Separation Pay Recoupment Begins Again

Apr 24 2010

Published by at 1:41 pm under Military Benefits,VA Benefits

The Defense Finance and Accounting Service (DFAS) announced the recoupment of Voluntary Separation Incentive (VSI) and Special Separation Benefit (SSB) (including the other types of separation pays) will resume again starting in August 2010.

Recoupment of the separation pays stopped last June as DFAS reviewed the policies for repayment. The idea was to see if some flexible could be built into the repayment policy to provide a bit of relief for military families under financial strain. With the passage of some new laws, some flexibility can now be built into the repayment formula.

DFAS has reduced the maximum repayment rate from 90 to 40%. Those who can prove financial hardship may be eligible for even more lenient repayment schedules.

If this information applies to you, you will receive a letter from DFAS 90 days prior to recoupment beginning again. The letter will contain additional information for applying for hardship review. Former spouses who will be impacted by this program will also receive notification letters.

*** See my comments below on 20 May if you want to understand the gross-net tax issue better. ***

For more info, call DFAS at 800-321-1080 or go to

31 responses so far

31 Responses to “Separation Pay Recoupment Begins Again”

  1. Frank Howeon 11 May 2010 at 8:39 pm

    How will the VA benefits be recouped? Will they also be at 40%? And because Army Retirement recoups all of the pay (to include taxes) and the VA does not, who will keep track of the balances??

  2. dton 19 May 2010 at 2:21 pm

    Please someone who can answer this authoritatively, please do and confirm the following, which is what I believe:
    The VA did not stop recoupment of SSB/VSI like DFAS did. VA will still continue to recoup from VA disability (full monthly amount, so you should not receive any payment until it is paid back, not including taxes). When that amount is paid back, you’ll start receiving the full amount of your VA disability. I hope and don’t think both DFAS and VA can simultaneously recoup, one at the taxed amount, and the other for the non-taxed amount – that would be grossly unfair and like a double whammy!

  3. J. Creanon 19 May 2010 at 9:47 pm

    Good question – DFAS explained “they will work with the VA” and just left it at that.
    Little background for you. I have tried since 1999 to get the law changed to stop the recoupment of the money we never saw. Started with a politician in Texas (who wanted Texans) then NY state and both failed to get it done. Mix in a deployment to Bosnia, Korea, Iraq (2x), and time just got away from me. Finally I retired in summer 2008 with over 20 years active duty. Did I mention I asked for help from the Legion, VFW, MOAA, and AUSA – no help. One guy from MOAA made an inference that I should stop my complaining and just pay.
    Did you know there are over 100,000 folks that took the SSB and VSI? Many elected to not go any further because of the heavy restrictions. Even so, you would think that with those numbers we could influence the law changes necessary to at least forgive the taxed portion. In retrospect instead of working this alone I should have tried to form a group. I now know of several people that experienced the same success as me. With the political climate and the state of the economy I am pessimistic that anything will be done.
    Big mystery for me is why didn’t we know this thing was going thru the political mill? The letter I received only stated that DoD was reviewing. Maybe a few well placed letters in the hands of the people working this bill to cap it at 40% would have helped? Don’t get me wrong, I am thankful for the 40% thank you but this tax thing makes my blood boil.
    If anyone at MOAA cares (ROA seems to be the most sympathetic – see ROA Resolution 10-27) this could be something that you could champion. Our single efforts to get help and relief did not work.

  4. Shane Ostromon 20 May 2010 at 7:49 am

    I don’t know who in MOAA would have told you ‘shut-up and pay’ because that response isn’t necessary when a person understands what is really happening in the recoupment process.

    Recoupment of separation payments is not what most folks think it is. If a member stays in the Service after separation until retirement or receives VA compensation, the original separation pay is not separate and distinct from future retired pay. Separation pay is by-law an advance of any future retired/disability pay. This is the key point that has to be understood–the advance of pay. A member that separates from the Service receives true separation pay with no pay back.

    Once this concept is understood, then you can see how at the time your retired pay begins, you have already been paid an amount up-front at the time you were separated. Technically you’re not paying back anything; your pay is withheld due to the advanced payment you received in the past.

    There were no extra taxes paid either. You paid taxes upon your “advance”, as you should, since Service pay is taxable. And now, since you were advanced an amount earlier, that is the amount you are now withheld–the amount DFAS advanced you in pay. Example: DFAS advanced you $100,000 in pay earlier. Now DFAS/VA withholds $100,000 in current pay due to your advance.

  5. Brian R. E. Milleron 20 May 2010 at 8:24 am

    I understand that VSI/SSB payments will now be recouped at the 40% rate when you are eligible for retirement pay. My question is this:

    For those of us who received Involuntary Separation Pay (i.e. did not opt for the incentive and were still separated) will our Involuntary Separation Pay also be recouped?

    Thanks for any assistance-

  6. J. Creanon 21 May 2010 at 9:01 pm

    Thanks for the response – never looked at it as a future retired pay! I do have the pdf link you sent, along with dozens of articles and other regulatory product. Also, prior to my last deployment I received some things from DoD that proved to be useful when I was trying to get the law changed. I hear you but I still think paying back the gross amount vs. the net amount is wrong. Now having said that, I’ll pay it back. Funny you weighed in on this as I spoke to a financial guy last night on options. Knowing this was going to happen I prepared by stuffing money in the TSP from 2001 until my retirement. Back in 2001 my sole purpose for saving was to pay off the debt, but I think that being taxed and penalized for withdrawing that money is being stupid on top of stupid so I am looking to invest that money into something that pays better than the 1 or 2% G fund pays.
    Spoke to DFAS and VA today and each pointed the finger at the other so as usual we do this (learn) on our own and when fortunate enough to get experts like you to jump in I am happy and grateful.
    I am not an expert on this and many of us are different. For instance I left with over 13 year’s service in 1994. Came back in 2001 and retired with over 20 years active duty July 2008. On top of that I received a sizable VA disability in DEC 08. I am receiving both VA and retirement and they are not offset. So here we are; 40% of retirement pay (thank God they changed the law) and I think that VA is going to stop disability until I pay back the “net” amount I walked away with. I believe this is what DT stated as well. Still trying to track the definitive answer down but I think some of the folks posting here and on other boards can answer or lead to the correct source of information.

  7. J. Stewarton 16 Jun 2010 at 9:43 am

    If one is awarded $15,000 in separation pay, the person may actually receive only $10,000 due to tax witholding. However, DFAS demands repayment of the entire $15,000. How does one recover the missing $5000 since I doubt you can file an amended tax return 20+ years later?

  8. Shane Ostrom, CFP®on 16 Jun 2010 at 2:34 pm

    BRE Miller, yes, invol sep pay is also recouped. The intent of the pay is to see people go away. Sep pay is considered a separate/distinct form of pay UNLESS you retire. Then the sep pay is related to your retired pay. If you don’t go away because you continue to serve in another capacity (salute to you folks!), once you retire, the sep pay is viewed as an advance of retired pay and you owe back the advance. Another way to think about it is that you aren’t paid some of your initial retired pay until your advance is covered.

    J Stewart, check out my response of 20 May. You don’t get the taxed amount back because your sep pay was an advance of future retired pay. You were advanced retired pay at $15k and paid taxes. Now DFAS withholds $15k of retired pay from your current pay to recoup the advance.

    As for the coordination between VA and DFAS and who recoups, it’s a mystery. We are told you don’t pay back twice–one sep pay amount; one sep pay recoup amount.

  9. Markon 06 Aug 2010 at 9:38 am

    I accepted SSB in 1992 and was rated at 10% compensible soon after. I have had recoupment of my SSB since I have been rated disabled. I know that I am entitled to a refund because the total VA disability payments exceed the post tax total. I have contacted the VA several times and they refuse to acknowledge the refund. I even gave them the excerpts from the Public Laws and spreadsheets of payments and totals. Where do I go and who can help? I am very frustrated at this point. The VA administrators don’t even know their own regulations! They won’t even take the time to read the areas of their regulations when I give it to them. Thank you.

  10. Shane Ostrom, CFP®on 06 Aug 2010 at 11:28 am

    Mark, note my previous comments about why and how payments are recouped. The gross amount is withheld from your future pay, not the net. If this doesn’t explain the amount withheld from your VA comp, then I can only recommend you get with a Vetreran Service Officer (VSO) to help with your case. If you’ve worked with a VSO already, find a new one. Start with the VSOs provided by your state. Each state has VSOs, state employees, in each county. See list under ‘state’ title here. If not there, check under the ‘private organizations.’ Hope this helps.

  11. rj whitmoreon 22 Aug 2010 at 2:16 am

    i received the ssb in 1992 and never filed a claim until this year
    with the va for dissability . So let me understand, you meen i have to pay that back even though i met my 9 years of inactive ready reserve???

  12. Carlon 14 Sep 2010 at 12:56 am

    I was involuntarily separated and received “readjustment pay”. I knew that I would have to pay back (satisfy the advance) before I would receive my reserve retirement at age 60. Since then, I was given a 40% rating by the VA. Again, I know that I will not receive money from the VA until I pay back (satisfy the advance, less taxes this time). My question is that when I read the DFAS Press Release 0410-003, and I read Section 1174(h) of the code, I think that I would fall under the maximum recoupment rate of 40%. Or is this not related because the VA is recouping my “readjustment pay” and not the retirement department? And, does any one know where I can find the “amended” sections 1174(h) and 1175(e) of Title 10 that the press release talks about? Thanks for all the help, Carl…

  13. Sharrison 25 Feb 2011 at 2:52 pm

    I do not understand why severance money has to be paid back in order to receive our VA disability. If we were in the civilian sector trying to get disability, we wouldnt have to pay back the company that paid us a severance. Our disability has nothing to do with those of us who were seperated under the new Perform To Serve Program. We were involuntarily seperated. It just seems like we are getting a royal boot up the rear. The military told we could have 1/2 of our severance up front and if we joined the reserves we could have the other half. I just dont understand their logic at. I didnt want to be seperated. I had dreams of going all the way. So I get screwed in the end? Here is a little money to get you on your feet, but now that you have been determined disabled, you have to give us that money back before we will give you the money you earned by serving your country and suffering casualties of sorts????

  14. Jerry55on 23 Dec 2011 at 6:50 pm

    I received $48Kin Separation Pay in 92 and the VA recouped the net after taxes of $36K (72%) from my disability pay.

    As a reservist when I retire the retirement form asks 1) If I got separation pay; 2) If yes, how much have I paid back?; 3) The reserve retirement section told me I have to pay the est. $12K out of my reserve retirement at 60.

    Paying back the gross taxed separation pay amount with gross retirement income is roughly a wash at retirement. However, since the post retirement VA recoupment gross vs net amount (est $12K) is now being recouped out of my at 60 retirement income it negates the net vs gross payback provisions of the VA recoupment.

    Confusing yes. This equates to my having paid back the first $36K gross amount, not the net as was intended when they changed the VA recoupment rules. I will now be paying back the remaining $12K gross amount with $12K gross amount of retirement pay.

    The VA and Reserve retirement policies need to be reconciled, obviously

  15. Diane Morrisonon 03 Sep 2012 at 10:03 pm

    On Aug 25, 2010 Shane Ostrom under Military Pay, Benefits, and Health Care published this article.
    “Yes, When it comes to separation pay, it’s all in its name.” “The MOAA position will follow.” “Separation pay is given to members separated early from the Service, it is intended to help the separating member transition to civilian life. The point being, the member leaves the Service. THAT’S WHY A SEPARATED MEMBER WHO ACTUALLY SEPARATES DOESN’T RE-PAY THE SEPARATION PAY, BECAUSE THE MONEY WAS USED AS INTENDED.” If this is true and I know it is why is VA re-couping my SSB payment? I DID NOT RETIRE FROM ANY BRANCH OF MILITARY SERVICE, I DID EXACTLY AS YOU STATED ABOVE, LEFT THE MILITARY AND NEVER RETURNED.

  16. Shane Ostrom, CFP®on 04 Sep 2012 at 8:40 am

    Ms Morrison, My article was specifically addressing those who go on to qualify for retirement, but you bring up another sore point for many. I’m sorry that all I can do is say the law mandates that the sep pay be deducted from VA comp. See Title 10, section 1174(h)(2). I wish there were more to explain your situation than the double dip restrictions. Shane

  17. Seamus O'Hearnon 27 Sep 2012 at 10:39 am

    Nice to see the SSB/VSI debate is still active!! So here’s my situation…
    1971-1980 enlisted WI ANG, 1980-1992 active duty USAF leaving with 79,000 dollars gross SSB, 50,000 dollars net, 29,000 dollars federal income tax, paid no state (thank you FL)! 1992-2008 ART (air reserve technician) USAFR, disability retired at 60% (not my desire nor choice). Applied and awarded 60% disability with the VA, they recouped up to the net amount of SSB, while DFAS is still recouping the gross amount. I’m currently at the 27,000 dollars left amount at the 40% recoupment rate of 1,924 per month of my military disability retired pay (no CRDP I might add, but that’s a different story!)….
    So, my question is: How do I now file or what form do I use with the IRS when I accomplish my personal income tax return (1040) for 2012 to recoup my already paid taxes (1992) that I am now paying again? I’m sure there is a way, somewhere in that mess of a thing called the US tax code. And, I might add, I believe somewhere in the back of my head, stored way too deep for me to remember, it’s there, probably from a previous discussion group somewhere, some time ago, some double secret IRS Tax Form XXX! Thanks in advance for your help.

  18. Shane Ostrom, CFP®on 27 Sep 2012 at 5:41 pm

    Seamus, there is no tax refund or IRS form for that purpose. I covered the tax issue in this article:


  19. Seamus O'Hearnon 27 Sep 2012 at 6:24 pm


    There is only one problem with that arguement, i.e., I don’t pay income tax on my disability retirement….so, if it was meant to be an “advance” on my up and coming retirement, then shouldn’t I reap the same reward for my disability as I do today vice 1992 and not pay taxes on it?


  20. Seamus O'Hearnon 01 Oct 2012 at 9:35 am

    what no comment Shane….

  21. Jeff Meyeron 20 Dec 2012 at 3:49 pm

    I have fought this battle for 22 years. Around 2004 I sent the whitehouse an email asking for help. It was referred to DFAS and I heard form some guy, I presumed was knowledgeable. He allayed my fears that I would be paying the government 60K (30K to VA and 30K to DFAS) after going to the bank with only 24K (which was used to pay for housing and food during that first year out of uniform working for near minimum wage at Disney Florida) Oh yeah I was in the IRR too and later through happenstance I got my 20 year letter and am now retired. This DFAS guy assured me that I would only be paying back a total of 30K. I was somewhat satisfied when I asked about having to pay the 6K in taxes a second time and he said I would get a chit to get credit on my taxes in the year the recoupment was complete. I recently asked DFAS where my chit was and they haven’t stopped laughing.
    The bottom line is that VA recouped over 27K and DFAS got the remainder 2+K to finish the 30K payback. So how come I have to give the government 36K to get 24K? That is 120%


  22. Mac Dickinsonon 13 Apr 2013 at 11:47 am

    I am being involuntary separated and entitled to half separation pay of $30,000.
    I have read on the net that congress is looking to pass new laws by 2014 that SM’s would not have to pay back the Sep pay. From what I have read it seems everyone is getting screwed paying Sep pay back.
    I am in position to where I could transfer out of the Army with needing the Sep pay and I will be getting a VA rating of 50% or more. Can anyone give me some advice to either take it or not take the Sep pay; also I am will not be required to join the reserves to receive the Sep pay. Mac

  23. Ken Bartoon 14 May 2013 at 8:52 am

    I see a lot of people are having issues with severance pay and recoupment. I have a question, I was given a severance from the Military in 2008 which I in turn had to give to the VA to recieve my benefits payments from them. in 2009, Me and a group of people sued the Army under the SABO class action suit, and we won our case which means my seperation was changed to a retirement in the system. As soon as my status changed with the Army, they sent me a letter and said they were now recouping my severance pay and took all my retirement back payments to 2008. So this means that in 2008 I had to give the VA 39,000 dollars to recieve my VA payments, now I have to pay the Army back that same 39,000 dollars before I can receive any retirement payments, which means I have paid 78,000 dollars in total? How does this work? How did I come out 39,000 negative? Can anyone lend any guidance? I’m being screwed.

  24. Diane Morrisonon 17 May 2013 at 12:37 am

    Mac Dickinson, where this you read this and what is the net how can I find this “I have read on the net that congress is looking to pass new laws by 2014 that SM’s would not have to pay back the Sep pay.”
    please reply @

  25. Edward Langanon 21 Oct 2013 at 6:58 pm

    Ok, I get it the USAF paid separation in lieu of retirement, the IRS taxed it at the rate of ~37 percent. Then you go back on AD and ultimately retire. Your retirement is reduced until the pay is recouped. Now at a time of reduced circumstances you are in effect paying back an advance that was taxed at a higher rate than it would be in your current reduced circumstances. It doesn’t address the amount of your VA disability…your retirement pay is being reduced by the VA disability and nontaxable. Bottom line: who pays 19K taxes on a 45K salary? Defense Finance and Accounting Service needs to do a little accounting to resolve these faults.

  26. Matthew Hinrichson 12 Aug 2015 at 1:45 am

    This is the biggest scam I have ever heard…Those who are involuntarily separated and do not have the opportunity to retire should not have their military disability compensation with held.

  27. Paul M. Steeleon 10 Nov 2015 at 9:34 am

    I was involuntarily separated in 1996 and received $62K (gross) in separation pay (12 years of service). I returned on active duty in 1998 in response to a voluntary recall to active duty for my highly demanded specialty. I am looking to retire in a couple of years with nearly 40 years of total service. If the Army asked me to come back on active duty, why should I be required to pay back the separation pay? The Army made the mistake of downsizing too many people and then asked many to come back.

  28. Shane Ostrom, CFP®on 12 Nov 2015 at 7:06 am

    Paul Steele, because you were paid for the 12 years of service at separation. Those years are gone and paid for. Then you served extra new years. If only the new years were counted toward your future retirement, you wouldn’t owe the pay for the previous service back. But you are about to get credit for the old paid-for years and the new years that haven’t been paid for. If you want credit for the old years and be paid for them, the money for the old years has to come back. Had the Service kept you like you say they should have, you would have never seen the pay after 12 years. Now you still won’t. Shane

  29. Joseon 09 Dec 2015 at 11:56 pm

    My question is regarding Combat related disability. I was told that the dual compensation, or recoup of VSI, SSB or other payments were waived from recouped if you were medical retired for combat related disabilities. I am finding some information here and there about the issue, but nothing concrete yet. In my case I was VSI in 1996. Was called back after 911, and due to combat injuries was medical retired from the Army with 70% combat related disability n 2013. I was told then that my VSI was going to stop because I got disability from VA in 2013, but I did not have to repay what I already recieved because my disability was Combat Related (I did not get VA disability prior to 2013). I received a letter in Nov 2015 that recoup of the VSI was to start in April 2016. Is there any truth about the exception for Combat related disability and the dual service payment rule, or VSI? I found confirmation for dual retirement payment from the government and the military for the same years of service as long you were medical retired with Combat Related disabilities. could anyone help in this issue?

    Thank you

  30. Shane Ostrom, CFP®on 11 Dec 2015 at 7:27 am

    Jose, I can find no mention of what you mention other than for payment of “Disability Separation Pay.” DSP is not recouped for combat-related separations. Here is the DOD Financial Regulation for your reference. Shane

  31. Jeanon 21 May 2016 at 9:56 am

    Glad to have stumbled here before committing to my first idea. Was going to make the effort to pay back the net SSB received in 92 to the amount quoted by DFAS as enough to recoup. Stupid idea for someone who can wait for the amount that will actually be recouped by VA. My motivation began when I received the long awaited letter awarding my 70%. Oh, and BTW, won’t be getting it back until I’ve paid back to the VA in 2+ years.

    I went out with an SSB and a 3 year commitment to IRR. I seriously thought that was it. I was simply finished and given a pile of cash, literally. (When I asked could they at least issue a check as my bank was in a rough part of town they laughed).

    I do have a question. I’m not trying to be smart or especially morbid, but there are alot of veterans in a similar situation, realizing the joke has been played. The 70% is the setup and the SSB recoup as the punch line. To someone who can’t miss a serious dose of anti-depressant every day. This isn’t a good thing and obviously wasn’t thought through. So my very sincere question is this. If a former servicemember has been awarded a percentage and finds there is no other way to get his disability than simply wait. Say he or she dies for any reason (including and especially suicide) will the designated survivors still be able to receive the compensation or at least the amount the VA has already recouped?