Escheatment Process for Retirement Accounts: A Step-by-Step Guide

Retirement accounts are built to protect a client’s long-term financial security. But when these accounts become dormant or unclaimed, financial institutions have a legal duty to manage them through the escheatment process - ensuring compliance while safeguarding client trust.

At Eisen, we know that escheatment for retirement accounts demands more than just regulatory precision - it requires sensitivity, strong internal controls, and a proactive approach to owner outreach. In this guide, we’ll walk through the escheatment process for retirement accounts and how Eisen helps simplify and automate each step.

What Is Escheatment in Retirement Accounts?

Escheatment is the legal process by which unclaimed property is transferred to the state after a specified period of inactivity. For retirement accounts, this typically occurs when an account holder cannot be contacted and required actions, like taking distributions, are not completed.

Retirement accounts commonly subject to escheatment include:

• Traditional and Roth IRAs
• SEP and SIMPLE IRAs
• 401(k) accounts
• Pension plans
• Keogh plans
• Annuities with a cash value

Each state has its own dormancy criteria and escheatment rules, often influenced by federal tax laws and distribution requirements. Failure to properly manage these accounts can result in penalties, tax complications, and reputational risk.

The Escheatment Process for Retirement Accounts

Managing unclaimed retirement accounts involves a series of critical steps to remain compliant and protect client assets. Here’s what the typical process looks like:

1. Identify Dormant Accounts

Retirement accounts may be considered dormant based on:

• No owner-initiated activity (e.g., contributions, withdrawals, communication)
• Returned mail, including tax forms or IRS notices
• Failure to take Required Minimum Distributions (RMDs) after age 73 (per SECURE 2.0) 
• Reaching a state-defined age threshold without other verified contact

The dormancy period for retirement accounts often aligns with state laws, typically ranging from three to five years after triggering inactivity events.

2. Special Considerations for Determining the Dormancy Trigger Date

Determining the correct trigger date for dormancy is one of the most nuanced aspects of retirement account escheatment. While common indicators like returned mail or lack of activity are relevant, the critical legal question is when the account becomes “distributable” - a status that often initiates the dormancy countdown.

For traditional IRAs, this typically occurs when the account holder reaches age 73 and fails to take a Required Minimum Distribution (RMD), as mandated by federal legislation under SECURE 2.0. However, not all states defer to federal RMD standards. Some define their own trigger dates by statute, regardless of SECURE 2.0.

In contrast, Roth IRAs are not subject to RMDs during the original owner’s lifetime, and therefore are not generally considered “distributable” unless the owner is deceased and a specific number of years has passed. This creates a gray area in dormancy determination. To close this gap, several states have updated their unclaimed property laws to explicitly include both “tax-deferred” (e.g., traditional IRAs) and “tax-exempt” (e.g., Roth IRAs) accounts, ensuring that both fall within the escheatment framework.

3. Additional Complexity with ERISA-Governed Accounts

Retirement accounts governed by ERISA, such as 401(k) plans, are subject to an additional layer of federal regulation. Escheating ERISA-covered plans may conflict with fiduciary obligations and participant protections under federal law.

Institutions should be especially cautious and consult legal counsel before applying state unclaimed property laws to ERISA plans. For a detailed legal review, see: Labor Policy and Escheatment of Retirement Benefits – Alston & Bird.

4. Perform Due Diligence Outreach

Before escheating a retirement account, institutions are legally required to make a good-faith effort to contact the account holder. These due diligence efforts typically include:

• Mailing a written notice to the owner’s last known address
• Sending electronic communications, if the owner has consented to digital contact
• Conducting reasonable searches (e.g., internal databases, third-party tools) to locate missing owners

Most states require that due diligence outreach be completed 60 to 120 days before the escheatment report is filed. Accurately documenting all outreach efforts is essential for audit readiness and regulatory compliance.

5. Apply Required Tax Withholding for IRAs

When escheating IRAs and other tax-deferred retirement accounts, institutions must comply with federal tax withholding rules. Under IRS Revenue Ruling 2018-17, any distribution of these accounts, including those made to a state unclaimed property fund, is considered a taxable event and requires:

• Federal income tax withholding at the applicable rate (typically 10% unless otherwise specified)
• Issuance of IRS Form 1099-R to report the distribution and withholding
• Timely remittance of withheld taxes to the IRS on behalf of the account holder

Failure to apply proper withholding can expose the institution to regulatory risk and potential IRS penalties. Institutions should ensure their escheatment processes are aligned with tax reporting obligations to maintain full compliance.

6. Report and Remit the Unclaimed Property

After completing due diligence and applying any required tax withholding, institutions must:

• Submit an unclaimed property report listing all escheated retirement accounts, typically in NAUPA format
• Remit the appropriate assets (cash or securities) to the designated state unclaimed property office
• Follow state-specific procedures for retirement account reporting, which may include additional documentation or tax coordination

While a few states provide exceptions or deferment options for tax-advantaged accounts, the majority require full compliance with escheatment protocols, regardless of account type.

7. Maintain Records and Stay Audit-Ready

To support compliance and prepare for potential audits, institutions must maintain detailed records, including:

• Documentation of owner activity or inactivity
• Copies of all due diligence communications and any responses
• Tax withholding and reporting records (e.g., Form 1099-R)
• Submitted reports, remittance confirmations, and supporting schedules

Most states require 10+ years of record retention, and unclaimed property audits may span multiple reporting cycles. Proactive documentation is essential to reduce risk and demonstrate good-faith compliance.

Challenges Unique to Retirement Account Escheatment

Retirement accounts bring additional layers of complexity, including:

• Tracking Required Minimum Distributions (RMDs) and age-based triggers
• Managing beneficiary designations and processing death notifications
• Applying mandatory tax withholding and handling associated reporting
• Differentiating between pre-tax and after-tax account rules
• Coordinating compliance across multiple states and regulatory frameworks

Failure to manage these complexities can lead to regulatory penalties, reputational harm, and diminished client trust.

How Eisen Simplifies Escheatment for Retirement Accounts

At Eisen, we help financial institutions and retirement plan administrators navigate the complexities of retirement account escheatment with clarity, compliance, and confidence. Our platform is purpose-built to address the unique regulatory and operational demands of these accounts:

• Escheatment Manager: Automate the full escheatment lifecycle - identifying dormant accounts, performing due diligence, filing state reports, and remitting assets. Say goodbye to spreadsheets and manual errors.
• Disbursement Manager: Enables secure, efficient remittance of cash and securities, with support for multi-state compliance and real-time reconciliation.
• Outreach Manager: Delivers automated, audit-ready communications to maximize owner reactivation and reduce escheatment exposure.

Retirement account escheatment requires precision, coordination, and proactive compliance. Eisen transforms a complex regulatory burden into a seamless, secure process, protecting your institution, your clients, and your reputation.