Q&A: Top questions about reporting unclaimed property

Jamshid Ebadi, Ryan Hartman
| 4/11/2022
Q&A: Top questions about unclaimed property

Unclaimed property is an ongoing risk for today’s healthcare organizations. Increased audit activity and growing interest in the topic among states persist, with many states pursuing unclaimed property – money owed to an original owner that has not yet been claimed by that owner – more vigorously as a source of revenue generation.

Good reason exists to believe unclaimed property will continue to be an area of concern. Many states are casting a wider net when it comes to pursuing unclaimed property audits, focusing their attention downstream from the largest health systems to smaller provider organizations and the companies that conduct business with them. In addition, the third-party firms that the states partner with to conduct audits receive a contingency fee based on the amount of unclaimed property reported, giving them a financial incentive to locate noncompliant organizations.

Here are answers to some common questions about unclaimed property reporting, especially as it relates to the healthcare industry.

1. Why do healthcare organizations need to report unclaimed property?

Noncompliance with statutory requirements for reporting unclaimed property can expose organizations to costly financial and reputational risks as well as audits. Compliance efforts, therefore, are crucial.

All states require businesses to report unclaimed property. However, reporting requirements vary widely across the country. In healthcare, some of the most common types of unclaimed property include active credit balances, payroll, accounts payable, and patient refunds.

Unclaimed property is due back to owners at their last known address. It’s important for organizations to note, therefore, that unclaimed property reporting rules are determined by the state in which the payee is located, not the state in which the hospital or health system is based. If a large health system treats patients in several states, or if the organization conducts business with vendors in multiple states, that health system might be required to report unclaimed property to all those states.

2. How can an organization stay compliant with unclaimed property regulations?

Unclaimed property should be escheated to states annually. Because organizations might have compliance obligations in several different states, they should be aware of nationwide variations in reporting requirements.

The Uniform Law Commission has developed several acts over the years (most recently the Revised Uniform Unclaimed Property Act in 2016) in an attempt to achieve uniformity in unclaimed property reporting. However, a great deal of variety still exists when it comes to how states have adopted the rules. In fact, most states have adopted pieces of each act in a patchwork manner, making it even more difficult for businesses to understand. If an organization has compliance obligations in multiple states, to minimize risk, it should identify its exposure states and the primary rules governing unclaimed property in those states. The goal is to comply as closely as possible to each state’s reporting requirements.

After understanding to which states the organization should be reporting unclaimed property, the organization should review its balance sheet to identify any property in its possession that could be unclaimed property. The organization should review outstanding disbursements (for example, payroll, accounts payable, or vendor checks) and any credits (for example, unidentified or unposted cash) that might be dollars it is holding on behalf of someone else and that it has not been able to return to the owner.

Once the organization has identified unclaimed property, the next step is determining to which state each item should be reported. Then, it must review those states’ specific reporting requirements, such as dormancy periods.

After determining reporting requirements, the organization should perform due diligence. Again, requirements vary by state, so organizations need to be aware of them for each state in which they do business. For example, all states require companies to send a mailing to property owners before the unclaimed dollars are turned over to the states as unclaimed property. Requirements for those letters – such as formatting and language – vary.

After completing all these steps, the organization would then prepare its unclaimed property reports and send payment to the states.

3. What are some commonly overlooked areas related to unclaimed property in healthcare?

Credit balances. It is estimated that well over three-quarters of a health system’s total unclaimed property liability is active credit balances in its patient accounting system (PAS).1 Examples of credit balances that could be unclaimed property include inactive credits, patient credits, payer credits, and false credits (credit balances that are the result not of an overpayment but, rather, of a contractual adjustment error).

The various statutory requirements regarding how to handle credit balances include rules about when overpayments must be returned to patients. Healthcare provider organizations also should consider other factors, including specific rules for governmental payers and commercial payers regarding overpayments.

Organizations should consider all the factors involved with handling government payer dollars, including requirements within the Social Security Act about how these dollars need to be returned. It is wise to have mechanisms in place to make sure these accounts are addressed and not aging. Recently, an uptick in False Claims Act cases brought by whistleblowers has led to healthcare entities getting caught in the middle between the states, which claim those dollars need to be escheated to them as unclaimed property, and federal regulators. Again, thoughtful, thorough documentation is critical for avoiding risk.

Unposted cash and write-offs. A large unposted cash account, with dollars that have not been cleared out and distributed appropriately within the PAS, can be a huge risk. An organization should perform an annual review of its use of clearing accounts and its processes for reconciling cash inflows and outflows. Having a process in place for resolving those accounts and posting them appropriately will go a long way toward mitigating risk.

Regarding write-offs, even if the organization has decided internally to not write off balances of a certain amount, these still need to be identified, as the states will consider them unclaimed property, and the amounts will need to be included in unclaimed property reports and escheated as such. Good recordkeeping and thorough documentation are essential.

M&A activity. When organizations engage in mergers, acquisitions, consolidations, or other such transactions, as part of the due diligence process they need to gain full visibility into a potential business partner’s unclaimed property liability. Likewise, the organization should make its own unclaimed property reporting status and processes known to potential partners.

4. How can an organization address past unclaimed property with states?

When an organization discovers it has a large quantity of unclaimed property on its books and an unintentional gap in its reporting history (this might happen, for example, during a merger or acquisition), it should take care of the backlog as soon as possible and get up to date with compliance requirements. To initiate the process of handing over the unclaimed property to the state or states, the organization can consider a voluntary disclosure program (VDP).

Most states offer the opportunity for voluntary disclosure, which allows an organization to come forward and declare its desire to be in compliance, enter a formal process with the state to identify which unclaimed property has been missed, and submit those dollars to the state. A major benefit of a VDP is that most states will waive related penalties and interest for the organization. As with many aspects of unclaimed property reporting, states vary in how they process voluntary disclosures, including the application process.

5. What should an organization do if it receives an “invitation” from a state for an unclaimed property audit?

Unclaimed property audits are evolving. For example, self-audit programs are becoming more popular in several states. Some states, including Illinois and Washington, are sending “invitations” to entities to participate in a self-audit of their unclaimed property. These self-audits, however, often are still administered by third-party auditors (the organization controls the audit, but the third-party audit firm collects the audit fee).

An organization should not ignore an invitation to conduct a self-audit. Rather, it should approach the audit with caution and follow the recommended time frame. In some cases, the self-audit might be benign in that the organization fills out the information, submits it to the state, and never hears anything about it again.

Other times, however, a self-audit invitation might seem benign but can turn into a full-blown audit. If the organization has a vendor partner with whom it works to review and escheat unclaimed property, it should turn to that third party for guidance on the appropriate way to handle a self-audit. Doing so can prevent potential overexposure of information to the state and is good practice in general for managing unclaimed property and avoiding risk.

6. With all the concerns about data privacy in healthcare and other industries today, what information is an organization allowed to provide to the state?

The third-party firms that conduct unclaimed property audits on behalf of states routinely ask for sensitive customer information such as birth dates, Social Security numbers, and addresses. The information that companies are – and are not – allowed to share varies by state. Organizations should familiarize themselves with state privacy laws and keep data privacy top of mind.

 

1 According to data from Crowe client engagements, 2009-2021.

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Jamshid Ebadi
Jamshid Ebadi
Principal
Ryan Hartman
Ryan Hartman