- The U.S. Treasury can garnish your Social Security benefits for unpaid debts such as back taxes, child or spousal support, or a federal student loan that’s in default.
- If you owe money to the IRS, a court order is not required to garnish your benefits.
- You’ll have to shell out 15% of your Social Security for back taxes and as much as 65% for alimony or child support owed.
What Is Wage Garnishment and How Does It Work?
Here’s how garnishing works. A commercial creditor to whom you are in debt hauls you into court and wins a judgment against you. Then the creditor asks the judge for an order to garnish your wages, bank account, and any other assets you may have to satisfy that debt. The judge approves the garnishment to square the debt. Are all your assets vulnerable, including Social Security and retirement benefits, such as a 401(k) or an individual retirement account (IRA)?
When the Creditor Is a Commercial Entity
When it comes to federal benefit payments, the answer is “no.” We’re talking Social Security, veteran’s benefits, railroad retirement benefits, and Office of Personnel Management retirement benefits—especially if said creditor has issued you a credit card or an auto loan and your payment is late. Creditors holding medical bills, along with personal and payday loans, are also prohibited from garnishing these benefits. That’s according to Section 207 of the Social Security Act. It’s the law.
With regard to 401(k)s and IRAs, the former are generally safe from garnishment by commercial creditors as long as the money stays in the account, thanks to the Employment Retirement Income Security Act of 1974 (ERISA), while the first million dollars in your IRA are protected under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
If you’re not ordered to pay back taxes or child support, then the bank has to review the history of your account (or accounts) for the two months prior to receiving the garnishment order. If your Social Security or other protected benefits have been directly deposited into your accounts within that two months—the so-called “look-back period”—the bank must protect the funds up to the total of the direct deposits. You’re free to spend it on anything.
However, if you’re still working, your creditor can garnish your wages and, depending on the state where you live, other allowable assets you may have, such as a house or car.
When the Creditor Is the Federal Government
Suppose that you owe the federal government back taxes. Well, the Treasury Department is a different kettle of fish. You’re going to have to hand over 15% of your Social Security. Funds in a 401(K) or an IRA are also vulnerable to the Feds.
If you owe alimony or child support, the federal government can get involved in that too: You may have to forfeit as much as 50% to 65% of your Social Security. What’s more, the Internal Revenue Service (IRS) doesn’t need a court order to garnish your benefits—it can do it on its own.
Once your bank receives the garnishment order, it has two business days to conduct a review and identify your accounts. If the order is to collect federal taxes or child support, the bank may freeze those accounts, even if the money is from Social Security.
You can avoid the garnishment if you make an arrangement with the IRS to pay off back taxes. In that case it will no longer garnish your Social Security benefits, though it retains the right to do so if you fail to hold up your end of the bargain.
Retirement plans set up under the Employee Retirement Income Security Act (ERISA), such as 401(k)s, are generally protected from judgment creditors. The fact that 401(k) plans legally belong to your employer also offers some protection from federal tax liens.
When the Creditor Is a Federal Student Loan
If you become delinquent on a federal student loan, the government can take up to 15% of the outstanding debt. It is not, however, entitled to the first $750 of your monthly Social Security and retirement benefits.
For example, if you have $850 in benefits, 15% of that would be $127.50. As you can’t be given less than $750, the most that can be taken from you is $100. This rule applies only to federal student loans, not private loans.
The Bottom Line
Only the federal government can garnish your Social Security and other federal retirement benefits. If you are in danger of such a scenario, get legal help. The American Bar Association provides links to free and low-cost lawyers who can advise you.