Governor Wolf and the State Legislature of Pennsylvania took a bold step that could conceivably affect the IRA retirement accounts of PA residents. In the budget bill passed in July, a new provision makes it easier for PA to deem IRA retirement accounts “abandoned,” which would thereby require these accounts to be turned over to the state as unclaimed property regardless of the age of the owner of the account.
First, is this legal? Unfortunately for PA taxpayers, it is legal. All states have abandoned property laws, known as escheatment laws. These laws allow a state to take possession of individuals’ lost property so the state could use its greater resources (such as tax and property records) to find lost owners and reunite them with their property. The premise of the law is good. Whether states actually use their greater resources to find the property owners is questionable.
How does the escheat process work? Assume that ABC Company issues dividends to its shareholder, John Doe, who has moved and did not notify ABC of his new address. The dividend checks are returned to ABC as undeliverable. If there were no abandoned property law, ABC would simply pocket the money. However due to the abandoned property law, ABC is required to turn the dividend money over to a state for safekeeping. When the state publishes its annual listing of persons who have property being held by the state, John Doe, a relative, or friend may see that he is entitled to money and the appropriate person makes a claim to recover their property. (Since the states don’t publish the value of the property being held, the claimant is often excited about a possible windfall).
What is new with the PA legislation is that no other state goes after retirement accounts (IRAs, self-employed retirement accounts, or similar plans) this aggressively. Generally, states wait until the account owner reaches age 70 and a half before they begin the escheatment process. As of September 10, 2016, Pennsylvania will be the first state to remove this age restriction, meaning that every retirement account in PA is at risk.
So has does this affect PA residents? Under the “old law”, if the holder of the account was unable to make contact with the IRA account owner, those IRA monies would not have been required to be turned over to PA until three years after the account holder had reached age 70 ½. Under the “new law”, accounts become escheatable three years after the holder (fiduciary) has “lost contact with the owner” of the account, regardless of age. A owner will not be deemed to have lost contact if he or she – (1) has commenced receiving distributions of principal or income; (2) increased or decreased the principal; (3) received payment of principal or income; or (3) has otherwise indicated an interest in the property – including an interest in any other property that may also be held by the holder, such as a checking or money market account. PA has broadly applied the “indicated an interest in the property” so as to include such things as merely logging online to the account, updating the account, responding to an email message from the holder and the receipt of mail without it being returned as undeliverable, to the holder. In addition, no property is reportable unless two (2) consecutive communications sent by the holder, via first class mail, have been retuned as “undeliverable.” If the account owner has elected to receive electronic communications, the property is not reportable unless the owner has failed to respond to any electronic communications two (2) years after the last “indicated interest in the property,” and the holder attempted to contact the owner by first class mail but the correspondence was returned as
Whereas an IRA holder can have monies distributed by the IRA custodian almost immediately to meet medical or financial emergencies, if held by PA, there is much paperwork that needs to be submitted and distributions cannot be made immediately (usually several weeks or months are needed to process the request). There are those who believe that if the IRA account is escheated for a person under age 59 ½, it could subject that account owner to the 10% tax penalty for an early deemed distribution.
To protect yourself, make sure you (and other family members) identify the IRA accounts you hold and make sure that you periodically check to make sure your account is active and if you relocate, make sure that you notify the account holder of your new address. This also includes providing the account holder with your new email address if that is your primary means of notification with the fiduciary account holder.
If you wish to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.