Aug 25 2010
Yes. When it comes to separation pay, it’s all in its name. First I’ll explain the law and DOD policies on this issue. 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.
On the other hand, a member who returns to the Service in some other form, and becomes eligible for retirement, didn’t separate from the Service as intended. Under this situation, the separation pay, which wasn’t used to separate, is now considered an advance of retired pay—a key difference in the nature of the pay. By law, you can’t be paid twice for the same service. Separation pay is a form of retired pay in lieu of actually retiring. You were already paid for your previous service and now you’re using the same service to qualify for actual retirement.
As an advance of retired pay, when the member qualifies for retired pay, you have already received a portion of retired pay when you transitioned (not separated) to another Service component. As a result, your “separation pay” amount is withheld from your retired pay until your advance is recouped.
Regarding the taxation of the pay… You were advanced a gross amount of pay and you paid taxes. This is the same for any retired pay. When you eventually receive retired pay, the gross amount is withheld from your pay because that is how much retired pay was advanced to you. Example: the DOD fronted you $30,000 and the DOD withholds $30,000 to recoup their advance. In the case of repayment by the VA, the VA only deals in tax-free compensation. The after-tax, net amount of your pay is considered the tax-free portion of your separation pay, therefore the net amount is recouped.
For more on taxes see my Comments below dated 11 Sept at 0935.
The new repayment program of DOD has capped the rate of repayment at 40%. If you can show financial hardship, you can appeal for a lower repayment rate.
Now for the MOAA view.
For many years MOAA has fought and continues to fight as one of our goals to stop the repayment of all involuntary separation pay. We do not believe involuntary separation pay is an advance of retired pay. We have not been able to get support from representatives on the Hill for this position.
For voluntary separation pay, we have worked and continue to work to have a portion of the pay designated transition pay that wouldn’t have to be paid back. Some of the pay is figured based on service years and you can’t be paid twice for the same service time so some voluntary separation pay would still have to be paid back. Once again, no representatives will support this action.
MOAA’s position is that it’s not right for involuntarily separated members to have to pay it back. We have to live with the law until we can convince enough legislators to support our positions.