On December 21, Congress overwhelmingly passed a consolidated bill (H.R. 133) that contains $1.4 trillion in appropriations to keep the federal government funded until October 2021 and $900 billion in coronavirus economic relief. The latter is found in Division N of the lengthy bill (which runs over 5600 pages) entitled “Additional Coronavirus Response and Relief.” Division N of the bill contains much needed economic relief for struggling individuals and families, additional funding for businesses through the Paycheck Protection Program, and an extension of the troubled debt restructuring provisions from the CARES Act, among many other things.
Although President Trump was expected to sign the bill immediately, on December 22 he signaled that he might not sign the legislation. President Trump called the package “a disgrace” and advocated that Congress amend the bill to increase economic impact payments (“EIPs”) from $600 to $2,000 for individuals and from $2,400 to $4,000 for married couples. Nonetheless, President Trump finally signed the bill five days later on December 27 without any changes, thus narrowly averting a federal government shutdown and bringing much needed economic relief to needy individuals, families and businesses.
This blog post focuses on an exemption for EIPs from garnishment by private creditors and debt collectors that is contained in H.R. 133. The first round of EIPs provided under the CARES Act, which was enacted on March 25, 2020, did not exempt EIPs from garnishment by creditors and debt collectors. However, H.R. 133 makes EIPs completely exempt from garnishment by creditors. Banking trade groups successfully lobbied for this provision because banks were caught in the middle between their legal obligation to recognize state garnishment orders obtained by creditors and their desire to help protect EIPs for their financially-strapped customers.
Sections 272 and 273 of the bill authorize a second round of EIPs for individuals and families. The refundable tax credit is $600 per taxpayer (or $1,200 for married filing jointly), in addition to $600 per qualifying child. That means that a family of four could receive a payment of $2,400. The individual tax credit is half as much as the CARES Act provided last March ($1,200), but the tax credit per qualifying child is $100 more than the CARES Act allotted ($500). The tax credits are subject to phase-outs for incomes above $75,000, or $150,000 for joint filers, based on 2019 income tax returns.
Section 272 of the legislation provides an aggressive timeline for distribution of EIPs by instructing the Treasury Secretary to provide EIPs “as rapidly as possible” and setting a deadline of January 15, 2021 to issue such payments. Likely timing of Treasury action is discussed later in this blog post.
Like the CARES Act, EIPs are generally not subject to administrative reduction or offset for past due federal or state debts under H.R. 133. However, unlike the CARES Act, H.R. 133 makes EIPs completely exempt from bank garnishment or levy by private creditors or debt collectors. The term “garnishment” is defined broadly to include execution, levy, attachment, garnishment or other legal process. The bill would extend protection to EIPs by treating them similarly to other federally protected benefits. Specifically, direct deposit EIPs that are coded by the Treasury Department are exempt from garnishment orders under procedures currently applicable to garnishment exemption of other federal benefits like Social Security by requiring review of accounts during the “look-back period” required under 31 C.F.R. Part 212 of Treasury’s regulation. Other EIPs (e.g., checks, other electronic payments) may be exempt from garnishment upon request of the recipient.
Therefore, if a financial institution receives a garnishment order that applies to a deposit account that has received an encoded EIP payment, the financial institution must follow the account review “look-back” procedures in Treasury’s rules. As we understand the legislation, the EIP provisions of H.R. 133 would become effective immediately upon enactment and apply prospectively to garnishment orders from private creditor and debt collectors.
Although the exact timeline for the second round of EIPs is unclear, it is expected that the Treasury Department will quickly begin sending EIPs via ACH payment or check – likely within one week – because Treasury already has that infrastructure in place after implementing it following enactment of the CARES Act. As a result, it will be critical for banks to quickly ramp up planning at all levels of their organization to deal with the additional EIPs that will be received in individual bank accounts, as well as potential garnishment issues they may confront.