Compliance Bulletin

New Garnishment Exemption For Federal Benefit Payments
February 28, 2011

Several federal agencies [1] have issued a joint interim final rule establishing procedures that financial institutions must follow when they receive a garnishment order [2] on direct deposit federal benefit payment recipients [3].

 The interim rule applies only to direct deposit ACH benefit payments, and not to check payments on the rationale that the recipient can choose to cash a check rather than deposit it and take on the risk that the funds will be garnished. An additional reason is that financial institutions cannot readily identify whether a check represents exempt funds.


Account Review. Upon receipt of a garnishment order, an institution will have two business days from the date of its receipt first to determine if the United States or a state child support enforcement agency has included in the order a Notice of Right to Garnish Federal Benefits (see “Exceptions” below). If the notice is included, then the process for handling exempt federal benefit payments under the interim rule does not apply and the institution must process the order following its customary procedures.

If such notice is not included in the order, the institution must review the account history during the two month period prior to the receipt of the order [4]. If during this “lookback period” one or more exempt payments were directly deposited to the account, the account holder must be given “full and customary” access [5] to the lesser of the exempt payments in the account or the account balance as of the date of the account review, referred to as the “protected amount.” [6] Thus, the institution may not simply freeze the account. Also, the institution may not require an account holder to assert any right to a garnishment exemption or take any other action as a condition to gaining access to the protected amount. Appendix C to the interim rule includes several examples of how to handle the account review during the lookback period and determining the protected amount.

Where a garnishment order does not include sufficient information to identify whether the debtor is an account holder, the time limit commences when the institution receives sufficient information. Where the institution is served a batch of a large number of orders, the deadline is extended to whatever date is permitted under the terms of the garnishment orders. The agencies note that this does not mean that the deadline may be extended simply because a large number of separate orders are received at one time.

During these two days and during the time between receipt of the order and the date that the account review must be completed, an institution will not be liable to a creditor for penalties under state garnishment or other laws, to the accountholder for any frozen amounts, or for contempt of court for failing to honor a garnishment order where federal benefit payments have been deposited into an account.

To ease identification of payments, a benefit payment is covered only if the ACH Batch Header Record contains a specified unique garnishment exemption identifier, that is, the characters “XX” encoded in positions 54 and 55 of the “Company Entry Description” field. Thus, a social security payment that currently contains “SOC SEC” in this field will be encoded as “XXSOC SEC,” and a federal retirement payment currently encoded as “FED ANNUT” will appear as “XXFED ANN” and so forth. All benefit payments subject to the interim final rule will be similarly encoded by May 1, 2011.

An account holder is defined as a natural person against whom a garnishment order is issued and whose name appears in a financial institution’s records as the direct or beneficial owner of an account. Each account that is owned by an individual, whether in a consumer or business account, against whom a garnishment order has been issued must be reviewed. For example, if an individual maintains two accounts at the same institution, and payments issued under two different benefit programs are directly deposited to each account, both accounts must be separately reviewed and a separate protected amount must be calculated and applied for each account.

Notice. The institution must then send a notice to the account holder (or to a fiduciary who administers the account and receives communications on behalf of the account holder) within three business days “from the date of account review,” which may be construed as from the completion of account review. Only information and documents pertaining to the garnishment order may be included in the communication. The institution may issue one notice with information related to multiple accounts of an account holder. The notice need not be sent to a co-owner on the account. It does not have to be sent by registered mail or be personally served, and a copy does not have to be sent to the creditor. The institution must inform the account holder of the means of contacting the creditor and court only if the order includes that information. A notice is not needed if the balance in the account is zero or negative on the date of account review.

The content of the notice is prescribed as follows: (1) the fact that the financial institution received an order against the account holder; (2) the date that the order was served; (3) a “succinct” explanation of garnishment; (4) the financial institution’s requirement to protect and make available directly deposited federal benefit payments within the last two months; (5) the protected account subject to the order; (6) the financial institution’s requirement pursuant to state law to freeze other (unprotected) funds in the account to satisfy the order and the amount frozen, if applicable; (7) the amount of any garnishment fee charged; (8) a list of the federal benefit payments protected; (9) how to assert against the levying creditor for further garnishment exemptions; (10) the account holder’s right to consult an attorney or legal aid service in asserting against the creditor that initiated the order a further garnishment exemption for amounts above the protected amount; (11) the name of the creditor, and (if available in the order) contact information. A model notice (set forth in Appendix A to the interim rule), if used, is deemed to be in compliance with the requirements of the interim rule, but use of the model notice is optional.

The interim rule expressly permits an institution to offer also the following optional information in “readily understandable language”: how to contact a local free attorney or legal aid service, how to contact the financial institution, and that by issuing the notice the institution is not providing legal advice. It may also integrate information about a state’s garnishment rules and protections and provide more complete information about an account (see below). A safe harbor is also provided for the provision of this optional information. A garnishment fee [7] may be charged only against funds in the account in excess of the protected amount on the date of account review if the institution customarily charges its other account holders the fee. After such date, no charge is allowed.

An institution’s response to a garnishment order is intended to be a one-time event. It may not repeat the review subsequently, including in cases where the same garnishment order is served again on the institution. But if the institution is subsequently served a new or different garnishment order against the same account, it must execute a new account review. State laws are preempted that require continuing garnishments, i.e., an order requiring the garnishee to monitor, preserve and remit funds coming into the garnishee’s custody on an ongoing basis.

Exceptions. The rule does not apply to garnishment orders obtained by the United States or by state child support enforcement agencies (in California the Department of Child Support Services). Exempt garnishment orders will have attached or included with them a standard Notice of Right to Garnish Federal Benefits (reproduced at Appendix B to the interim rule) for easier identification. As discussed above, in these situations the institution need not review the account and may follow its customary procedures for garnishment orders as if no federal benefit payment were present. However, this exclusion does not affect the accountholder’s rights under other applicable laws.

Other provisions

Guidelines. The interim rule includes guidelines to ensure the uniform review of accounts. When a financial institution performs an account review it will not consider (1) the presence of other funds commingled in the account, (2) the existence of a co-owner, (3) the existence of benefit payments to multiple beneficiaries, and/or under multiple programs, deposited in the account, (4) the account balance if above zero on the review date, (5) contrary instructions in the order, or (6) the nature of the debt or obligation underlying the order. The review must be conducted before taking any other actions related to the garnishment order that may affect funds in the account.

An account holder may not instruct a financial institution in advance or in a standing agreement to use exempt funds to satisfy a garnishment order, nor may such authorization be included in any account agreement. However, an institution may comply with written accountholder instructions dated after the order is served to use exempt funds to satisfy the order, and such action is protected by a safe harbor.

The agencies note that the interim rule does not address an institution’s right to take a security interest in its deposit accounts or to exercise a contractual right to deduct fees or a common law right of offset against funds that are exempt from garnishment, except for deducting a garnishment processing fee. Nor does it address the conditions under which an account may be closed.

State law. The interim rule preempts any state or local government law or ordinance that is inconsistent with the rule. Such law is preempted only to the extent that an inconsistency between the rule and the law would prevent a financial institution from complying with the requirements of the rule. Thus, if a state law protects funds from garnishment in an amount that exceeds the protected amount, the interim rule would not preempt the requirement if the institution has complied with all of the requirements of the interim rule.

According to Ted Kitada [8], when a garnishment order is served on a financial institution under a writ of execution issued under California’s statutory process for the enforcement of money judgments, if a deposit account having direct deposit of social security benefits or public benefits is subject to the order, the account generally enjoys an automatic, fixed exemption that applies without the account holder having affirmatively to seek a stay or release of the order. The following amounts apply (as updated on April 1, 2010, and every three years thereafter by the California Judicial Council):

  • $1,425.00 where one depositor is the designated payee of a directly deposited public benefits payments.
  • $2,875.00 where one depositor is the designated payee of directly deposited social security benefits payments.
  • $2,150.00 where two or more depositors are the designated payees of directly deposited public benefits payments.
  • $4,300.00 where two or more depositors are the designated payees of directly deposited social security benefits payments.

Accordingly, upon service of a writ of execution and notice of levy on a financial institution, the financial institution would, effective May 1, 2011, comply with the interim rule to identify a protected amount, if any. Upon identification of a protected amount, the financial institution would thereafter determine if additional funds (including social security benefit payments) are protected in accordance with the amounts detailed above.

Upon confirming that social security benefit payments (or public benefit payments) are additionally protected under California law, the institution would automatically assert the exemptions granted under California law on behalf of its account holder up to the statutory amount through the memorandum of garnishee delivered to the levying officer within ten business days of the levy. Note that even if the deposit account is funded from multiple sources (in addition to a benefit payment defined under the interim rule), a financial institution need not engage in the tracing of the directly deposited exempt payments to confirm that in fact the funds in the deposit account are the proceeds thereof. Generally the institution is expected to grant automatically the exemption to the fullest extent upon confirmation of the nature and extent of the exempted direct deposits, provided the deposit account has available funds.

Enforcement and records retention. Compliance with the rule will be enforced by the federal banking agencies. Financial institutions must maintain records of account activity and actions taken in handling garnishment orders sufficient to demonstrate compliance with the rule for at least two years from the date receipt of a garnishment order.

An institution will not be liable “bona fide errors” that occur despite reasonable procedures to prevent such errors in complying with the interim rule, or for customary clearing and settlement adjustments that affect the balance in an account, including protected amounts. This would include adjustments caused by the return of unpaid items and debit card transactions settled for amounts higher than originally authorized.

The interim rule is effective on May 1, 2011.

A garnishment order means a writ, order, notice, summons, judgment, or similar written instruction issued by a court or a state child support enforcement agency, including a lien arising by operation of law for overdue child support, to effect a garnishment against a debtor.

  1. The Department of the Treasury’s Fiscal Services, the Social Security Administration, the Department of Veteran Affairs, the Railroad Retirement Board, and the Office of Personnel Management.
  2. The benefits affected include Social Security benefits, Supplemental Security Income (SSI) benefits, VA benefits, Federal Railroad retirement benefits, Federal Railroad unemployment and sickness benefits, Civil Service Retirement System benefits and Federal Employee Retirement System benefits.
  3. “Lookback period” is defined to mean the two month period that (i) begins on the date preceding the date of account review and (ii) ends on the corresponding date of the month two months earlier, or on the last date of the month two months earlier if the corresponding date does not exist. For example, under this definition, the lookback period that begins on November 15 would end on September 15. On the other hand, the lookback period that begins on April 30 would end on February 28 (or 29 in a leap year), to reflect the fact that there are not 30 days in February.
  4. Access may be subject to any limitation on funds availability to which the account is subject. For example, if funds on deposit are subject to a hold under Regulation CC or a limitation on withdrawal applicable to a time deposit, the rule would not override or affect those limitations.
  5. “Protected amount” is defined as the lesser of (i) the sum of all benefit payments posted to an account between the close of business on the beginning date of the lookback period and the open of business on
  6. the ending date of the lookback period, or (ii) the balance in an account at the open of business on the date of account review.
  7. A garnishment fee means any service or legal processing fee, charged by a financial institution to an account holder, for processing a garnishment order or any associated withholding or release of funds.
  8. Mr. Kitada is Senior Counsel at Wells Fargo Bank and Chair of CBA’s Legal Affairs Committee.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

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