IBA Compliance Connection

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Is a federal or state tax refund that was directly deposited into a checking or savings account subject to garnishment, or is it considered exempt, like a social security or child support payment?

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No, we do not believe that a federal or state tax refund that was directly deposited into a checking or savings account would be exempt from garnishment.

Federal benefit payments paid by benefit agencies are considered “protected amounts” that are exempt from garnishment during a lookback period. However, “benefit payments” must be paid by one of the following benefit agencies: the Social Security Administration, Department of Veterans Affairs, Office of Personnel Management or Railroad Retirement Board. Since tax refunds are not paid by a federal benefit agency, they do not qualify as benefit payments and are not exempt from garnishment.

For resources related to our guidance, please see:

  • 31 CFR 212.6 (“The following provisions apply if an account review shows that a benefit agency deposited a benefit payment into an account during the lookback period.”)
  • 31 CFR 212.6 (“Protected amount. The financial institution shall immediately calculate and establish the protected amount for an account. . . . A protected amount calculated and established by a financial institution pursuant to this section shall be conclusively considered to be exempt from garnishment under law.”)
  • 31 CFR 212.3 (“Benefit agency means the Social Security Administration (SSA), the Department of Veterans Affairs (VA), the Office of Personnel Management (OPM), or the Railroad Retirement Board (RRB).”)
  • 31 CFR 212.3 (“Benefit payment means a Federal benefit payment referred to in § 212.2(b) paid by direct deposit to an account with the character ‘XX’ encoded in positions 54 and 55 of the Company Entry Description field and the number ‘2’ encoded in the Originator Status Code field of the Batch Header Record of the direct deposit entry.”)
  • 31 CFR 212.2(b) (“Federal benefit payments protected from garnishment pursuant to the following authorities: (1) SSA benefit payments protected under 42 U.S.C. 407 and 42 U.S.C. 1383(d)(1); (2) VA benefit payments protected under 38 U.S.C. 5301(a); (3) RRB benefit payments protected under 45 U.S.C. 231m(a) and 45 U.S.C. 352(e); and (4) OPM benefit payments protected under 5 U.S.C. 8346 and 5 U.S.C. 8470.”)