. American Accounts Payable Association.

Unclaimed property compliance has become a hot topic for corporate management due to its increasing impact on all organizations—profit and non-profit alike.

The following factors are responsible:

• as many states struggle with budget shortfalls in times of economic uncertainty, unclaimed property has become an important source of revenue;
• a proliferation of third-party contract auditors, some of whom are paid on a contingency-fee basis, has significantly increased the number of companies undergoing unclaimed property audits; and, as a result,
• large assessments are more and more commonplace; and,
• in this post-Sarbanes-Oxley Act era, the importance of accurate company financial statements is more crucial than ever.

In prior years, payroll (e.g., wages) and accounts payable (e.g., expense reimbursement) distributions were limited to cash, manual paper checks, and electronic funds transfer (e.g., direct deposit). However, with the recent introduction of paycards, companies have a new and somewhat unconventional means of issuing compensation and reimbursements to employees. Our collective consulting experience has been that paycards can raise a number of potential concerns and unanswered questions regarding unclaimed-property reporting responsibilities. This two-part article examines unclaimed property pitfalls and advantages that companies using paycards, or thinking of using paycards, need to know.

Confiscation: A Brief History

Unclaimed property laws, sometimes referred to as “escheat laws,” descend from feudal England where the Crown would escheat—or confiscate—land under feudal tenure back to the Crown when no legal heirs existed. Today, all 50 states, as well as various foreign countries, have enacted unclaimed property laws. With rare exception, these laws are custodial in nature, meaning that title to the property does not pass to the state. Rather, the state holds the unclaimed property until it can be reunited with the rightful owner or their heirs, which may or may not be possible.

Characteristics of Unclaimed Property

Unclaimed property generally has four basic characteristics:

• the property is intangible personal property, e.g., uncashed checks, outstanding customer credit balances, and unclaimed stock certificates (Note: many states claim a few limited types of tangible personal property—such as contents of safe deposit boxes.);
• the whereabouts of the apparent owner is not known;
• the property must remain unclaimed by the owner for a period of time prescribed in the statutes as the “dormancy” or “abandonment” period; and
• there must be a “fixed and certain obligation” owed by the holder to the owner.

Under the rules of jurisdiction, promulgated by the U.S. Supreme Court in the seminal case of Texas v. New Jersey, the state with the first right to claim the property is the state of the owner’s last known address, as shown on the holder’s books and records. If there is no address of record, the holder’s state of incorporation can claim the property.

Outstanding wages, commissions, and employee reimbursements are included as applicable property types in the various state laws and most states specify a one-year dormancy period for payroll. Expense reimbursements, which are normally included in the accounts payable function, generally have a three- to five-year dormancy period.

Because unclaimed property addresses a vested “property right,” whereby the owner’s rights are preserved until they can be reunited with their property, there is generally no statute of limitations. Therefore, unlike a tax audit, state unclaimed property audits, in some states, can reach back more than 20 years. As a result, small-dollar amounts deemed immaterial in any given year can become material, given the cumulative effect of the unclaimed property audit liability over a five-, 15-, or even 20-year-plus period (i.e., the sum of the past due unclaimed property, plus any interest and/or penalties that are assessed). Although the financial reporting aspects of unclaimed property compliance are beyond the scope of this article, further guidance may be obtained via Michael Houghton, et al., Unclaimed Property, 74-2nd C.P.S. (BNA-Rev. 2009), pp. A-57-60.

Though these laws were not intended as sources for generating revenue, in recent years some states have included forecasting revenues in their budgets and/or employed more aggressive methodologies for calculating an unclaimed property liability. According to a Wall Street Journal article from February 2, 2008, “States Scooping up Assets from Millions of Americans,” states collected approximately $5.1 billion in unclaimed property in fiscal 2006. In total, the states collectively held $35 billion in unclaimed property as of June 2006. The article further states, “On average, the states identify owners and return about one-third of this property.”

Paycards—A Viable Alternative?

Employers have recognized the benefits of electronic payment methods for years. Not only does the company save the costs of printing and distributing a hard-copy check to its employees, it also saves the time spent on tasks such as reconciling a manual checking account and excessive fraud-monitoring techniques.

In fact, according to the American Payroll Association (APA), “NACHA—the Electronic Payments Association—estimates that companies save up to $0.60 per payment by using direct deposit instead of paper paychecks.” However, some industries may have a workforce where many of the employees are “unbanked”—meaning, without a bank account. In response to the employer’s desire to pay unbanked employees through electronic means, banking institutions and third-party vendors have developed a solution: paycards.

A paycard operates much like a debit card. It can be used as a method for an employee to receive their wages and expense reimbursements, as well as make purchases anywhere the card is accepted. They can withdraw funds through automatic teller machines, and if lost or stolen are easily replaced. As defined by the APA, the card operates “in a manner similar to traditional PIN-based debit cards that are linked to a checking and/or savings account held by individual consumers at any given financial institution.” The primary difference between a traditional debit card and a paycard is the employer selects the issuing financial institution.

So, opting for paycards rather than manual checks offers a number of advantages to an employer. In addition, the advantages to the employee include convenience, elimination of fees such as check-cashing charges, time savings, and the secure transfer of wages and expense reimbursements. By using a paycard, an employee avoids the possibility of misplacing or losing the check. In addition, exposure to identity theft may decrease, as the likelihood of personal information on manual paychecks ending up in the wrong hands is eliminated. Paycards also prove convenient where employees work in remote locations and may not have ready access to banking/financial institution facilities.

There are also potential disadvantages to using paycards. It is important to consider that when contracting with certain vendors or financial institutions, service fees for certain transactions such as transfers or automatic teller machine withdrawals may be imposed on the card holder. In addition, an employee may find it difficult to obtain any small-dollar balance residing on the card if his or her relationship has been terminated with the employer. Thus, some banks may charge a monthly maintenance fee or a fee that is greater than the balance left on the card, leaving the employee with little choice but to abandon the account after the relationship with the employer has ceased.

Paycard Controls

Employers should recognize potential disadvantages with offering a paycard program. While a paycard program is designed as a no-cost benefit to employers, companies may need to ensure extra internal controls. The controls should include measures to account for all paycards issued and to ensure no paycards are funded twice. Also, a corporation with multiple branches or subsidiaries may find it useful to issue a paycard under each unique entity. While this would provide an additional element of control, it will likely result in added cost. And, as will be discussed in part II, there may be unanswered unclaimed-property questions that should be considered.

In recent years, the electronic payment solution has become an increasingly popular option. For employers, it’s an efficient, electronic payment alternative. And for employees, it’s a quick and convenient means of receiving wages and expense reimbursements. However, as new methods emerge, state lawmakers may need to play catch-up with regulations. As indicated in the aforementioned Wall Street Journal article, unclaimed property has been used as a key revenue source for the states, and new property types are always being reviewed for potential escheatment.

Upcoming in Part II

In Part II we will discuss the interface of paycards with state unclaimed property laws, and will further discuss why compliance with such laws is important to accounts payable personnel. Some selected laws that specifically mention paycards will be examined, as well as the effect of the paycard on the underlying obligation for purposes of the state escheat laws. We will also look at how a few selected state unclaimed property administrators currently view paycards from an unclaimed property perspective.

About the Authors

Valerie Jundt

Valerie Jundt is the Director of State Relations in the Unclaimed Property Group of Thomson Reuters (Property Tax Services), and formerly was with the Unclaimed Property Group of Deloitte & Touche LLP. She is a co-author to the Unclaimed Property Treatise published by the BNA in May 2006 and has been quoted in a number of national publications including Money Magazine, Redbook, Women’s World, Good Housekeeping, and Readers Digest. Val is the former State Unclaimed Property Administrator for the State of North Dakota. She managed the administration and enforcement of the North Dakota Unclaimed Property Act, initiated legislation, and testified before various legislative committee hearings on the subject of unclaimed property. She is often a featured speaker for holder education seminars and has been actively involved in the Unclaimed Property Professional’s Organization (UPPO) since 2001. Val may be contacted via valerie.jundt@thomsonreuters.com

G. Samuel Schaunaman, II

G. Samuel Schaunaman II is a Senior Manager in the Unclaimed Property Group of Thomson Reuters (Property Tax Services), and formerly was with the Unclaimed Property Group of Deloitte & Touche LLP. He has consulted with clients in numerous industries, with particular unclaimed property expertise in the Oil & Gas and ERISA/employee benefits areas. He previously served as the Co-chair of the Unclaimed Property Professionals Organization (UPPO) Legislative Committee, and currently serves as Co-chair of the UPPO Emerging Issues Committee. He is a member of the Oklahoma Bar Association. Sam may be contacted via sam.schaunaman@thomsonreuters.com

Christopher Jensen

Christopher Jensen, CPA, is a Senior Consultant in the Unclaimed Property Group of Thomson Reuters (Property Tax Services) and formerly was with the Unclaimed Property Group of Deloitte & Touche LLP. Chris’s experience with Thomson focuses on assisting companies with various aspects of unclaimed property compliance such as analysis and quantification of potential unclaimed property liabilities, voluntary disclosure initiatives, and the development of comprehensive policies and procedures. Chris is currently the Chair of the Unclaimed Property Professionals Organization (UPPO) Finance Committee. He is also a member of the American Institute of Certified Public Accountants and North Dakota Society of Certified Public Accountants. Chris may be contacted via christopher.jensen@thomsonreuters.com

Unlike a tax audit, state unclaimed property audits, in some states, can reach back more than 20 years.