Tuesday, December 1, 2020

Best practices for banks receiving direct deposit of stimulus payments

By John Burnett
BankersOnline (for the OBA Compliance Team)

The Treasury Department tells us ACH payments for CARES Act Stimulus Payments should begin hitting banks within the next several days. We have fielded a number of questions about how to handle some of these payments.

Listed below are what we recommend as “best practices” for banks that receive these payments. Use them to inform your decisions on how to handle the payments that hit your bank.

Rejects (closed accounts)

In general, the rule is to return any Treasury ACH credit that’s rejected because the account identified in the payment record is closed or doesn’t exist. Your back-office processors should send them back with return reason code R02 or R03. When the returned payment is received by Treasury or the IRS, a check will be sent to the name and address for the taxpayer in the IRS’s records.

Don’t re-open an account to post a reject payment. You won’t have a deposit contract.

Rejects (exceptions)

Some banks have said they want to redirect some of the rejects so that their customers can get their stimulus payments quickly. For example, a customer and bank may have closed an account and opened another in the same name(s) because there were fraud or other problems with the old account. This sort of customer service is certainly something that can work for a bank if it verifies the name(s) on the ACH payment record match the name(s) of the account owner(s).

I don’t recommend “getting into the middle of things” with other exceptions for rejected credits. Send them back.

General rule on posting Treasury ACH credits

If one of the payments posts to an open account, a bank is not under any obligation to examine the payment to ensure the name(s) on the ACH record matches the name of the account owner(s). That includes a payment:

• Sent for two individuals (joint tax return) who have now divorced and one of those individuals is no longer an account owner. They will need to sort it out themselves. Don’t make it your problem.
• Sent to Joe Taxpayer, based on his individual return for 2018, and credited to what was his joint account with Jane. But when Joe and Jane were divorced in 2019, he had his name removed from the account, so Jane gets his stimulus payment. Joe can sort it out with Jane or make a claim with Treasury/IRS that he didn’t get his payment. Not your problem (although it could have been avoided if the bank had not allowed Joe to remove himself from the joint account, closed the joint account, and had Joe and Jane open their own accounts).
• Sent to a taxpayer who is now deceased, with the payment credited to what was a joint account with his widow but is now in the widow’s name alone.
• Sent to a now-deceased taxpayer, and the account was taken over by their Personal Representative as an estate account. Not a problem, since they payment belongs to the estate.
• Sent to a tax preparer (paid or otherwise) who forwarded the tax refund to the taxpayer(s) but fails to forward the stimulus payment. Once again, this is not your problem.
• Misdirected to an account owned by someone else due to IRS or taxpayer error (e.g., payment identified with Ben; account owned by Jerry). This could also involve Jerry as an unpaid tax return preparer (see above) or a “friend with a bank account” when Ben doesn’t have an account. Also “not your problem.”

Known mismatches

Some banks use “front-end” programs that attempt to identify mismatched ACH transactions. Or an account may be “flagged” to reject ACH payments because a customer has died. These banks will already have a process for handling Treasury items. I recommend they don’t deviate from that process, with the possible exception of items like those described under “Rejects (exceptions)” above.

Miscellaneous

• We do not believe these payments are “exempt” from garnishment orders. They are not expected to arrive with “XX” in positions 54-55 of the Company Entry Description Field. They are not federal payments that are protected under Treasury’s “Garnishment of Accounts Containing Federal Benefit Payments” regulation.
• If a stimulus payment is credited to an account that’s overdrawn prior to receipt of the payment, that’s not a problem. There’s no “set-off” against the payment. It’s just a deposit that increases the account balance. One banker I talked with said, “the customer just spent it early.”

Handling complaints

… and there will be complaints. I recommend that each bank have a standard response for the problem situations outlined above (and others the bank might think of), and, if reasonable for the bank’s size and staffing, a designated point of contact. Whatever the bank’s procedures are related to the stimulus payments, they should be uniformly applied. And don’t forget that the payments are likely to arrive in large batches over the next couple of weeks, and smaller bundles later in the spring.