By Amy E. Buttell
Published November 18, 2010 | CreditCards.com
If you're receiving federal government benefits, a debit card may be in your future. That's because the Treasury Department is finalizing a law requiring that all federal payments - except for tax refunds - be made electronically, starting in March 2011. That means that instead of getting a paper check for your Social Security benefits, for example, you'll be required to get them either via direct deposit or on a debit card.
The federal government has already given recipients the option to make the switch for some types of payments, most of which are recurring payments. But as of now, there's still no law mandating that a federal benefits recipient take the funds electronically. That's likely to change, however, in the next few months.
Consumer advocates are wary, saying that though many transactions are free on these debit cards, the programs are filled with tricks and traps that will cost unwitting consumers. But banks and government officials love the idea, claiming that the cards are cheap, convenient and even safer than regular paper checks.
"Checks are expensive for the government to issue," says Terry Maher, general counsel with the Network Branded Prepaid Card Association, a prepaid card trade association. "There are a lot of problems with checks being returned because of beneficiaries relocating, especially due to natural disasters like Katrina. In a situation where people have to be relocated on short notice, it's hard to get them their benefits checks. There is also a lot of fraud involved with checks."
What's in the proposal?
While the final rule is still to come -- it's expected later this year or in early 2011 -- the proposal would take effect on March 1, 2011. Beginning on that date, individuals would receive their benefits via direct deposit. Those who choose not to use direct deposit, the proposal says, would then be enrolled in the federal government's DirectExpress Debit MasterCard program, unless they meet one of these two conditions:
They already receive federal payments by check as of March 1, 2011.
They filed a claim for federal benefits before March 1, 2011, and specifically requested check payments when they filed.
There is one important exception: tax refunds. IRS payments are excluded from the current proposal, though the Treasury is even considering issuing debit cards for tax refunds, says Dave Turner, senior vice president of government solutions at ACS, which provides debit card services to state and federal government agencies. The IRS already offers direct deposit as an option for tax refunds.
Also, this would apply only to federal payments, though most states are following the federal government's lead in relying more heavily on electronic payments. (See our story on comparing state governments' electronic payment programs.)
How the debit cards work
You don't necessarily have to wait until March 2011 to enroll in the U.S. Direct Express MasterCard program. Many government programs -- including Social Security and Supplementary Security Income -- allow participants to begin receiving benefits today. (Contact your program's administrator to see if it pays benefits via debit card.) Also, if you have an older DirectExpress card, which was issued before April 1, 2008, you may able to lower your fees by getting a new card.
To enroll, visit USDirectExpress.com or call the program's card enrollment center toll-free at (877) 212-9991. Once you get the card, which is issued by Comerica Bank, you activate it via the customer service line and select a PIN. Once you've activated it, you can use it for ATM withdrawals and to make purchases anywhere MasterCard debit cards are accepted.
The website promises the card comes with no sign-up costs and no monthly fees. However, the card is hardly fee-free. For example, you get one free ATM cash withdrawal with each deposit to your account. After that, you'll pay 90 cents per withdrawal. There are also fees for receiving a monthly paper statement through the mail (75 cents a month), transferring funds to another bank account ($1.50 per transfer) and others.
To avoid incurring fees once you activate your card, get cash back at retail stores, where purchases are also free. Get cash back, fee-free, with purchases and withdrawals at MasterCard-affiliated banks, credit unions and savings and loans. You can also check your balance for free at an ATM or over the phone. For extra protection, sign up for online low balance and deposit alerts to keep updated on your account balance to make sure you don't overdraw your account.
You won't necessarily be able to overdraw the account, since the card's terms state that a transaction may be refused for insufficient funds. If you do overdraw your account, the excess amount will likely be deducted from future credits to your account. Or if no money's ever added to the card again, you may be contacted and asked to pay back the extra funds.
Opinions are mixed
Consumer groups aren't thrilled with the move toward plastic. They say consumers should have the option to receive paper checks and program fees should be lowered. In a letter to the director of the federal government's debit card program, Michelle Jun, staff attorney for Consumers Union, notes that consumers should have the option to still receive checks because many don't live near ATMs or have bank accounts. Also, the fees charged can eat away at a beneficiary's balance, leaving less for food, medications and housing costs, she says.
Another argument against phasing out paper checks, experts say: Many disabled or elderly benefit recipients have never used debit cards and don't understand the rules. For recipients who don't have access to the Internet or to bank branches, the paper statement fee of .75 per month is a major burden as is the limit of one free ATM withdrawal a month.
Consumers who are careful about where they withdraw funds and who keep track of their balances will find many positives, however. For example, debit cards are beneficial for recipients who don't have banks or credit unions in their neighborhoods, says Maher. "You might have to go to a cash checking outlet and pay fees to have your check cashed or pay for money orders to get your bills paid," he continues.