Keanotes

Obligations for Nonprofit Organizations

By Gary Joseph, Senior Manager, Consulting & Advisory Services Team and Paola Narez, Senior Manager, Consulting & Advisory Services Team

March 24, 2020

Introduction

Unclaimed property is a well-known exposure area for many business sectors, including banking, insurance, securities, healthcare, manufacturing/construction and energy. States have historically focused heavily on the aforementioned industries, however every now and again they venture away from the norm into new industries. For example, over the past couple years we have seen an increase in the audits of FinTech companies as a result of the expansion of e-commerce and digital currency. Likewise, we have observed an increase in nonprofit organizations receiving compliance notices as states search out organizations with the potential for unclaimed property exposure. A common misconception is that nonprofits are exempt from unclaimed property compliance due to the charitable nature of their organizations, limited personnel staffing, relatively small size of property exposure compared to other industries, lack of profit margins, and strict cash flow management criterion.

Unclaimed Property in Nonprofit Organizations

Nonprofit organizations have the potential to generate unclaimed property and may be subject to the same unclaimed property laws (i.e. escheat laws) as organizations in other industries. While certain states exempt non-profits who qualify as 501(c)(3) organizations from unclaimed property requirements, others consider them on the same level as all other organizations. Generally speaking, the larger the nonprofit’s asset portfolio (i.e. bank accounts and accounts receivables) and the greater its rate of spend (i.e. check issuance), the higher its risk of generating unclaimed property. In our experience, unclaimed property types generally held by nonprofits include:

  1. Uncashed or unresolved payroll
  2. Accounts receivable overpayments
  3. Uncashed accounts payable disbursements
  4. Outstanding patient refunds
  5. Employee benefits

While we have seen the greatest exposure to the nonprofit industry in the form of accounts receivables overpayments and outstanding checks, the other property types mentioned deserve just as much attention. The omission of proper controls and assurance of compliance with state unclaimed property laws can prove to be a costly and time-consuming burden when states suddenly come “knocking” on the door to conduct unclaimed property audits. Even a seemingly small amount of unclaimed property can accrue significant penalties and interests over time.

Recommendations

The recent increase in unclaimed property audits and state outreach communications within the nonprofit sector means that entities should familiarize themselves with unclaimed property laws, especially for jurisdictions in which they operate. Moreover, they should review their books and records to assess potential risk (e.g., identify properties of greatest exposure), develop plans to mitigate, and implement appropriate management systems (e.g., policies, procedures, training, systems/IT controls) to meet unclaimed property requirements.

Unclaimed property can be a challenging task for nonprofits, as it is often uncharted territory for them – not to mention that the enterprise may not possess the resources or expertise to conduct a self-evaluation of compliance. Nonprofits may be best served by consulting an external unclaimed property expert to assist in a comprehensive evaluation of exposure to ensure controls are in place to mitigate risk and ensure ongoing compliance.

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