Pennsylvania’s New Rules on “Unclaimed Property” and Retirement Accounts

As of September 10, 2016, Pennsylvania’s rules on when a retirement account is viewed as unclaimed property that “escheats” to the Commonwealth underwent significant change. Escheatment is the process by which “abandoned” property falls under the custody and control of the Commonwealth. Upon such transfer of custody and control, the Commonwealth may then either hold the property or sell the property and hold the proceeds. At any time after the escheatment, the property, the proceeds or any income made on the property may be returned to the owner, but only after the owner presents evidence showing he is the owner. Unclaimed property or proceeds are held, minus a reserve, in the Commonwealth’s General Fund, for Commonwealth use.

Now, unlike before, if an IRA shows no activity for a period of three years, regardless of the account holder’s age, that account may be deemed “dormant” for purposes of this unclaimed property law. While the State Treasurer assures citizens that “(p)roperty owners or their heirs may claim the value of their property in perpetuity,” this still may not be much comfort to an individual who expects that his account will be in place and available when he or she needs it.

The new rules are different than Pennsylvania’s past practice which only placed retirement accounts in such jeopardy if the holder had reached the Required Minimum Distribution (RMD) age of 70 ½. Now, however, accounts held by owners of all ages (and Roth IRAs which have no RMD requirement) are also under such review. Ownership of retirement accounts will be transferred to the Commonwealth if the Account holder has ”lost contact with the owner” (very generally meaning that two mailed notices have been sent to the owner and are returned as undelivered) and if in the three years after such loss of contact, the owner has not:

  • increased or decreased the principal in the account;
  • commenced receiving distributions; or
  • indicated an interest in the account or plan or in other property of the owner in the possession, custody or control of the holder.

Based on this three year time line, it seems clear that no one is immediately in danger of having their account deemed unclaimed; however, it is not too early to start engaging in good practices to ensure that this does not happen to you in the future—especially if your mailing address has changed. Steps that you may want to take include:

  • periodically contacting your IRA holder by phone or setting up on-line access and using it;
  • ensuring that the holders of your IRAs have your correct, current address so no mail to you is returned as undeliverable and the three year “clock” does not start running; and
  • for this and federal tax reasons, make sure you take your RMDs (because the three year clock still begins to run at age 70 ½ irrespective of whether the account holder has lost contact with you).

This new legislation has been criticized in many quarters. Some reporters and commentators have suggested that the new law is budget motivated and meant to help shore-up the State’s finances. The Department of the Treasury replies that this is not the case and that “(t)he change was written with the support of the Pennsylvania Bankers’ Association to provide greater clarity on how account administrators should maintain contact with account owners and to protect the interest of account beneficiaries.” Notwithstanding that response, it seems strange that a retirement account, which is specifically designed to be a long term holding available upon retirement, would be vulnerable to escheatment to the Commonwealth simply because someone in their thirties, forties or fifties does not handle the account actively enough.

Financial problems can easily be foreseen with the new law. For example if the IRA contains stocks, bonds or other securities, those assets would have to be liquidated. Thus, the owner of the account would lose the investment characteristics of the IRA that he or she initially set up. Additionally, there is a question raised by at least two commentators over whether this escheatment would result in the IRA being treated as distributed. This would result in a tax being due, and in the case of an owner being under the age of 59 ½, a 10% penalty being owed.

— Rod Fluck

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