The cents and sensitivities
of pay cards
by Debera Salam, Ernst & Young LLP
Security, direct deposit, including pay cards,...
According to NACHA’s 2011 PayItGreen Survey, close
to 75% of employees are paid by direct deposit, with
employees citing c...
The facts about pay cards
Mandating pay cards
More than half of the states require that employees consent to
(See EY’s 201...
Leading employer pay card practices
• Comply with the law
State law may regulate not only that employees consent
to electr...
EY | Assurance | Tax | Transactions | Advisory
Mary Angelbeck
mary.angelbeck@ey.com
+1 215 448 5307
Anthony Arcidiacono
an...
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EY - Cents and sensitivities of pay cards

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In recent years, pay cards (also known as prepaid debit cards) have attempted to bridge the direct deposit gap by giving US employees the ability to accept funds via a prepaid debit card (rather than through a personal bank or other financial account). Theoretically, pay cards give employees a pathway to the conveniences of direct deposit and a reprieve from substantial check cashing fees.
This article explores the facts about pay cards and highlights leading employer pay card practices.

For further information about EY's US employment tax services, please visit: http://www.ey.com/US/en/Services/Tax/State-and-Local-Tax

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EY - Cents and sensitivities of pay cards

  1. 1. The cents and sensitivities of pay cards by Debera Salam, Ernst & Young LLP Security, direct deposit, including pay cards, is replacing from the transition. Payers enjoy a lower risk of payment fraud and a reduction in administrative burden caused by lost and outstanding checks. Payees can better predict when deposits will be available in their accounts while saving them the time needed to cash checks. Everyone in the direct deposit system wins by reducing paper clutter and its environmental footprint. According to the National Automated Clearing House Association (NACHA) in its 2011 PayItGreen® survey, close to 75% of employees are paid by direct deposit. Employees cite convenience as one of the primary reasons they like it, and increasingly, they are choosing direct deposit to help the environment. In fact, environmental protection is the primary marketing message of PayItGreen, which including billings and statements. reduction in paper transactions, but NACHA believes there is more work to do. Its focus is on what businesses can do to convince the remaining 25% of the workforce to give up its paper checks. “We’re always talking about how to switch that last 25% over to direct deposit,” said Janet O. Estep, NACHA President and CEO. “This research shows that where state law allows, employers may want to consider requiring employees to receive their pay electronically. Once employees start using direct deposit, its safety, security and convenience make them true believers. They wonder why they didn’t do it sooner.” “We’re always talking about how to switch that last 25% over to direct deposit. This research shows that where state law allows, employers may want to consider requiring employees to receive their pay electronically.” — Janet O. Estep NACHA President and CEO 2011 PayItGreen® survey 2 | Payroll Perspectives September 2013 Payroll workshop
  2. 2. According to NACHA’s 2011 PayItGreen Survey, close to 75% of employees are paid by direct deposit, with employees citing convenience as one of their primary reasons. Increasingly, employees, particularly Gen Y, are choosing direct deposit to help the environment. In fact, environmental protection is the primary marketing message of PayItGreen, which is leading a global push and statements. Pay cards — bridging the direct deposit gap One barrier to the growth in direct deposit was the population of employees unable to obtain a checking account who had no choice in the past but to refuse direct deposit. Without another option, these employees often were forced to incur substantial check cashing fees. According to e-How, in June 2010 such fees ranged from 1% to 5% of the check amount. In recent years, pay cards (also known as prepaid debit cards) have attempted to bridge this direct deposit gap by giving employees the ability to accept funds via a prepaid debit card (rather than through give employees a pathway to the conveniences of direct deposit and a reprieve from substantial check cashing fees. Last year, the Aite Group reported that the volume of dollars loaded to pay cards continues to grow at “lightning speed.” The Aite Group, dollar volume loaded to pay cards will increase from $26.6 billion cautioned, however, that “in the midst of this [pay card] growth, the regulatory environment has become much more complex … requiring extra resources and focus by all providers in the ecosystem.” Pay cards come under scrutiny by consumer groups and the media Fueling the potential of increased regulation of pay cards is the current controversy about the possible adverse effect they have on low-wage earners. This summer, criticism of pay cards sharply increased after The New York Times reported that low-wage earners are being forced to accept pay cards carrying substantial fees while, at the same time, employers are collecting cash incentives from pay card issuers. Within days of the initial article, The New York Times reported that New York’s Attorney General was investigating the pay card practices of some of the state’s largest employers. Under New York law, EY state survey on page 6.) By the end of July, the story unfolding in New York played out on network television, expanding the pay card discussion to a national audience. Some of the claims made by the media include: • Employees are forced to accept pay cards. • Fees eat up $30 per month of workers’ wages. • Employees don’t receive pay statements, thereby allowing employers to hide wage theft. • Employer kickbacks amount to a return of the “old-time company store.” At the heart of the media message is a plea for additional regulatory protections governing the use of pay cards. ( NBC News.) “In the midst of this [pay card] growth, the regulatory environment has become much more complex … requiring extra resources and focus by all providers in the ecosystem.” — The Aite Group, November 14, 2012 3Payroll Perspectives September 2013 | Payroll workshop Click here for NBC News video.
  3. 3. The facts about pay cards Mandating pay cards More than half of the states require that employees consent to (See EY’s 2013 direct deposit survey on page 6.) Pay card fees Perhaps the most misunderstood aspect of pay cards are the fees employees must pay to use them. NetSpend, one of the nation’s largest pay card providers, charges $2.50 plus ATM-owner fees to withdraw funds from the debit card account. By comparison, check cashing fees range from 1% to 5% of net pay. For a minimum wage worker netting $200 per week and paying a check cashing fee of just 1%, there is little cost difference between the check cashing fee and the initial fee to withdraw funds from the pay card. The fact is, employees are forced to leave funds in their pay card accounts only if there is a restriction on the amount of cash that can be withdrawn at one time. Such restrictions are prohibited under the pay card laws of numerous states (e.g., Colorado, Hawaii, Minnesota and Tennessee). However, in many states, pay card employees may be getting a better deal than those still cashing paper checks because issuers are required to give pay card holders the ability to withdraw funds without stating that “any pay card plan adopted by the employer shall entitle the employee to one withdrawal for each deposit, free of any service charge to the employee.” (A.R.S. §23-351.) The objective of this law is to give employees the ability to draw cash out their prepaid debit card account in much the same way as they would exchange paper checks for cash (minus the check cashing fee). In arriving at pay card fees of $30 per month, the assumption is made that employees pay a fee for every cash withdrawal and that they leave their funds in the prepaid account, thereby incurring ongoing transaction and even overdraft fees based on how the card is used (or misused). The fact is, employees are forced to leave funds in the pay card account only if there is a restriction on the amount of cash that can be withdrawn at one time. Such restrictions are prohibited under the pay card laws of numerous states (e.g., Colorado, Hawaii, Minnesota and Tennessee). The cents and sensitivities of pay cards Continued 4 | Payroll Perspectives September 2013 Payroll workshop
  4. 4. Leading employer pay card practices • Comply with the law State law may regulate not only that employees consent to electronic pay, but that they incur no additional fees or be subject to restrictions in gaining access to their cash. Disclosures concerning fees may also be required and available in different languages (e.g., Minnesota). • Offer options Employees should be given the option of direct deposit or pay card, and employers should consider when paper checks might also be an appropriate option (see the U.S. Department of Labor’s Field Operations Handbook, 30c). • Don’t be pushy Pressuring employees into accepting direct deposit or pay cards could be a violation of the law. For example, Michigan requires not only that employees participate voluntarily, but that their consent is obtained without intimidation, coercion or fear of discharge or reprisal. (MCL §408.476(2).) • Carefully choose the card issuer In choosing a pay card provider, consider using “brands” that employees recognize and trust and that offer them convenient locations from which to make cash withdrawals. of the pay card provider. • Be mindful of card terms and conditions Employees should be able to withdraw all of their pay once per payday without fees or restrictions and be given free and convenient access to their account information. Employers should also be wary of pay card features, such as overdraft • Provide information to employees Information concerning the pay card, including how and where to withdraw cash, how to make purchases, and any fees and limitations, should be available to employees in a convenient forum, such as a website where passwords are not required. Where applicable, the information should be available in foreign languages. • Make changing payment methods easy for employees EY insights The movement toward paperless pay is not likely to be slowed by the recent consumer advocate movement; however, expansion and enforcement of employer regulations are a likely outcome. More immediately, employers may need to consider the renewed focus on and perception of pay cards. In addition to complying with state rules governing pay cards, employers should consider leading practices that foster employee and community trust. For the highlights of EY’s 2013 direct deposit survey, go to page 6. For the complete survey, email Debera Salam. More than half of the states require that employees card arrangement. Pay stubs While it is true that employee pay stubs are not required under federal law, most states impose this requirement. Some states go so far as to require that employees given electronic pay stubs also be able to print them without cost (e.g., Utah). Click here for CBS News video. 5Payroll Perspectives September 2013 | Payroll workshop
  5. 5. EY | Assurance | Tax | Transactions | Advisory Mary Angelbeck mary.angelbeck@ey.com +1 215 448 5307 Anthony Arcidiacono anthony.arcidiacono@ey.com +1 732 516 4829 Peter Berard peter.berard@ey.com +1 212 773 4084 Gregory Carver gregory.carver@ey.com +1 214 969 8377 Bryan De la Bruyere bryan.delabruyere@ey.com +1 404 817 4384 Jennie DeVincenzo jennie.devincenzo@ey.com +1 732 516 4572 Richard Ferrari richard.ferrari@ey.com +1 212 773 5714 David Germain david.germain@ey.com +1 516 336 0123 Julie Gilroy julie.gilroy@ey.com +1 312 879 3413 Mary Gorman mary.gorman@ey.com +1 202 327 7644 Ken Hausser kenneth.hausser@ey.com +1 732 516 4558 Nicki King nicki.king@ey.com +1 214 756 1036 Kristie Lowery kristie.lowery@ey.com +1 704 331 1884 Thomas Meyerer thomas.meyerer@ey.com +1 202 327 8380 Chris Peters christina.peters@ey.com +1 614 232 7112 Matthew Ort matthew.ort@ey.com +1 214 969 8209 +1 415 894 8519 Debera Salam debera.salam@ey.com +1 713 750 1591 Debbie Spyker deborah.spyker@ey.com +1 720 931 4321 Mike S. Willett mike.willett@ey.com +1 404 817 4637 Ernst & Young LLP contributors: • Debera Salam, CPP, Editor in Chief, Director, Payroll Information and Process Services, National Tax • Gregory Carver, National Director, Employment Tax Advisory Services • Rebecca Bertothy, National Tax • Peter Berard, National Tax • David Chan, National Tax • Thomas Meyerer, National Tax • Alan Mierke, National Tax • Gino Petrozzi, National Tax Special contributing editor: • Brian Farrington State desk: • Lisa Miedich, State Employment Tax Analyst Graphic design and production: • Shaun Maxwell, Senior Designer Editorial: • Kevin Daniels, Copy Editor Public relations: • Lizzie McWilliams lizzie.mcwilliams@ey.com +1 202 327 6764 Ernst & Young LLP employment tax advisory contacts About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young does not bear any responsibility whatsoever for the content, accuracy or security of any websites that are linked (by way of hyperlink or otherwise) to external websites. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. © 2013 Ernst & Young LLP. All Rights Reserved. SCORE No. YY3003 BSC No. 1308-1122741 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com Connect with us Follow us on Twitter Visit us on LinkedIn

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