The state’s four year contract with JPMorgan Chase to issue income tax refunds using debt cards will purportedly cost the state about $25,000 a year, but it will save the state about $290,000 a year in administrative costs and bank fees.

An existing contract between JPMorgan Chase and the state was amended on Jan. 25 by state Treasurer Denise Nappier to allow the bank to manage direct deposits and the new debit cards. JPMorgan Chase in partnership with People’s United Bank was one of two bidders for the contract. Nine companies had initially expressed interest in the contract.

The written contract has a ceiling of up to $500,000 specifically for the addition of Revenue Services to the master contract, but Nappier’s staff said that’s just a formality of its internal contracting process with the Office of Policy and Management.

“This new contract, at an annual cost to the state of approximately $25,000, will yield estimated annual savings of $290,000 in administrative costs and bank fees,” Nappier said Tuesday in a press release.

The debit card concept is new for Connecticut taxpayers who are used to receiving their income tax refunds by check. Last year 45 percent of filers opted to receive their refunds by check. Those refunds will now be placed on debit cards, which has sparked some security concerns, despite statements to the contrary from Department of Revenue Services Commissioner Kevin Sullivan.

“Issuing tax refunds as debit cards provides a security and convenience not available with paper checks,“ Sullivan said Monday. “Couple that with the elimination of check cashing fees and the refund debit cards are a benefit for taxpayers and the state.”

In its contract with the state JPMorgan Chase promises to use a 128-bit encryption system to safeguard information and plans to use a PGP or an encrypted phone line to receive the data from the Department of Revenue Services in batches. JPMorgan Chase said it can’t commit to maintaining a virus free system, but it was willing to have the state go over its security measures prior to the signing of the contract.

The contract says JPMorgan Chase will contact Revenues Services within one day if fraud is detected or reported. It will also issue the cardholder a new card and card number within two weeks if fraud is detected. The contract also specifies how long a cardholder may be on hold with the company when it calls with questions. The time limit is no more than 3 minutes.

And as part of the deal JPMorgan Chase will insure the cards through the FDIC up to $250,000 per depositor. The state has already said it won’t be issuing individual cards over $10,000 to any individual so if a refund is bigger than that it will be issued through a check.

Last year, Revenue Services it issued a total of 17,474 refund checks that were not cashed. Of those, 11,745 were for amounts between $1 and $20.

If a debit card is not used within a year of its issuance JPMorgan Chase will begin deducting $1 per year, which it gets to keep.

The first debit cards will be issued this week and Sen. Minority Leader John McKinney, R-Fairfield, is calling the legislative committees of cognizance to convene a public hearing on the cards.

“Legislators and members of the public have a number of questions pertaining to this new state policy and we need those questions answered before the first debit cards are issued,” McKinney said.

Some of the questions McKinney would like to see answered include: “Is the state of Connecticut opening up accounts at Chase for the individual taxpayer? If so, what right does the state have to sign another person up for a bank account without their permission, or to impose withdraw limits on how much of their refund check they can access at one time?”

“Is DRS transferring taxpayer money directly to JP Morgan Chase?” McKinney wondered.

There were very few answers Tuesday as lawmakers sought more details about the contract.

The state has already started using direct deposit and debit cards to pay unemployment benefits.

“Those services, which have been well received, are estimated to save the state more than $4 million in annual costs,” Nappier said.

“Based on our due diligence, overall debit cards are more efficient and a cheaper method of disbursing tax refund payments, and the increased convenience and lower cost of debit cards should also benefit the unbanked and those who have not elected direct deposit,” she added.