Guide 19 · Legal and compliance
Do unclaimed property laws apply to loyalty points?
Usually not for points given free and redeemable only for goods, services or discounts: the model unclaimed property act excludes these loyalty rewards from the property businesses must report. The risk rises when a reward can be redeemed for cash, when members paid for points, or when the reward is a stored-value card. State laws differ, so map your reward types and have counsel confirm your position.
Unclaimed property law is one of the less visible risks in a loyalty program. Most points programs fall outside it, but some reward designs do not, and the difference often comes down to a few words in the terms and whether a reward can be turned into cash. This guide explains how the law works, where loyalty rewards fit and what to document. It is general information, not legal advice.
How the law works
How do unclaimed property laws work?
Unclaimed property is governed by state law. A business that holds money or property belonging to someone else, such as an uncashed refund or a forgotten account balance, acts as its custodian. If the owner does not claim it or show interest in it for a set dormancy period, the business must report it and hand it over to the state. This process is called escheatment. The state then holds the property for the owner, who can still claim it.
Dormancy periods vary by state and by property type. The Revised Uniform Unclaimed Property Act, a model law approved by the Uniform Law Commission in 2016, sets three years as the default for property it does not list separately, and three years for most stored-value cards. States adopt model laws in whole, in part or not at all, so the rules in your states may differ.
Which state can claim the property was settled by the US Supreme Court in Texas v. New Jersey (1965). The first claim goes to the state of the owner’s last known address in the business’s records. If no address can be determined, the claim goes to the state where the business is incorporated. That is why member address data matters for compliance as well as marketing.
Are points property?
Are loyalty points property under these laws?
Usually not, when they are designed in the common way. The 2016 model act defines a “loyalty card” as a record given without direct payment under a reward, loyalty or promotional program and usable only for goods, services or discounts, and it excludes loyalty cards from the property a business must report. The same definition stops at rewards that can be redeemed for money or otherwise monetized by the issuer.
Two details matter. First, the exclusion applies only to rewards members did not pay for. The act’s official comment says that where a program lets members buy additional rewards, the issuer must show that the balances it claims as exempt do not include balances members paid for. If you sell points, track purchased points separately from earned ones.
Second, the terms reinforce the position. Program terms that say points have no cash value, cannot be exchanged for money and are redeemable only for the program’s rewards describe a reward that fits the loyalty card definition. Terms that allow cash-out describe something closer to money owed.
Rewards with risk
Which rewards carry more risk?
| Reward type | Unclaimed property exposure | Why |
|---|---|---|
| Points given free, redeemable only for goods, services or discounts | Lower | Fits the model act’s loyalty card exclusion |
| Points members bought | Higher | The exclusion covers only rewards given without payment |
| Points or balances redeemable for cash | Higher | Redeemable for money, outside the loyalty card definition |
| Cash back balances and statement credits | Higher | Look like money owed to the member |
| Reward cards that work like gift or stored-value cards | Depends on design | Stored-value and gift card rules may apply |
Reward cards also fall under federal rules. Under Regulation E, a card issued in connection with a loyalty, award or promotional program is excluded from the federal gift card rules, which otherwise prevent funds from expiring within five years, but only if it carries the required disclosures. These include a statement on the front that it is issued for loyalty, award or promotional purposes and the expiration date of the funds, plus fee information and a toll-free number. A reward card without them does not qualify for the exclusion.
Expiry and dormancy
How do expiry rules and dormancy periods interact?
They are two clocks running on the same balance. An expiry rule in the terms removes points after a period, often of inactivity. A dormancy period is the time after which an unclaimed balance is presumed abandoned under state law. If points that fit the loyalty exclusion expire before any dormancy period would apply, there is usually little left to discuss.
For cash-like rewards, the relationship is less certain. Whether a business can extinguish a balance through expiry before it becomes reportable depends on state law and on how the reward is characterized. Design your points expiration policy and your unclaimed property position together, rather than in separate departments.
Breakage
How does unclaimed property affect breakage?
Breakage is the share of points you expect never to be redeemed, and many programs release it into revenue over time. A balance that must be remitted to a state is not breakage: the business pays it out, just to a different party.
For programs with cash-like rewards, the gap can be large. In a hypothetical program with 200,000 dormant accounts holding an average of $40 in redeemable value, $8 million that finance expected to release as breakage would instead be owed to the states if those balances were reportable. Check breakage assumptions against your unclaimed property position, especially for cash back and purchased points.
Manage the risk
How do you manage the risk?
- List every reward type you issue, how members get it and what it can be redeemed for.
- Check the terms for each: no cash value, no cash-out, redeemable only for rewards, and clear expiry rules.
- Separate purchased points from earned points in the ledger.
- Review reward cards against the Regulation E disclosure requirements.
- Keep member addresses current, since they determine which state has the first claim.
- Write down your position for each reward type, with the reasoning and the terms that support it, and have counsel review it for the states where your members live.
States audit unclaimed property compliance, and a documented position prepared in advance is much easier to defend than one assembled after an audit letter arrives. Our guide to loyalty program laws covers other regional rules that affect program design.
More answers
Frequently asked questions
What is escheatment?
Escheatment is the process by which a business holding money or property that belongs to someone else reports and hands it to the state after it has gone unclaimed for a set dormancy period. The state then holds it for the owner, who can still claim it.
Are loyalty points considered unclaimed property?
Generally not when members receive them without paying and can redeem them only for goods, services or discounts. The 2016 Revised Uniform Unclaimed Property Act excludes such loyalty cards from reportable property. Each state writes its own law, though, so the answer depends on where your members live and how your rewards work.
Which loyalty rewards carry unclaimed property risk?
Rewards that can be redeemed for money or otherwise turned into cash, points members bought, and cards that work like stored value or gift cards. Cash back balances deserve particular attention because they look like money owed to the member.
Does points expiry avoid unclaimed property obligations?
It can reduce the balances at issue, but it is not a guaranteed defense. Whether a balance that expires under the terms was ever reportable depends on state law and on how the reward is characterized. Design expiry and unclaimed property positions together, with counsel.
Which state's law applies to unclaimed loyalty balances?
Under rules set by the US Supreme Court, the first claim goes to the state of the owner's last known address in your records. If there is no address, the claim goes to the state where the business is incorporated.
How does unclaimed property affect breakage?
If a balance must be reported and remitted to a state, it is not breakage you can release into revenue. Programs with cash-like rewards should check their breakage assumptions against their unclaimed property position.
Sources
- F-G3-0112 CFR 1005.20 Requirements for gift cards and gift certificates (consumerfinance.gov)
- F-G3-0212 CFR 1005.20 Requirements for gift cards and gift certificates (consumerfinance.gov)
- F-G3-03Revised Uniform Unclaimed Property Act (2016), Uniform Law Commission text (legislature.maine.gov)
- F-G3-04Revised Uniform Unclaimed Property Act (2016), Uniform Law Commission text (legislature.maine.gov)
- F-G3-05Revised Uniform Unclaimed Property Act (2016), Uniform Law Commission text (legislature.maine.gov)
- F-G3-06Revised Uniform Unclaimed Property Act (2016), Prefatory Note (legislature.maine.gov)