Where Liability Lies: Third-Party Administrators and UP Compliance

By Laurie Andrews, Director of Consulting

December 19, 2019

There have been a lot of questions around third party administrators (“TPA”) and whether or not they assume a company’s responsibility to track, monitor and report unclaimed funds. There is a lot of concern within the unclaimed property industry, and the issue warrants further discussion. Generally speaking, a TPA is a firm that serves as vendor that performs tasks related to accounting or record keeping functions that may impact unclaimed property compliance. Examples of TPAs are transfer agents, payroll processors, issuers of official checks, rebate processors, and gift card administrators.

When using a TPA, the question becomes, who is responsible for escheatment. The only way to know is to pull out the contract and read through it carefully. The language in the contract should define who is ultimately responsible for escheatment in the event that a transaction remains uncashed or unused or an account becomes dormant. It is important to note that if the contract is silent on escheatment, the obligation remains with the company who meets the definition of “holder” under unclaimed property laws. Without a clear indication of intent to transfer the obligation to escheat, it will not rest with the TPA.

Recently, we’ve become of aware of a TPA who returned funds from uncashed official checks to financial institutions years AFTER the funds were due to escheat. In fact, in many cases, the checks were issued by predecessor entities and the current financial institutions had no awareness of these checks, or the fact that they remained outstanding and uncashed. Several of these financial institutions no longer even used the services of this TPA. Moreover, in many cases the contract between the TPA and the entity or its predecessor was so old that it was outside of the entity’s record retention requirements and therefore it was no longer accessible.

This situation precluded the financial institutions from arguing that the TPA had the ultimate contractual responsibility for escheatment. In this case, the TPA did not communicate with the financial institutions concerning the outstanding official checks and associated funds during the applicable dormancy period. Rather, the funds were retained by the TPA for years before the financial institution, often a successor to the original TPA client, was notified. Ultimately, since the financial institutions were the “issuers” of the official checks, the unclaimed property obligation remains with the financial institution while the TPA continues to assert that they are not responsible. To further complicate this issue, depending on the state to which these funds are due, any associated penalties and interest may be borne by the “issuer”. Finally, any indemnity obligations on the part of the TPA for its failure to timely provide information regarding the funds, are likely to be found in the same inaccessible services contract that would have defined escheatment obligations in the first place.

If you use the services of the TPA to perform functions that could impact or result in unclaimed property, what steps can you take to help protect your company from similar situations? First, be sure to review the contract to verify that responsibilities for the functions that impact potential unclaimed property and the corresponding responsibilities to report and remit outstanding unclaimed property arising out of the arrangement are clearly defined.

Is this enough? I say it isn’t. As a further safeguard, you should always, always, request copies of the escheatment reports filed on your company’s behalf to validate what’s been escheated. This will confirm the TPA met the terms and conditions of their contractual obligations. Copies of these reports should be maintained for a minimum of 10 years along with proof of payment.

Following these simple precautionary measures can help to reduce the unclaimed property risks associated with TPA relationships.

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