The Pennsylvania General Assembly passed HB 1605 on July 13, 2016, and it was approved by Governor Tom Wolf on the same day. Contained within this omnibus finance bill are two sections that significantly amend Pennsylvania’s unclaimed property law: section 4, which revises the dormancy standard applicable to IRAs; and section 5, which imposes formal due diligence requirements on holders.
In particular, section 4 of HB 1605 revises section 1301.8 of Pennsylvania’s unclaimed property law to provide that the dormancy period for a retirement account is triggered when the holder “has lost contact” with the owner, which is evidenced by one or possibly two instances of returned mail (“RPO”). An IRA would be reportable three years after such contact has been lost provided there has been no intervening owner contact or activity. This standard replaces the previous standard that required an IRA to be escheated 3 years after the owner turned 70 1/2 or last indicated an interest in the account or plan (or other property held by the holder).
The implementation of an express RPO standard in the context of IRAs is certainly a positive development for holders. However, significantly, there does not appear to be any requirement that the owner must also reach the age of required minimum distributions (“RMD”) (i.e., April 1 after the year in which the owner turns 70 ½) in order for the IRA to be presumed abandoned, which was a feature of the prior law. Thus, under the new law, if a holder receives two consecutive instances of RPO from mailings made to the owner when the owner is 40 years old (for example), the IRA will be escheatable three years later, assuming no contact/activity by the owner. In addition to resulting in escheatment of the account (and subsequent liquidation, if it contains securities), this could subject the owner to tax penalties by virtue of the fact that a distribution will be deemed to occur prior to when the owner turns age 59 ½. It seems to make little sense for a state to require an IRA to be escheated prior to the date that the owner would be required to begin taking distributions (or even prior to the date that the owner could begin taking distributions without penalty). Indeed, nearly every other state that expressly addresses IRAs in its unclaimed property law pegs the dormancy standard to federal RMD rules.
At the same time, section 5 of HB 1605 adds a new section 1301.10A to the Pennsylvania law, which imposes a formal, written due diligence requirement on holders of unclaimed property. Pennsylvania thus joins the 49 other states (plus D.C.) that require some form of due diligence. The requirements generally reflect those contained in the 1981 and 1995 Uniform Unclaimed Property Acts – i.e., due diligence is required to be sent not more than 120 days nor less than 60 days prior to filing the report, provided that the holder’s records do not disclose the owner’s address to be inaccurate and the value of the property is $50 or more. The legislation also specifies that the letter must be sent by first-class mail, which is also required by certain other states (although notice may be sent electronically if the owner has previously agreed to electronic notice). Finally, the legislation requires the due diligence notice to indicate (i) a description of the property, (ii) a description of the property ownership, (iii) the value of the property, and (iv) information necessary to contact the holder.
It is possible that the General Assembly believed that having an RMD requirement for IRAs was not necessary given HB 1605’s imposition of due diligence requirements. However, the assumption that requiring due diligence will mitigate the risks associated with escheating IRAs before the owner turns 70 ½ seems overly optimistic. In addition, there is an express exemption from conducting due diligence where the holder’s records disclose the owner’s address to be inaccurate, which would necessarily be the case for all potentially escheatable IRAs under the new standard (in other words, the holder will have “lost contact” with the owners of these IRAs). Thus, it is unclear whether a holder would ever be required to conduct due diligence with respect to an IRA.
HB 1605 has been signed and is scheduled to take effect in 60 days. Holders should therefore review the impact of this legislation on their operations and consider the implications associated with the potential escheatment of IRAs prior to April 1 of the year after the owner turns 70 ½.