How do paycards work?

Author: Alice Gilman

Paycard accounts can be set up in an employee's name, similar to direct deposit. Alternatively, an employer may set up one pooled account for all employees who are paid by paycard, provided there are subaccounts in each employee's name. A pooled account must generally be insulated from an employee's creditors and meet these criteria:

  • An employee's subaccount must be eligible for deposit insurance on a pass-through basis;
  • The records of the financial institution, custodian or other party must disclose the employee's identity as the cardholder who actually owns the deposits and the amount owned by each employee; and
  • The funds in the paycard account cannot expire. A paycard account may be closed after six continuous months of inactivity (longer under some state laws), but the employee must be provided with reasonable notice of the impending closure and any remaining funds in the account must be refunded to the employee free of charge.