Every once in a while, your business will write a check, and it will never get cashed. After a period of time it’s tempting to just reverse the expense and put the cash back into your general fund. However, unclaimed property laws complicate the process. Even if the payee never cashes it, a so-called stale-dated check isn’t free cash for your business — it almost always belongs to the state.
Unclaimed Property and Escheatment Laws
Every state in the union has what are called escheatment laws that require a business to hand over unclaimed property after a certain time period. Uncashed checks to vendors, contractors, payroll checks to employees, and dividends and distributions to stockholders are all potential unclaimed property.
Each state has different rules regarding when you need to report unclaimed property. How long it takes for an uncashed check to become unclaimed property is referred to as the “dormancy period.” Dormancy periods have been steadily decreasing in the last decade, so you may not have as much time as you expect. On average, states require business owners to report common types of unclaimed property after about three years. However, there are many exceptions to the rule. For example, California requires business owners to turn over unpaid wages and order refunds after just one year.
Almost every state requires a business to perform due diligence by contacting the owner of the unclaimed property. The exact due diligence requirements vary by state, but the National Association of Unclaimed Property Administrators — NAUPA, for short — recommends a formal letter to the check recipient sent by first-class mail. Letters should alert the owner of your obligation to turn over the property to the state. Let the owner know how he can claim his check and provide a deadline for doing so. Allow a reasonable amount of time to respond. For example, if you’ll need to report the property on June 1, mail the letter before the beginning of the year.
A Practical Policy
The first step to implementing a practical company policy for stale-dated checks is to understand state laws. Read up on requirements both for your home state and for any other states your company does business in. Consider the type of unclaimed property you could potentially have and investigate the state dormancy period for each. Use this information to create a policy on owner contact and state remittance for different categories of uncashed checks. NAUPA’s free reporting software can help you craft a sensible policy.
It’s important that all employees, especially accounting personnel, know that unclaimed property doesn’t belong to the company. Since you owe that money to either the state or the property owner, uncashed checks should never be voided. Rather, they should be monitored and the owner should be contacted periodically. Make sure your bank accounts are reconciled on a monthly basis — this will allow you to track which checks haven’t yet been cashed. When you do have to contact a payee, use a letter template that covers all due diligence elements recommended by NAUPA.