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UPPO seeks clarification about Pennsylvania’s due diligence and IRA provisions

Posted By Administration, Thursday, October 6, 2016

On July 13, 2016, Pennsylvania Gov. Tom Wolf signed H.B. 1605 into law. The massive bill revises the commonwealth’s Fiscal Code, including its unclaimed property program. Among H.B. 1605’s unclaimed property provisions are requirements for conducting due diligence and escheating Individual Retirement Accounts (IRAs). Unfortunately, the law’s language is causing confusion for unclaimed property holders. In an effort to gain clarity, UPPO submitted a letter to Treasurer Timothy Reese and legislative leaders on Sept. 22, 2016.

 

Due Diligence

One of the new statutory provisions imposed by H.B. 1605, Section 1301.10A, requires holders to perform due diligence for property valued at $50 or more when the holder’s records do not disclose the owner’s address to be inaccurate. The statute specifies that holders must send written notice by first class mail, “unless the owner has previously agreed to a method of electronic notice that remains valid to contact the owner.”

 

The statute’s wording opens the door to multiple interpretations. It is unclear whether an owner’s agreement to receive electronic notices triggers a requirement for the holder to use electronic communication or merely gives the holder the option to choose either first class mail or electronic communication.

 

The due diligence provision also fails to specify what constitutes owner agreement to receive electronic communication. It fails to define whether the owner’s request to receive any type of communication from the holder is sufficient or if the agreement must specifically include due diligence notices. Similarly, it causes confusion for holders who have received consent to send specific types of communication via one method (tax forms by mail, for example) and other types of communication via another (i.e., general account information by email). 

 

IRA Distributions

Under federal law, IRA owners are allowed to take account distributions beginning at age 59 ½ without penalties and are required to take account distributions beginning at age 70 ½. If they choose to take distributions before 59 ½, they are subject to an additional 10 percent “early distribution” tax (with some well-defined exceptions).

 

Section 1301.8(2) of H.B. 1605 suggests that IRAs could be reportable to Pennsylvania regardless of the owner’s age. This could trigger the 10 percent early distribution penalty for owners under the age of 59 ½. Because the Internal Revenue Service has not addressed whether unclaimed property reporting of an IRA owned by someone younger than 59 ½ triggers the early distribution tax, the change to Pennsylvania’s law could lead to several unintended risks for IRA owners and custodians, including:

  • The incorrect application of taxable income reporting.
  • Tax withholding and overall tax liability computation.
  • Long-term loss of compounded interest earned on account balances.
  • Long-term loss of the accrued value of reinvested dividends no longer accruing on accounts.
  • General interference with the long-term retirement investing goals of individuals who often use IRAs as passive, long-term investments with no expectation of the need to access the funds prior to retirement.

In its comments, UPPO encouraged Pennsylvania officials to consider the potential negative tax consequences of the unclaimed property provisions on the commonwealth’s residents and questioned whether the state has the authority to subject residents to such consequences.

 

Federal Preemption

The new IRA dormancy standard in H.B. 1605 also may conflict with federal law governing the creation, control and tax treatment of such accounts. UPPO points out that the tax implications from IRA distributions required by the new law contradict Congress’ intent to provide a clearly defined and heavily regulated tax benefit to retirees. Thus, the state’s unclaimed property law would violate the Constitution’s Supremacy Clause, which establishes that federal law takes precedent.

 

Pennsylvania Law Inconsistency

In addition to the apparent conflict with federal law, H.B. 1605’s IRA provisions seems to conflict with Pennsylvania’s own unclaimed property principles. UPPO writes, “The Pennsylvania Disposition of Abandoned and Unclaimed Property is founded on the premise that the Commonwealth may take custody of property that is ‘payable or distributable’ to an owner, but which the owner has abandoned or neglected to claim. The change implemented by H.B. 1605 permits the Commonwealth to take custody of assets that are not ‘payable or distributable,’ and ignores whether the owner has truly abandoned the property or not. Thus, the legislation crosses over the threshold of taking custody, and acts instead to confiscate the assets of Pennsylvania residents.”

 

A spokesperson for Pennsylvania’s Treasury Department told The Wall Street Journal that the dormancy standard was aimed at protecting retirement account beneficiaries, allowing them to access IRA accounts when the owner died before the mandatory IRA distribution age. The wording of the new IRA dormancy provision, however, is overly broad for that intent.

 

UPPO hopes to receive clarity regarding these issues soon. We will update membership via the blog with news and developments related to the UPPO letter or these regulations. View UPPO’s letter.

 

 

Tags:  compliance  due diligence  IRAs  Pennsylvania  unclaimed property 

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