Allsup: Convincing Unbanked to Use Direct Deposit for Social Security Benefits May be a Challenge [Professional Services Close – Up]

The U.S. Department of Treasury announced last month that eventually it will provide all federal benefits through direct deposit, including payments to more than 8 million workers receiving Social Security Disability Insurance (SSDI) benefits.

Making certain recipients understand the costs and benefits of their choices is essential for a smooth transition, according to Allsup, a nationwide provider of SSDI representation and Medicare plan selection services.

Effective May 1, 2011, paper checks no longer will be issued to individuals applying for benefits. Instead, applicants must choose either direct deposit into a bank or credit union account or deposit onto a Direct Express Debit MasterCard. Those already receiving paper checks will need to switch to one of these options by March 1, 2013. Those who do not choose will automatically be switched to the debit card payment method. The government estimates eradicating paper benefit checks will save Social Security$1 billion over the next decade.

"People have known about electronic payment options for years, but many are still reluctant or fearful to make the transition," said Paul Gada, personal financial planning director for the Allsup Disability Life Planning Center. "They may not understand how bank accounts or debit cards work, leaving them vulnerable to fees, penalties and service charges."

Current beneficiaries will receive information about making the switch with upcoming payments. Find more details about SSDI benefit payment options online at allsup.com/personal-finance/financial- planning/ssdi-benefit-payment-options.aspx.

SSDI Security Concerns

Both debit cards and direct deposit have some safety advantages. For example, with direct deposit there is no paper check to get lost or stolen. Additionally, benefit payments placed on the debit card or deposited into a bank or credit union are insured by the Federal Deposit Insurance Corp. (FDIC).

Gada pointed out that some Social Security recipients may be fearful that their benefits could be taken by creditors, which is not true in most cases. Federal law prohibits creditors from taking Social Security benefit payments from a recipient's bank account or placing a freeze on their debit card.

Two explicit exceptions include garnishing Social Security funds to pay outstanding child support or alimony payments. Additionally, the U.S. Treasury Department plans to issue rules to protect federal benefit payments from garnishment after they are directly deposited into accounts.

In addition to security, beneficiaries also need to evaluate which electronic payment option would better meet their needs.

Debit Card: Streamlined Payment Option

About 7.7 percent of U.S. households, or 17 million adults, are unbanked, according to a 2009 study by the FDIC. They may prefer the debit card if setting up and managing a bank account is not practical.

People evaluating the debit card, however, should be aware of potential fees.

Debit card free features:

-No cost to sign up.

-No monthly maintenance fees.

-No cost for purchases made at retail stores.

-Banks or credit unions that display the "MasterCard" acceptance mark must provide cash back with no surcharges.

-One free ATM cash withdrawal for each deposit made onto the debit card.

-Basic customer service, including calls, web account access, deposit and low-balance notifications.

-One replacement card each year.

Debit card potential costs:

-Cash back fee with some purchases.

-Cash back fee from some banks.

-Surcharges from some stores for card use.

-Charge to use ATMs outside the Direct Express network.

-ATM withdrawal after the first one (90 cents per withdrawal), plus non-network ATM surcharges.

-Electronic bill payment (50 cents per bill).

-A mailed, monthly paper statement (75 cents).

-Fees for purchases made outside the United States.

"Consider how the fees would apply to your intended use," Gada said. "Also, examine your local bank and credit union options to see if they could provide a more cost-effective solution for how you want to manage your Social Security benefits."

Bank or Credit Union Accounts: Finding Flexibility

Free and low-cost checking accounts are becoming more difficult to find as banks modify their offerings and apply fees to improve revenue.

The availability of free checking accounts with no monthly minimum requirements has dropped from 76 percent in 2009 to 65 percent in 2010, according to a study by BankRate.com. However, agreeing to terms such as making one direct deposit each month can increase the likelihood of finding a free account. An SSDI monthly benefit electronic payment would meet the direct deposit requirement.

However, Gada cautioned, a free checking account only means there is no cost to open the account and no monthly maintenance charge. Other fees can be added, such as a charge for paper statements, ATM fees and overdraft fees. With average ATM fees surpassing $2.25 per transaction and overdraft fees above $30, a consumer can spend hundreds of dollars a year on avoidable bank fees.

"A bank account provides more flexibility," Gada said. "But fees can add up quickly, so make sure you are managing your account."

More Information:

www.Allsup.com

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