A.      Background

The Department of the Treasury, Fiscal Services (Treasury); the Social Security Administration; the Department of Veterans Affairs (VA); the Railroad Retirement Board (RRB); and the Office of Personnel Management (OPM) (collectively referred to as the “Agencies”) recently issued an interim final rule implementing statutory restrictions on the garnishment of Federal benefit payments. A copy of the proposed rule can be found here. The interim rule goes into effect on May 1, 2011 and the Agencies will accept public comments until May 24, 2011.

Pursuant to the interim rule, Social Security benefits, Supplemental Security Income, VA benefits, Federal Railroad retirement benefits, Federal Railroad unemployment and sickness benefits, Civil Service Retirement System benefits, and Federal Employee Retirement System benefits (collectively referred to as the “Federal Benefits”) are all protected from garnishment unless the order is from the United States of a State child support enforcement agency. The Agencies intended the rule to cover any institution that might hold an account to which Federal Benefits may be directly deposited, including banks, savings associations, and credit unions.

B.      Requirements of the Rule

Upon receipt of a garnishment, a financial institution must determine, within two business days, whether the garnishment was issued by the United States or a State child support enforcement agency. If there is a Notice of Right to Garnish Federal Benefits attached or included with the garnishment, which is required if the garnishment order is issued by the United State or State child support enforcement agency, then the financial institution may garnish the Federal Benefits without any further review. On the other hand, if the financial institution determines that the garnishment was not issued by the United States or a State child support enforcement agency, then it must conduct a review of the defendant’s account.

An account review must be performed within two days following the receipt of the garnishment. The financial institution is required to review the defendant’s account for a period of two months prior to the date of the garnishment. If the Agencies did not deposit a Federal Benefit into the account during the two month period, then the financial institution should proceed with its standard garnishment procedures. Note – the rule only applies to Federal Benefits that were directly deposited into the garnishee’s account. A financial institution can determine whether a deposit is a Federal Benefit by looking at the “Company Entry Description” of the ACH Batch Header Record. The Company Entry Description will contain the characters “XX” encoded in 54 and 55 if the deposit was a Federal Benefit.

If the financial institution determines that the account did receive Federal Benefits in the look-back period, then the financial institution cannot (1) include those funds in the garnishment; (2) charge a garnishment fee on the protected funds; (3) freeze the protected funds; or (4) limit in any manner the account holder’s access to the protected funds. Additionally, the financial institution is required to send notice to the account holder if Federal Benefits were deposited during the look-back period. The notice must include specific information, including but not limited to: the date the garnishment was served on the financial institution; an explanation of what a garnishment means; the protected amount of Federal Benefits; the requirement to freeze other funds to satisfy the garnishment; the amount of any garnishment fee; and the account holder’s rights.

Finally, the rule requires that all financial institutions maintain records of account activity and actions taken in handling garnishment order sufficient to show compliance for a period of not less than two years from the date of receipt of the garnishment order.

C.      Implementation

Although the interim final rule may change after May 1, 2011, financial institutions are encouraged to take steps now to prepare for the rule’s implementation. For example, financial institutions may want to review the rule in its entirety, review its current garnishment procedures, make any necessary changes to ensure compliance with the rule, and train employees as necessary prior to May 1, 2011.