Prepaid Card Programs that Disburse State Funds Must Comply with State Escheatment Laws

by PaymentsJournal 0

States are increasingly choosing prepaid card programs to disburse funds, including tax refunds, unemployment insurance payments, and money collected for child support. Banks currently offering or proposing to offer one of these programs must be careful to comply with the varying requirements states impose on the holder of abandoned or unclaimed funds. Specifically, they should know what they must do when cards loaded with disbursed state funds are not activated or when funds underlying the cards are not used.

Unclaimed or abandoned property laws aim to make it easier for a property owner, such as a cardholder or accountholder, to later locate his or her property. These laws provide that property that is unclaimed for a specified period of time, often called a dormancy period, is deemed abandoned and reverts, or “escheats,” to the state. At that point, the holder of the property must turn it over to the designated state agency. A property owner can then reclaim his or her property by filing a claim with that agency.

State abandoned property laws apply to government funds—including those funds disbursed through prepaid cards. But applying these laws to a prepaid card program is complicated because the dormancy period applicable to these programs varies by state. In addition, this dormancy period depends on where the funds reside—whether the funds are held by a state government agency, are loaded onto a prepaid card, or are otherwise deposited into a bank account. When a state contracts to disburse funds via a prepaid card, the state delivers the funds to the card issuer.

The card issuer then holds the funds in a pooled account for the benefit of the person designated to receive them, not in an account of the state. Thus, once the state delivers the funds to the card issuer, the dormancy period that pertains to funds held by the government does not apply.

Beyond that, no uniform dormancy period exists. For example, some states have enacted laws that specifically address state funds disbursed to a prepaid card. New York’s abandoned property statute provides that debit cards issued for paying a tax refund escheat to the state if they are not activated within one year of the date of issuance. In Texas, by contrast, money collected for child support does not escheat to the state if the state has disbursed it into a child support debit card account.

But many states do not yet have specific laws that apply to prepaid cards. For these states, the laws that apply to funds held by banking organizations, or laws that apply to intangible property generally, must be reviewed. For example, in Illinois, property held by a state agency escheats to the state after seven years, property held by banking organizations escheats to the state after five years, and intangible property that is not otherwise covered under the statute also escheats to the state after five years.

Escheatment periods for gift cards or gift certificates may also apply. Some states define “gift card” and “gift certificate” broadly enough to capture the general-purpose prepaid cards used in these programs. For example, Virginia defines “gift certificate” to include gift cards and electronic cards that can be exchanged for money or credit of equal value. Gift certificates, which arguably include general-purpose prepaid cards, escheat to the state if they remain unclaimed for five years. Because these laws vary by state, those currently offering or proposing to offer a prepaid card program for the disbursement of state funds must be mindful of the rules that apply to abandoned or unclaimed funds they hold in respect of prepaid cards and must ensure that they are satisfying their legal obligations. Continued monitoring will also be necessary, because we may see states amend their escheatment laws as they continue to expand prepaid card programs.