The following is an article reprinted with permission from the upcoming Summer 2008 edition of The WWR Letter:
Dormant Accounts and Escheatment
By: Matthew Burg, Esquire
“A penny saved is a penny earned”…well, unless the account becomes dormant. This old adage obviously did not contemplate dormant accounts and the state’s power of escheatment.
Credit unions, like banks, must deal with dormant customer accounts – accounts that sit unused usually due to its owner’s death, inadvertence or forgetfulness. Once an account becomes dormant, the funds escheat, or revert, to the state. Astonishingly, the State of Ohio’s Unclaimed Funds Division maintains more than 3.2 million accounts, some generated from money left in dormant accounts, worth over one billion dollars.
For purposes of Ohio’s escheatment laws, checking and savings accounts are deemed dormant after five years of inactivity on the account between the owner, i.e., the person or legal representative having an interest in the account, and the holder, i.e., the credit union or bank who has possession of the money in the account. Any activity on the account, however, such as an owner’s increase or decrease of the funds, correspondence with the holder concerning the funds, or some acknowledgement by the owner of an interest or knowledge of the funds, will protect the account from being dormant.
If an account becomes dormant, the holder is required to report the unused, abandoned or unclaimed funds to the state. A credit union’s failure to accurately and timely report dormant accounts may result in penalties. Aside from the penalties associated with failing to report unclaimed funds contained in dormant accounts, the costs associated with maintaining a dormant account are generally unrecoverable once the funds escheat to the state.
Some tips and traps to keep in mind when dealing with dormant accounts:
• Dormancy Periods: Know your state’s dormancy periods for each type of account. Each state has its own time periods, which differ amongst the states. States also apply different dormancy periods to different types of accounts. For example, a bank account becomes dormant after five years in Ohio, but an IRA becomes dormant after only three years.
• Reporting: Know your state’s reporting deadlines. In Ohio, the reporting deadline for accounts dormant as of June 30 is November 1 of the same year. Even if no unclaimed funds are held, a “negative” report must still be filed.
• Preemption: Federal law preempts state law whenever a conflict exists. Thus, even if your state law does not allow state credit unions to retain a portion of the dormant funds before they escheat to the state, the same is not true for federal credit unions governed under federal law. Generally, federal credit unions may recover fees or costs generated in maintaining an account before the unclaimed funds escheat to the state.
• Multiple customer accounts: When customers have multiple accounts with a credit union, link the accounts together. If one account becomes dormant, a customer’s activity with the other accounts may insulate the dormant account from reverting to the state.
• Penalties: Knowing the reporting requirement and providing accurate reports are crucial because of the potential penalties for non-compliance. In Ohio, a failure to report unclaimed funds or under-reporting unclaimed funds may result in civil penalties of $200.00 per day or criminal penalties as high as $500.00 a day, plus interest.
Overall, maintaining both a dependable computer system and accounting/operating procedures are critical to a credit union’s success in monitoring accounts, promoting activity and complying with state reporting requirements. And for those customer accounts that do remain active, a penny saved will be a penny earned.
Matthew G. Burg is an Associate in the Litigation & Defense department of the Cleveland office. He can be reached at (216) 685-1111 or firstname.lastname@example.org.
Resources utilized in preparing this article:
Ohio Department of Commerce at http://www.com.ohio.gov/unfd/
Ohio Revised Code Ch.169
Current Issues in Credit Unions podcast, March 22, 2008, http://www.ciicu.libsyn.com/ (featuring WWR Partner, Robert W. Rutkowski)
McMahan, Emmet. Guide to Unclaimed Property in Ohio.