Can a Retirement Pension Be Garnished?

A retirement pension represents a significant financial asset for many individuals. This article explores the circumstances under which retirement pensions can be garnished, detailing the federal and state laws that provide protections and specific exceptions.

Garnishment Basics and Key Terms

Garnishment is a legal process that allows a creditor to collect a monetary debt from a third party who holds money or property belonging to the debtor. In the context of retirement funds, it involves a court order or legal action directing a plan administrator or financial institution to withhold a portion of a debtor’s retirement assets or payments to satisfy a debt. It is important to distinguish between retirement accounts, such as 401(k)s or Individual Retirement Accounts (IRAs), and actual pension payments or distributions. The rules governing protection can differ significantly depending on whether the funds are still held within the retirement plan or have already been paid out to the individual.

Federal Protections for Retirement Assets

The Employee Retirement Income Security Act of 1974 (ERISA) sets standards for most voluntarily established retirement and health plans in private industry. ERISA mandates an anti-alienation provision (29 U.S.C. 1056) for qualified plans, meaning benefits cannot be assigned or alienated to creditors, preventing most creditors from reaching funds held within plans like defined benefit pensions, 401(k)s, and 403(b)s. This protection applies to the funds while they remain within the plan.

Social Security Act Section 207 generally exempts these benefits from garnishment, levy, attachment, or other legal processes by most creditors. This means private creditors, such as credit card companies or medical debt collectors, typically cannot seize Social Security benefits, even if they obtain a court judgment. If Social Security benefits are directly deposited into a bank account, federal regulations require banks to automatically protect at least two months’ worth of benefits from garnishment by most creditors.

Veteran Affairs (VA) benefits, including disability and pension payments, are protected by federal law (38 U.S.C. 5301). This statute generally exempts VA benefits from claims of creditors and from attachment, levy, or seizure. Pensions for federal employees, such as those under the Federal Employee Retirement System (FERS) or Civil Service Retirement System (CSRS), also benefit from federal protections against garnishment.

State-Specific Protections and Exemptions

While federal laws like ERISA offer robust protections for many private-sector retirement plans, state laws play a significant role in safeguarding other types of retirement income. State statutes often govern the protections afforded to assets not covered by ERISA, such as Individual Retirement Accounts (IRAs) and annuities, as well as pensions for state and local government employees. The extent to which these assets are protected from creditors can vary considerably from one state to another.

Some states offer full protection for IRAs, meaning these accounts are entirely exempt from creditor claims, while others may impose limits. For instance, some states protect IRAs only up to a certain dollar amount, or only if the funds are deemed reasonably necessary for the support of the debtor and their dependents.

The specific conditions for protection can also include provisions related to contributions made shortly before filing for bankruptcy or claims arising from domestic relations orders. Therefore, the level of protection for non-ERISA qualified plans largely depends on the specific laws of the state where the individual resides.

Specific Circumstances Allowing Garnishment

Despite the general protections afforded to retirement assets, there are specific circumstances under which they can be garnished. One exception involves Qualified Domestic Relations Orders (QDROs). ERISA-protected plans can be garnished for child support, alimony, or marital property division if a QDRO is issued by a court. This is a specialized legal order that creates or recognizes an alternate payee’s right to receive all or a portion of the benefits payable under a retirement plan.

Federal tax levies represent another exception to retirement asset protection. The Internal Revenue Service (IRS) has broad authority to levy most types of retirement income, including pensions, 401(k)s, IRAs, and even Social Security benefits, to collect unpaid federal taxes. While the IRS typically considers such action a last resort, they can seize these funds without a court order for tax debts.

Defaulted federal student loans can also lead to the garnishment of federal benefits. The U.S. Department of Education, through the Treasury Offset Program, can garnish a portion of Social Security benefits, typically up to 15% of the monthly payment, for federal student loans in default. However, a minimum monthly benefit, such as $750, is generally protected, ensuring recipients retain some income.

In certain cases, retirement funds may be subject to garnishment for criminal restitution or fines. Federal courts have ruled that the Mandatory Victims Restitution Act (MVRA) can override ERISA’s anti-alienation provisions, allowing for the garnishment of retirement accounts to satisfy court-ordered restitution to victims of a crime.