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EMPLOYEE BENEFIT TRUST DISTRIBUTIONS

Large employers often establish some form of employee benefit/retirement plan. Retired and ex-employees move away, the plan administrator loses contact with them and their benefit distributions remain unclaimed. Often, a bank's trust department is the plan administrator and the auditor will require an introduction from the company before auditing records at the bank.

This is an area of continuing controversy. Employee benefit trusts (EBTs), established under the provisions of the Employee Retirement Income Security Act (ERISA), call for unclaimed distributions to be absorbed back into the trust for the benefit of the remaining members. This contradicts the prohibition against private escheat included in the unclaimed property statutes of Texas and many other states as well.

Much has been written over the years about whether ERISA, a federal law, preempts state unclaimed property laws. Some states have challenged it in the past; others continue to do so. The few actual court cases on this subject have been inconclusive. Texas has not taken a formal position on the issue, preferring to defer audits of ERISA-based plans until after the question is settled.

The results of step 1, then, will assist the auditor in deciding whether to continue with the rest of the audit of the employee benefit plan.

  • Determine the legal nature of EBT plans for the treatment of unpaid benefits.
  • Review the internal control over distributions.
  • Review the accounting procedure on distributions.
  • Age all outstanding or unpaid distributions subject to reporting.
  • Analyze liability accounts related to distributions or payments.
  • Trace reported distributions through the holder's system to determine their origin and disposition.
  • Review trust accounts and related declarations of trust.
  • Analyze accounts used in connection with revocable or irrevocable trust deposits. Review trust agreements as deemed necessary.

 

PERSONAL TRUST PROPERTY

The most frequently occurring form of unclaimed personal trust property is the excess of dividends over what can be allocated to personal trust accounts. This occurs as a result of timing differences between the sale of securities on behalf of one or more trust accounts and the declaration of dividends by the issuer of the securities.

Usually, the issuer's dividend disbursing agent will follow up with a refund request for excess dividends after being contacted by the new owner of the securities, but not always. Some dividend disbursing agents even refuse the trust company's attempts to return unallocable dividends when they haven't heard from the new owners because, left as is, their records balance.

  • Evaluate and document the system of internal control over unclaimed items.
  • Examine dividend and interest clearing accounts:
    • Analyze aging procedure.
    • Trace items from active accounts to special control accounts.
    • Trace items reported to the State.
      • Reconcile dates and amounts.
      • Add back all charges taken and amounts offset improperly.
  • Undeliverable fiduciary checks:
    • Analyze controls for outstanding checks and the disposition of same.
      • Prepare a schedule of unreported outstanding checks.
      • Test for write-offs of outstanding checks.
  • Suspense accounts:
    • Obtain a list of general ledger suspense accounts.
      • Select accounts for further testing.
      • Evaluate the internal controls over these accounts.
    • Test claims:
      • Trace items reactivated from suspense accounts.
      • Test for write-offs of suspense account items.
      • Trace items reported to the State.
        • Add back all charges taken.
        • Reconstruct amounts offset to unrelated debit items.
    • Reconstruct amounts improperly charged off or taken into fees prior to becoming reportable.
  • Analyze controls for uncleared unallocable dividends and the disposition of same.
  • Analyze suspense stock and bond positions for unclaimed stock, dividends, and interest that cannot be allocated to individual trust accounts.
  • Test for the sale of suspense stock certificates and the ultimate disposition of the proceeds.

 

CORPORATE TRUST PROPERTY

Coupon-Bond Paying Agent
The bond-paying agency of a bank's corporate trust department is frequently out of balance in many of its client accounts when the bonds are bearer instruments. Bond issuers transfer funds to the paying agent at each coupon maturity date to cover that period's interest payments. Though some commingling of funds may occasionally be found, the common procedure is for the agency to deposit the funds to the appropriate demand deposit account (DDA) set up for each specific bond series. Bond and coupon redemptions are then paid directly from those accounts.

Some bond paying agents have such tight controls on these DDAs that they are able to report exactly which coupons from which numbered bonds remain outstanding. However, the many similar names of the different bond series increase the chances for clerical errors when interest coupons are received for payment. Coupons from one series of bonds are redeemed with funds received for another series and, within a few years, the accounts can be hopelessly out of balance.

  • Evaluate and document the procedures for processing of undeliverable and outstanding interest payments.
  • Review document files for debt accounts and obtain copies of pertinent sections of the indenture agreements instructing the trustee.
  • Evaluate the internal control over undeliverable property.
  • Test currently open and closed principal and interest control accounts for:
    • Unreported property.
    • Property service charged or charged off.
  • Test transaction journals for questionable entries for: (Redemption accounts, debt maturity accounts for both principal and interest.)
    • Service charging.
    • Charge-offs.
    • Fees being charged.
    • Offsetting to recoveries accounts.
    • Return of funds to principal.
    • Accounting offset of unrelated property.

Dividend Disbursing Agent
Even when the actual certificates are presumed to be in the possession of the missing owner, stock shares must be reported as abandoned if:

  • All distributions have remained unclaimed, or mail addressed to the owner has been returned as undeliverable, for at least three years,
  • The owner has not communicated with the holder, in writing or otherwise, within the past three years, and
  • The location of the owner is unknown.

When reported, these are identified as underlying shares. Please note, the only time mail not returned by the Post Office prevents the assumption of abandonment is when there have been no distributions during the previous three-year period.

  • Document the system of internal control over the issuance of cash dividends.
    • Obtain a listing of cash dividend bank accounts.
    • Obtain oral evidence as necessary to supplement the working papers.
  • Evaluate and document the system used for the processing of undeliverable or uncashed cash dividends.
  • Evaluate the internal control over undeliverable or uncashed cash dividends.
  • Test transaction journals for questionable entries.
  • Determine if underlying shares are subject to reporting.

Stock Transfer Agent/Exchange Agent

  • Document the system of internal control over the issuance of stock dividends and fractional-share payments.
  • Document the internal control over undeliverable stock dividends and fractional-share payments.
  • Evaluate and document the system used for the processing of undeliverable stock dividends.
  • Test transaction journals for questionable entries.
  • Age undelivered stock dividend records and determine if unreported dividends and fractional-share payments exist.
  • Evaluate the internal control over unexchanged stock and fractional-share payments.
  • Evaluate and document the system used in accounting for unexchanged stock.
  • Test transaction journals for questionable entries.
  • Age unexchanged stock records and determine if unreported stock and fractional-share payments exist.
  • Determine if underlying shares are subject to reporting.

Receiverships

  • Obtain a list of liquidated corporations for which the holder has been appointed a receiver.
  • Evaluate the internal control over unclaimed distributions.
  • Test transaction journals for questionable entries.
  • Age liquidation distribution records and determine if any unclaimed distributions are subject to reporting.

EQUITY AND DEBT

The auditor may find the required records at the holder's office, but frequently this function is contracted out to one or more agents.

  • Research outside sources such as Capital Clearinghouse (CCH) Changes Reports prior to commencing the examination. Analyze the history of holder, i.e., classes of stock outstanding, stock splits, stock dividends, mergers, acquisitions, spin-offs, etc.
  • Prepare a list of all merged or acquired companies where acquisition was made in a stock-for-stock deal.
    Determine:
    • The date of merger or acquisition.
    • The exchange ratio.
    • If there was cash in lieu of fractional shares or liquidating distribution rates.
    • If the merged company was a public company.
    • The merged company's predecessor transfer agent.
    • The merged company's dividend history.
    • The disposition of unclaimed dividends subsequent to merger.
  • Obtain a list of matured or called debt (bonds, debentures, or notes) for the holder and/or merged companies.
  • Determine if the merged company filed reports with the State. Obtain and review copies of these reports for any previously reported property.
  • Request an introductory phone call or letter from the holder to review the accounting records of the outside agent, if necessary.
  • Request a copy of written procedures used to handle and account for unclaimed equity and debt.
    • Evaluate and document the adequacy and utilization of the above procedures.
    • Evaluate the internal control over reportable property.
  • Determine if the aging of items is proper.
  • Reconstruct charges on any items or items charged off completely.
  • Trace items previously reported to the State to source records and note exceptions.
  • Obtain oral evidence as considered necessary to supplement the working papers.
  • Determine if authorization has been given by the holder to an agent to report unclaimed property to selected states.

 

Shareholder Equity

  • Obtain any legal opinions relating to the reporting of stock, dividends, underlying shares, etc.
  • Evaluate the system of internal control over records of inactive shareholders.
  • Analyze the procedures used to identify and report underlying shares and/or lost shareholders.
  • Obtain copies of agency contracts relating to applicable mergers, acquisitions and liquidations.
  • Evaluate and document the carrying forward of potential unclaimed property from prior transfer or paying agents and the ultimate disposition of same.
  • Determine the disposition of potential unclaimed property held for or by subsidiaries of the holder by prior agents.

Cash and Stock Dividends

  • Document the system of internal control over the issuance of cash and stock dividends.
    • Obtain a listing of cash dividend bank accounts.
    • Age check register and determine if unreported dividends exist.
  • Evaluate procedures used to report outstanding dividend checks.
    • Reconstruct any dividends charged off.
    • Obtain oral evidence as necessary to supplement the working papers.
  • Evaluate and document the system used for the processing of undeliverable cash and stock dividends.
  • Evaluate the internal control over undeliverable cash and stock dividends.
  • Test transaction journals for questionable entries.
  • Determine if underlying shares are subject to reporting.

Unexchanged Stock

  • Evaluate and document the system used in accounting for unexchanged stock.
  • Evaluate the internal control over unexchanged stock and fractional-share payments.
  • Age unexchanged stock records and determine if unreported stock and fractional-share payments exist.
  • Test transaction journals for questionable entries.
  • Determine if underlying shares are subject to reporting.

Principal and Interest on Debt Issues

  • Account for debt redemptions, maturities, and the disbursement of interest payments for registered and bearer debt instruments. (Until the early 1960s most debt securities were issued in bearer form.)
    • Evaluate and document the system of internal control and procedures for the processing of undeliverable and outstanding interest payments.
    • Review pertinent sections of the bond indenture agreements requiring the trustee to return outstanding and undeliverable interest checks or proceeds from unpresented coupons or uncashed checks to the holder after a stipulated period.
    • Review registration requirements of each security.
    • Review currently open and closed principal and interest control accounts for:
      •  Unreported property.
      • Property service charged or charged off.
    • Test transaction journals relating to principal redemption or interest payments for questionable entries: (Redemption accounts and debt maturity accounts for both principal and interest.)
      • Service charging or other fees.
      • Charge offs.
      • Offsetting to unrelated accounts.
      • Return of funds to principal. Requires a separate follow-up.

CREDIT MEMORANDA, GIFT OR MERCHANDISE CERTIFICATES, ELECTRONIC GIFT CARDS, SCRIP OR INSTRUMENTS REPRESENTING CASH SOLD OR ORIGINALLY ISSUED PRIOR TO SEPTEMBER 1, 2005

Some holders successfully prevent states from collecting unredeemed gift certificates by strictly adhering to a policy of redeeming them for merchandise or services only. That is why the auditor's identification of a waiver of this policy (addressed in step 2) is so significant. While the unclaimed property laws of many states, like Texas, include tangible property, most states are unwilling to go through the process of receiving and selling merchandise.

Gift certificates that are redeemable for merchandise or services only, and have a stated expiration period that is less than the statutory period required for the presumption of abandonment, will not be considered as reportable unclaimed property in Texas.

  • Determine if last known address of purchaser can be obtained, e.g., credit records, original issuance records, etc.
  • Determine whether terms of the instrument require presentation within a specified time period and whether only merchandise or services can be obtained. Also, determine if these terms are waived.
  • Determine if the accounting system permits aging of outstanding instruments. If not, use estimating procedures.
  • Analyze selected accounts to determine whether any outstanding credit memos have been taken directly into income or credited to an expense account.
  • For gift certificates, if these are not segregated in liability or reserve accounts, review tax returns to determine the amount unpresented and reported to the IRS as income. The holder may have reported the amounts in the taxable year following receipt, in accordance with U.S. Treasury Regulation 1.451-5.

In summary:  All gift certificates with expiration dates of less than three years are not considered unclaimed property.  Gift certificates with no expiration date or with expiration dates of three years and longer are considered unclaimed property.  However, as a practical matter, those gift certificates considered unclaimed property and redeemable only in merchandise or services should not be considered in an audit without prior approval.

CREDIT MEMORANDA, GIFT OR MERCHANDISE CERTIFICATES, ELECTRONIC GIFT CARDS, STORED VALUE CARDS, SCRIP OR INSTRUMENTS REPRESENTING CASH, SERVICES OR MERCHANDISE SOLD OR ORIGINALLY ISSUED ON OR AFTER SEPTEMBER 1, 2005

EFFECTIVE SEPTEMBER 1, 2005

The 79th regular session of the State Legislature passed Senate Bill 446 (as amended) on May 9, 2005.  The Governor signed the bill on May 17, 2005 with an effective date of September 1, 2005.

 

First and foremost; SB446 applies to stored value cards sold or originally issued on or after September 1, 2005.  All stored valued cards issued prior to this date will be subject to the audit policies and procedures in place prior to this date.  Effectively this means it will be a minimum of three years before this change becomes an audit issue. 

 

Senate Bill 446 is primarily a consumer protection statute relating to stored value cards.  This bill clarifies the definition of a stored value card and changes the criteria in which stored value cards (gift cards/certificate) would be consider unclaimed property and alters the manner and method they will be treated in an unclaimed property audit.

 

"Stored value card" means a record that evidences a promise made for monetary consideration by the seller or issuer of the record that goods or services will be provided to the owner of the record in the value shown in the record, that is prefunded, and the value of which is reduced on redemption.  The term includes a gift card or gift certificate


 

From an audit perspective the bill’s wording is confusing as to when or if a stored value card becomes reportable as unclaimed property.  For audit purposes it makes no difference whether the stored value cards are redeemable for cash, merchandise or service.  In all cases the following guidelines should be used:

 

  • A stored value card is not reportable as unclaimed property if the stored value card has no expiration date AND no fees are assessed, other than those permitted under Section 35.42(d) listed under (a) below.
    • Fees permitted under Section 35.42(d) must be disclosed and reasonable and may only be charged for:
      • Fees or charges for issuing the card or
      • Fees or charges for increasing the value or balance of  the card or
      • Fees or charges for accessing or changing the balance at an unmanned teller machine or
      • Fees or charges for reissuing or replacing a card that was lost, stolen or that has expired.
    • If the fees noted (a) above are not disclosed or not reasonable, then the stored value card’s balance is reportable as unclaimed property after the applicable abandonment period of three years except for wages (MS01 property) which is one year based on the latter of:
      • Card expiration date
      • Card issue date
      • Card last use date
  • If the stored value card has either an expiration date OR charges monthly service fees, other than those permitted under Section 35.42(d) (see specific items listed under 1(a) above), the net amount is reportable as unclaimed property.
    • Additional service fees not specifically covered under Section 35.42 (d):
      • must be disclosed and
      • must be reasonable and
      • may not be assessed until the 13th month after the date the card was sold or issued and
      • may not be assessed beyond the 36th month of inactivity.
      • If i, ii, iii,  OR iv above do not apply, the stored value card’s net balance is reportable and/or should be included in an audit.
  • If a card has an expiration date and does not represent wages and :
    • the stored value card has not been used, the net balance reportable three years from the earlier of:
      • the stored value card’s expiration date or
      • the stored value card’s issue date.
    • the stored value card has been used, the  net balance is reportable three years from the card’s last use date.
  • If a card  has an expiration date and represents wages (MS01 property type) and
    • the stored value card has not been used, the net balance is reportable one year from the earlier of:
      • the stored value card’s expiration date or
      • the stored value card’s issue date.
    • the stored value card has been used, the  net balance is reportable one year from the stored value card’s last use date.
  • Disclosure of the following information must be clear, conspicuous and legibly printed:
    • the stored value card’s expiration date (if applicable) and
    • the stored valued card’s expiration policy (if an expiration date is applicable) and
    • any fees noted in 1) (a) above and
    • any periodic reductions or fees of the unredeemed value not included in 1) (a) above and
    • any other material restrictions placed on the use of the card
  • If the holder cannot provided an address of the stored value card’s owner/purchases, then the last know address is presumed to be Austin, Texas, the address of the Comptroller of Public Accounts.

 

Note:  A stored value card sold without the disclosure as required by this section is valid until redeemed or replaced.


 

LIFE INSURANCE DEATH CLAIMS

The auditor will often find that the reasons some death claim payments are still unpaid years after the date of death relate to disputes between the heirs. Questionable circumstances surrounding the death of the insured, such as the beneficiary's contribution toward bringing about the death, can also hold up payment.

These are certainly valid reasons for delaying payment, but they cannot be used indefinitely. The auditor's inquiries may bring long-standing unpaid death claims to the attention of the holder, with the only reasonable resolution being to report the benefits for an unknown owner.

When examining this type of property:

  • Review the internal control over the death claim payment procedure.
  • Review the accounting procedures utilized to handle death claims.
  • Review the company's follow-up procedure on paying death claims.
  • Review the death claims register or listing for any aged items.
  • Trace a sample of unclaimed payments to policy files.
  • Analyze all death claims held in suspense or unpaid after a specified cutoff. Interview company attorney regarding disputed death claims.
  • Trace claims reported as unclaimed property through the system to determine their origin and disposition.
  • Analyze all claims taken into income or surplus.

 

MATURED ENDOWMENTS, POLICIES REACHING LIMITING AGE, AND OTHER MATURITIES DUE OR PAYABLE

People usually know if they've been named as beneficiaries on life insurance policies. In the event they don't, however, they are unable to inform the life insurance company of the insured's death. Without that information, the death benefits are not yet payable, the abandonment period cannot begin to run and, if the company doesn't learn of the insured's death through other means, the abandonment period won't commence until the limiting age specified in the policy is reached.

In the case of annuity payments and other obligations that are conditioned upon the continued life of a person, those payments are not considered to be "due and payable" in the absence of proof that the payee was alive at the time required by the contract. So, while losing contact with a payee often starts the abandonment period for other types of personal property, it will generally, and properly, result in the cessation of payments made pursuant to an annuity contract.

If the payment of premiums on a policy ceases, and the company is unable to locate the insured or make a determination of death, the cash surrender value may be consumed under an automatic premium loan or other non-forfeiture provision. This is an unfortunate, often unavoidable, consequence for the beneficiary when the insured cannot be located.

Steps to be followed include:

  • Review the internal control over matured items.
  • Review the accounting procedures utilized in handling maturities.
  • Review reserve tabulations for matured items.
  • Analyze all maturities reserved at face value.
  • Analyze unpaid matured endowments and annuity payments.
  • Analyze terminated policies with cash value. Determine options available.
  • Analyze all policies having reached the limiting age and obtain a reserve listing. Interview the actuary and review any reports prepared by him/her.
  • Analyze any maturities taken into income or surplus or otherwise disposed of.
  • Review company follow-up procedures on maturities.
  • Trace, on a test basis, items reported as unclaimed property through the system to determine their origin, accounting treatment and disposition.
  • Sample the master policy file to determine that no maturities are unrecorded.
  • Review policy files relating to questionable maturities.
  • Trace, on a test basis, purported payments of previously abandoned maturities to a canceled check or other documentation.
    • Determine if interest and/or supplemental benefits have been paid.
    • If so, examine reports of unclaimed property and verify that such amounts are included in report.
  • Obtain specimen copies of appropriate policies as deemed necessary.
  • Test dates of last contact on a sample basis.
Test the ratios of reportable maturities from year to year. Analyze variances.

[Table of Contents]
[Basic Rules]
[Statute of Limitations to Property and Casualty Insurance Claim Checks and Drafts]
[Mineral Interests to Unidentified Deposits/Remittances]
[Checks Issued by Banking Organizations to Collateral]
[Employee Benefit Trust Distributions to Matured Endowments, Policies Reaching Limiting Age, and Other Maturities Due]
[Agent Credit Balances to Penalties and Interest]
[Interest Calculation Worksheet Illustration]
[Commonly Reported Types of Unclaimed Property Listed by Industry]