Do I Have to Pay Back My Separation Pay?

Aug 25 2010

Published by at 2:00 pm under Military Benefits

When it comes to separation pay, it’s all about the meaning of the word “separation.”  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; the money was used as intended.

On the other hand, a member who returns to the Service in some other form (even if your separation required a return), and later 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.  In retirement, you expect credit for time served from the beginning. However, separation pay already paid you for time served up to separation. Now you need the time prior to separation to qualify for actual retirement. In this situation, the law and DOD policy treats separation pay as an “advance of retired pay.”

As an advance of retired pay, once a person qualifies for retired pay your “separation pay” amount is withheld from your retired pay until your advance is recouped. Once recouped, you receive retired pay in full. No different than getting a loan and having part of your pay garnished until the loan is repaid.

Regarding the taxation of the pay…  You were advanced (separation pay) a gross (taxable income) amount of pay and you paid taxes. When you eventually receive retired pay, the gross separation 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.

If your separation pay is being recouped from your VA compensation, it is different. The VA only deals in tax-free compensation. Therefore if your separation pay is being recouped by the VA, only your after-tax (net separation pay) amount is recouped. Since your debt is with the Service and not the VA, the VA is technically collecting the net amount for the Service. Since you owe the Service the full gross amount, as it becomes possible, the Service will come after the difference between what the VA collected and the full gross amount.

You have no grounds for an amended tax return and tax refund. You were paid taxable income and paid taxes as everyone does with taxable income. The confusion stems from the term “recouped” as it applies to the separation pay. It’s the term used by DOD. However it is not technically recouped. Recouped implies DOD takes the money back; they don’t. Actually, you just aren’t paid. Not being paid isn’t a taxable event. MOAA is not paying you right now and there is no taxable event.

Your taxable retired pay is reduced which saves DOD money that’s being used to fill the debt left by your separation pay. Amended tax returns for refunds are for getting back tax moneys you paid but shouldn’t have paid in the past. In your case, you were paid at separation, paid taxes and lived on the money. Now you receive retired pay in a reduced amount and pay taxes on the reduced amount. There is no time where you paid taxes on income and the taxes shouldn’t have been paid.

Nuanced I know but here is one more way of looking at it. Let’s say I paid you taxable income and withheld the income taxes. Later I want the money back. I’m not going to garnish your wages. I want you to literally remove the money from your accounts and pay me back leaving you in the hole. Now you have a taxable event as you paid taxes on money that was later returned and you suffered the loss. This is an amended tax return situation.

The 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.

99 responses so far

99 Responses to “Do I Have to Pay Back My Separation Pay?”

  1. Dave Bon 05 Feb 2013 at 9:46 am


    OK, maybe the term “negative income” is not the right way for me to explain what I’m saying. How about if I suggest another solution to the tax situation for this separation pay (and subsequent recoupment). After I have had my $56K in separation pay “recouped” the next five years, couldn’t I go back and amend my 1998 income tax form (if it’s posssible to amend a tax form that long after the fact) to subtract the $56K in gross separation pay at that point? If I pay that entire $56K back (even if that money is paid back many years later), then why can’t I at least amend that 1998 tax return and get the taxes back on that $56K separation pay amount since (once that pay is “recouped”) I never really received that amount. (It will all be paid back from my retirement pay from 2012 through 2016 at the current rate of recoupment). You state that “there is not a taxable event for not being paid anything”. Once I have paid off the entire $56K in separation pay that was given to me (less taxes) in 1998, I was not paid anything (in separation pay) for 1998. So, its seems to me that I should at least be able to amend that 1998 tax return, if I can’t list the separation pay recoupment amounts in the actual tax years that I’m paying off that separation pay.

  2. Dave Bon 05 Feb 2013 at 11:09 am


    One more update on my previous post…I guess my idea to amend my 1998 tax return after I repay all my total separation pay won’t work. After a little online research, I see you only have three years to amend a previous year tax return. I’m going to continue to research my options for the current and future tax years in which my previous separation pay was/will be recouped. Your assessment may turn out to be the correct (although unfair) answer to this question about the situation where I have to repay the entire separation pay, even though I paid income taxes on somewhere between 15% and 25% of that amount (depending on what my overall tax rate was for that year). Since I am not required to pay interest on that separation pay I received in 1998, the IRS may have determined it’s “fair” to require me (and everyone else in this situation) to pay back the entire gross amount, even though we didn’t actually receive the entire gross amount. I’m not going to give up yet. I plan to try to contact the IRS to discuss the “income repayment” section of IRS pub 525, to determine if this “income recoupment” of my 1998 separation pay qualifies as an “income repayment” as discussed in the refererenced IRS pub (which I mentioned in my 4 Feb post).

  3. Bert Godlewskion 20 Feb 2013 at 10:19 am

    There is a thread here with the answer. Right of Claim. IRS pub 525 & 529 cover how to deduct or get credit for the repayment of wages. You calculate two methods and use the one most advantageous to the taxpayer. Repayment can be reflected as either a misc deduction or a tax credit which ever works best for you. Your RAS showing your “debt” and your annual VSI statement showing the running total of the payback are the documents you need to have. It is exempt from 2% AGI threshold you have to do some math every year to get the amount. Now has anyone seen their W2 from DFAS for VSI YET? It was transition money not an advance on retirement.

  4. Maryon 28 Feb 2013 at 12:16 pm

    Ok, here is my delima, I took the SSB in 1992, I filed for my VA disability in 2011 and approved in 2012 – like everybody else I have to pay back the amount received except taxes — but in my case the Air Force withheld an addional $12,000.00 of the bonus amount, and it does not show any where that this money was withheld – DFAS may no longer have records due to the age (20 years) and I cann’t make a claim becasue there is a limit of 6 years, yet I’m to payback money I never got. What I do have is my LES, a copy of my bank log showing the check I did receive and of course my W-2 to show the money is not applies to the taxes — I can’t remember why it was withheld either — so anybody have any info on this subject!!

  5. Dave Bon 15 Mar 2013 at 3:04 pm

    Just one more note on this subject to add to my previous posts…while I at first came to the conclusion that Bert G did, in his 20 Feb post on this subject, I eventually decided I was not able to claim a deduction for the “repayment of wages”. I now concur with Shane Ostrom’s posts. (Sorry, I incorrectly addressed him as “Stu” in a couple of posts!) Let me try to better explain why I now think Mr. Ostrom is right. If I were actually writing a check to the government to “repay” my separation pay, then I think I should be able to declare that payment as a deduction for “repayment of income” as Bert G explained. However, as Mr. Ostrom pointed out, I’m simply not being paid a portion of my retirement pay. Part of my retirement pay is being withheld because the law concerning goverment military separation pay payments clearly states that the US (through DFAS) can “recoup the money” if you eventually collect military retirement pay. We can certainly argue about whether this is a fair policy, since many people who receive a forced separation from the military need that money during their transition to another job, and I don’t think that money should ever be treated as “advanced military retirement pay”. However, the law is what it is. The current law effectively changes the definition of this separation pay to “advanced military retirement pay” if you are later eligible to receive military retirement pay. So, the approximately $10K (gross) pay that was withheld from my military retirement pay in 2012, “recoups” to the US government $10K of the gross separation pay I received when I first separated from active duty in 1998. Anyway, this is all confusing, but the bottom line is my taxes for 2012 will be much higher than I had thought they would be, since I don’t believe I can take a deduction for “repayment of income” since I didn’t literally “repay” the income by sending the US Treasury a check. The approximately $10K withheld from my mil retirement pay in 2012, is just a part of the $56K that will ultimately be withheld from me over the next few years since that portion of my mil retirement pay is now (by law) considered to be “advanced mil retirement pay” which I already received back in 1998. The lump sum payment (less taxes) that I received in 1998 is no longer treated as “separation pay” but is now basically treated as a very early “advance” of my post military retirement pay. So…I wish I could agree with Bert G’s post. (It would save me a lot of tax money.) But…I have to now agree that Mr. Ostrom’s explanation of the situation is correct. DFAS will continue to recoup a portion of my mil retirement pay till they have completely “recouped” the $56K in gross separation pay I received in 1998. There’s no tax benefit I can claim. I’m simply earning less taxable retirement pay for the next few years until the entire $56 K of my previous separation pay is completely “recouped”.

  6. woodyon 04 Apr 2013 at 12:56 am

    since this has been happening to who knows how many people since the early 90’s and MOAA says they can not get traction up on Capital hill why dosn’t MOAA offer up courses of action to get this changed like we were all trained to do…why are we seeing congressman? why are we organizing on social media? why are we doing a class action lawsuit like all of the OTHER aggrieved parties in this country do. I agree with most posts on here. I think we were duped. I would have been 100% better off never coming back into the military after 9-11 to help fight the war on terror. If I would have stayed at my jobs I would have been 150,000 richer than I am now. I am very upset by this and it reminds me of the bonus marchers in 1923 when our ARMY was sent to crush the vets in Anacostia when they demanded their bonus be paid albeit ahead of schedule. We do we fight this injustice? We isnt MOAA doing better on this issue that obviously affects many people. What say the lawyers in this group or at MOAA?

  7. Diane Morrisonon 29 Apr 2013 at 12:22 am

    The VA is dead wrong for the recoupment of SSB/VSI payment from vets who did not retire or go back on active duty. Let me remind you that we gave up the time left on our enlistment in exchange for the SSB/VSI payments, so I believe that DOD and the VA are in violation of our enlistment contract. The military could not just end our enlistments contract without just cause. We agreed to give up the remainer of our enlistment contract in exchange for the SSB/VSI payments. The law thats being enforced is “prohibition against duplication of benefits” in other words double dipping. The law doesn’t need to be changed by congress, VA needs to learn who to apply the law to. Everyone who received the payments did not break the law just because they start to receive VA compensation. Receiving SSB and leaving the military Voluntary is not the same as receiving VA benfits. VA benfits are for disability substained while on active duty and being compensated for those disabilities.
    “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” Lots of vets did use the SSB/VSI payments as intended, so could someone please explain why the payment is being recoup? We do not need to be upset with the VA, the money is being recoup by them but I believe that the money is being refunded to the DoD back to the orginal fund where the money came from. Yes there was and maybe still is a special fund that was setup to fund the SSB/VSI programs.

  8. COL Brad Turner, Retiredon 29 Apr 2013 at 3:48 pm

    I received a separation pay after 9 years of AD because I applied for a voluntary indefinite status and was denied. I later finished my time (37 years) in the Guard and Reserve. This is a very STUPID situation.
    Example: You got $30,000 in separation pay. Let’s say that $3000 was paid in federal taxes. The US govt really just gave you $27,000 because they kept $3000.
    Now they want you to pay back all $30000!!! Does anyone else see the problem with this? The part that they withheld for social security and state taxes, I understand, but the Federal Tax they simply kept in the treasury.

  9. Shane Ostrom, CFP®on 30 Apr 2013 at 11:50 am

    COL Turner, I explain this tax situtation in the article and in several of the other comments I made to other peoples’ comments. It does make accounting sense and doesn’t cheat anyone. Shane

  10. Diane Morrisonon 01 May 2013 at 11:17 pm

    # Diane Morrisonon 29 Apr 2013 at 12:22 am

    The VA is dead wrong for the recoupment of SSB/VSI payment from vets who did not retire or go back on active duty. Let me remind you that we gave up the time left on our enlistment in exchange for the SSB/VSI payments, so I believe that DOD and the VA are in violation of our enlistment contract. The military could not just end our enlistments contract without just cause. We agreed to give up the remainer of our enlistment contract in exchange for the SSB/VSI payments. The law thats being enforced is “prohibition against duplication of benefits” in other words double dipping. The law doesn’t need to be changed by congress, VA needs to learn who to apply the law to. Everyone who received the payments did not break the law just because they start to receive VA compensation. Receiving SSB and leaving the military Voluntary is not the same as receiving VA benfits. VA benfits are for disability substained while on active duty and being compensated for those disabilities.
    “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” Lots of vets did use the SSB/VSI payments as intended, so could someone please explain why the payment is being recoup? We do not need to be upset with the VA, the money is being recoup by them but I believe that the money is being refunded to the DoD back to the orginal fund where the money came from. Yes there was and maybe still is a special fund that was setup to fund the SSB/VSI programs.
    (Shane Ostrom)

  11. "Retire" SFCon 21 Jun 2013 at 12:50 am

    How can the Government bail out all of these companies and they won’t give us a fair deal on our seperation pay. The PEB and MOAA and the rest of them are working aganist us that gave so much. The Army seperates most of their people with 10-20% disability severance pay and not retirement. There is a catch to the seperation pay, and you don’t have to be a genius to see it. That is why they won’t being this action to the house for a vote or action to be taken. Shame- shame, shame on them. I just took the severance and called it quit. It sounded like a joke was being played on a lots of service menbers.

  12. BryWon 02 Sep 2013 at 11:54 am

    Okay…who can answer this. I was involuntarily separated with 13.5 years Active Duty and received Sep Pay and filed a VA Disability while I was still active duty and joined the Ready Reserves. This Sep Pay was mine regardless if I joined the reserves. After talking with ready reserve people (and reading websites like these), I’ve been told that VA will re-coup my ready reserve pay for 2 months during each year I signed up for. Is it even worth doing ready reserves? Ready Reserve status doesn’t affect my Sep Pay or vice versa, correct? I’m not going to work for free is what I’m saying…I go to drill for free and the VA takes monthly disability payment (which I’m still awaiting for a decision). If I quit or miss drills, Sep Pay is mine without re-coupment?

  13. Shane Ostrom, CFP®on 03 Sep 2013 at 9:14 am

    BryW, recoupment of separation pay comes from retired pay or VA compensation according to the DOD Financial Management Regulations. We have not heard of or read anything about separation pay recoupment from Ready Reserve pay. Serving in the Reserves or Guard is not a condition for separation pay recoupment. Retirement is. VA compensation is. If your goal is to serve in the Reserves to reach retirement eligibility, you will pay back the separation money one way or the other…Shane

  14. Bert Godlewskion 09 Jan 2014 at 6:12 pm

    I was right and the IRS upheld my contention. It’s not a debt or recoup, it’s an offset. For the guy that does not believe in “negative income” try this:
    20% VA Disability coupled with Army retiree and VSI recipient. You get one dollar from VSI, Retirement does not give you a dollar and VA doe not give you a dollar. So for every $ you get in VSI, you lose $2. In Obamanomics that’s “hepping da ‘con’o’me” grow. For real people, that’s getting hosed. MOAA is so far off on this issue, it’s not funny.

  15. JoAnn Hortonon 22 Jan 2014 at 11:46 am

    I am so tired of being cheated by the Government. I was involuntarily discharged from AGR Active Duty in 2000. At that time, I already had my 20 year letter and had served 25 years in the Army Reserve. Since I was involuntarily discharged from AGR, I was given half separation pay ($29,000+) taxed at 28%, so I only received $26,000. I applied for disability and was awarded 40%. The VA took my ENTIRE disability check for 5-1/2 years to repay the separation pay, I fought with them the whole time, but they still took my money. I was finally given my disability pay in 2006. Now 13 years later, I am eligible for Army Reserve Retired pay and now DFAS is taking almost half my retirement
    check to pay back the TOTAL amount of the separation pay. I have a real problem with this, first of all it is 13 years later, second I have proof that the $8472 that they are recouping is tax money that has already been paid, and money that I never received. I hired a lawyer, but that did not help the matter, DFAS is still taking my money. I don’t care how anyone explains it (Shane Ostrom ,CFP) I should not have to pay this money twice and I should not have to pay back money that I did not get. And people who are not in this situation can find all kinds of ways to justify it, but let the Government wrongly take your money and see if you won’t feel the same way. This is so wrong, the pain and suffering that I endured while in the Army still continues 13 years later and this matter is causing a tremendous hardship.

  16. Buccaneer 6on 04 Mar 2014 at 3:14 pm

    I’m in shock that the Government is recouping VSI from my retired pay. I will retire in Sept 14 with 22 years of active service and 32 years of total service. I like so many of you, I departed Active Duty during the drawdown of the 1990’s with 11 years of active service. We were required BY LAW to join the guard or reserves in order to receive our VSI. My reserve unit mobilized and deployed to Iraq. While deployed I was asked by very senior Army leaders to remain due to a shortage of my skills. Accepted the voluntary recall to active duty they were promoting. At that time I asked the question do I have to pay back VSI? The senior leader asked the Army G-8 who responded. “The way the law currently stands you will have to pay it back! But, the way we are throwing money around in Iraq I’m sure that will change”. I know that several years ago DFAS stopped recouping VSI payback, I mistakenly thought the law changed. Now 9 years later I’m told by finance that yes you will pay it back using 40% of my monthly retirement. The way we have wasted money in Iraq and Afghanistan on contractors, poor construction and over priced products is shameful. Plus, when I recalled to active duty they were giving some soldiers 150,000 dollar bonuses to re-up… WE NEED TO HAVE VSI CHANGED TO A BONUS REQUIREING ZERO PAYBACK

  17. A. Andersonon 10 Mar 2014 at 5:01 pm

    I have a “state” specific question reguarding VSI and state taxes. Colorado has a military retirement exclusion where persons who are over 55 may exclude up to $20,000 of their military retirement benefits received during the calendar year from their state tax return. Reading through the thread above (and other sites where VSI appears to be considered like retirement income in military divorce cases), it appears to me that (at least currently) there is an argument that VSI could be claimed as a military retirement benefit (for the purposes of military retirement exclusion from state income taxes). Anybody know of any case law or judgements that would challenge this position? Thanks

  18. Jason "Duck"on 30 Mar 2014 at 9:40 pm

    Ok so my claim is a little different than most. Ok so I filed my claim in august of 2013 and I did so while waiting to be medboarded from the reserves. Ok so I did two years active before it was shortcomed by an injury. I recieved a 20% severance for my injuries. Now I am wondering if perhaps I’m going to payed all the way back to my Active duty discharge date or If I am only going to be paid from august until my claim is completed. I’m open to any suggestions or comments please feel free.

  19. Lorenzo Mirandaon 20 Apr 2014 at 8:04 pm

    L. Miranda,
    I need someone help/advice. As many of you did, I took the SSB in 1992 and left the service. Later on I jointed the USAR and with all my deployments I reached 20yrs of military service, qualifying for retirement. Shortly after I retired in 2012, I received a letter from DFAS stating that they were going to take half of my retirement check to pay the full amount of my SSB ($103K). I disagreed at first but I ended paying them anyway expecting that the amount taken was going to be tax deferred because I already paid off those taxes. For my surprise, when I received my 1099 this year it showed the full amount of my retirement as income. When I filed my tax this year it took me over another income bracket when I added to my full time job income. It could have made a big difference if only half of my retirement was taxable. I read some of your comments and someone mention something about treating this recoupment as a loan. Is any one have a tax advice on how to avoid paying taxes twice?
    By they way, those of you receiving VA benefits, if you ask DFAS they will recoup from VA whatever they had withheld from your VA benefits and apply it to your separation pay balance. Afterward, you should receive your full VA benefits.

  20. Shane Ostrom, CFP®on 21 Apr 2014 at 7:43 am

    L Miranda, You don’t pay taxes twice. I’ve covered this tax issue in several of my replies to comments in this post. Scroll thru the comments…Shane

  21. Lorenzo Mirandaon 23 Apr 2014 at 6:50 pm

    Thank you Shane for your respond. I understood your point, but I am not talking about the taxes the Army is recouping along with the separation pay. I understand I have to pay those. The ones I am talking about is the ones I have to pay to the IRS now for monies that I am not receiving. Half of my pay belong to the Army now, not to me; therefore, I should not pay taxes on it because those taxes were paid in 1992. So, yes I am paying taxes twice.


  22. Arnieon 08 Aug 2014 at 9:58 am


    If you have any further info or references on what he says please contact me. I was given the same information Col B gives by the Reserve Recruiter when I left Active Duty. Got the same info from my Civil Service Brigade Admin Officer and a a few others.

    2 guys who left Active Duty the same time I did and got Separation Pay hit 60 2 years ago and have been getting rheir Retirement Pay with no collection for the Separation Pay.

    Please email me at

  23. Arnieon 08 Aug 2014 at 10:01 am


    If you have anything to back up what he says Please post it on here. It would answer a lot of peoples questions.


  24. Arnieon 08 Aug 2014 at 10:01 am


    If you have anything to back up what he says Please post it on here. It would answer a lot of peoples questions.


  25. Anthony Parron 16 Aug 2014 at 1:24 pm

    You know I can see where some of you are really getting screwed. We ask for honor and service above and beyond –inspite of the fools in charge. Now you see money earned taxed twice , deducted twice and paid back twice. I dare you to prove me wrong. I wasn’t in after 1989, but I can say I’ve become ashamed of our military culture and have denied my own children to join. It’s not even on my resume and has proven to be a constant liability to my family for decades. Besides, if we can’t win a war with what all we got, especially against 15th Century cultures, maybe we shouldn’t go. We can’t expect any more from our “capable” citizens by “stirring a spoonful of manure in a barrel of ice cream” and calling it progress. It don’t hurt that manure at all, but ruins that whole barrel of ice cream. Prove me wrong>

  26. David densonon 10 Nov 2014 at 9:09 pm

    I hope someone can answer this for me. I took the ssb in 1992. I understood the payment was for my transition in the civilian world. I was not told about any repayment. I had 15 yrs of active service at this time. I live up to my part of the contract by not reentering the service. 22 yrs yrs later in was awarded 30% service related disibility. I the va is taking all my back pay plus all my monthly pay + my dependent entitlement until year 2022. Why the 40% max for retirement and all for disibility. Why punish my family? Iam not retired and now no disibility. Can someone tell me why the va have to take everything? My health has really gotten bad over the years and not able to work. I am now homeless. Any advise anyone

  27. COL Keith Ramseyon 10 Feb 2015 at 1:32 pm

    I believe Mr. Ostrom has several errors in his explanation of the “tax issue” posted back in 2010 (I’m just now catching up on these comments).

    Of course, what I believe and $4 will get you a cup of coffee. I do not claim to be an expert.

    1 – Mr. Ostrom states “We all pay taxes on income” – when, in fact, we don’t pay taxes on all income. For example, BAH is not taxed.

    2 – Mr. Ostrom states “Separation pay now considered an “advance of retired pay.””

    I can’t speak about all separation pay, but I received the Voluntary Separation INCENTIVE pay. According to 10 USC 1175, subsection (a) the SecDef “may provide a financial incentive to members of the armed forces described in subsection (b) for voluntary appointment, enlistment, or transfer to a reserve component, requested and approved under subsection (c).”

    That makes it pretty clear that the payment is an incentive to voluntarily transition from active duty to a reserve component. Not payment in advance or in lieu of retirement.

    I don’t believe there is any connection at all between the VSI payment and retired (regular or non-regular) pay other than the paragraph requiring repayment of the VSI {10 USC 1175, subsection (e), para (3)(A)}.

    3 – In Mr. Ostrom’s example, the service (part of the US Government) paid the member $30k and the Government kept the $6k in taxes leaving the member with $24k. The $30k hole in the “Service books” is more accurately a hole in the Voluntary Separation Incentive Fund administered by the Secretary of the US Treasury, and the US Treasury kept the $6k in taxes (this is ignoring state taxes, FICA, etc). Asking the service member to repay the entire $30k nets the Government $6k.

    Comparing the VSI payment to an advance from you might provide an employee is not accurate because it omits the fact that you as an employer are withholding a percentage of the $30k (as a cost of the advance or “tax”) and then expecting the employee to return the full amount (including the tax withheld).

    My fundamental argument is that the VSI should not be confused with an advance on retirement pay. The VSI was provided as an incentive to get the service member to voluntarily change from the active to the reserve component. Period. Based on the language used in 10USC 1175, it is not “retirement pay” for the service time accumulated. It’s an incentive designed to motivate a particular behavior from the service member – much like a re-enlistment bonus.

    Unfortunately, Congress has determined that repayment is required. However, the language used in the US Code is somewhat vague (at least to my non-lawyer mind). The Code states:

    “A member who has received the voluntary separation incentive and who later qualifies for retired or retainer pay under this title shall have deducted from each payment of such retired or retainer pay an amount, in such schedule of monthly installments as the Secretary of Defense shall specify, taking into account the financial ability of the member to pay and avoiding the imposition of undue financial hardship on the member and member’s dependents, until the total amount deducted is equal to the total amount of voluntary separation incentive so paid.”

    To me, the “total amount of voluntary separation incentive so paid” is the amount I actually received (after taxes). So, the VSI recipient should have to re-pay the net amount instead of the gross.

    Bottom line – I hope that the MOAA (and any other organization that supports military service members) will continue to encourage Congress to change the way the law is written. It would be best if Congress recognized that the VSI is not an “advance on retirement” and categorize it as an “incentive” that does not have to be recouped. Lacking that, Congress should adjust the recoupment to be the net amount received as opposed to the gross distribution.

    I recommend that all service members call, email, or write your elected representatives and let them know how you feel on this matter.


    Keith Ramsey
    COL, AR

  28. Lt Col. Marioon 04 May 2015 at 11:14 pm

    This is a new question/problem for me, and I’m trying to see if there’s been any change in the law in-reguards to repayment of involuntary separation pay? I was caught up in the 1992 RIF and served in the reserves until 2013; some 21-years after receiving an involuntary separation package.

    I spent 3 1/2 years in an active duty tour, declared sanctuary and retired with no notice or attempt to collect on the part of the AF. Four months after my retirement, I receive noticed that my retired pay will be garnished.

    Has MOAA made any headway with this issue since 2010?

  29. Shane Ostrom, CFP®on 05 May 2015 at 2:37 pm

    LtCol Mario, no we haven’t made any progress in this issue. No one on the Hill is interested in increasing benefits since everyone up there is in the cutting mood. We are fighting to hang on to benefits and pays we won over the last 15 years. They want to totally redesign the military retirement program to save money. Big targets are on the chopping block. Here is the DOD Financial Management Regulation for your review. It describes your separation program and the re-coupment process–even there is one on your program. Shane

  30. Gregor Mathewson 29 May 2015 at 12:58 am

    I took SSB in June of 1992. I cannot remember the gross/net amounts but from what I’ve read, I can find the gross amount on my active duty DD214 – it’s been so long I really do not remember – I was an E-6 – 18yrs 5months for pay purposes making $1779.00/mo gross as per 1992 military pay chart.
    I joined the Air Guard as required under SSB regs and served another 8 years. I was rated with a hearing loss disability in 2003 when I finally got into the VA system and that it would be retro-active to my seperation date from active duty. I was told that I would never receive any disability payment because it would go directly to pay down my SSB – I only received one letter (which I cannot find) that my % disability would be around $300.00/month. If what I was told is true, from 1992 (date of separation from active duty) to my birthday is approx. 22 years. If my disability amount is x by 12 mo.x $300/mo., that’s $79,200 and more than covers what I think was my SSB amount. I was eligible to start retirement Feb 2015 and just received my retirement envelope in the mail.
    I have two questions; 1. how do I find out if all those years of hearing disability was paid toward my SSB debt back to the military, Do I talk to the DAV or the VA about it, and; How do I find out where my % Disability is recorded – should I go to the DAV for them to be my advocate?
    Any input would be Great!

  31. Shane Ostrom, CFP®on 01 Jun 2015 at 6:59 am

    Gregor Mathews, The VA holds the information about your VA ratings and disability compensation. The Defense Finance and Accounting Service (DFAS) administers separation pay and retirement pay. You can use a Veteran Service Office (VSOs like the DAV) to act in your behalf when dealing with the VA. VSOs know the VA programs and processes and provide VA claims services to veterans at no charge. Or in your case, the VSO can get access to your VA records to determine your status and get past documents. DFAS Separation Pay site. DOD Financial Management Reg on Separation Pay recoupment.

  32. Terry Rogers, Major USAF Retiredon 16 Jun 2015 at 11:48 am

    I was offered VSI in 1992, when the F-111’s at Cannon AFB were starting to be retired. I was an IWSO on flying status who had met all my gates. I was a Captain with 4 years prior enlisted time. I had been grounded for lack of cockpits and had orders to go to ALO school, then to a 1 year remote tour at Camp Red Cloud, Korea. My Sqdn Commander called me in one day to tell me about VSI, a new program I might be interested in. My mother was getting elderly back in NC, so I was interested in separating from the Air Force. After talking with the Finance folks, I agreed to sign up for the VSI, which would pay me a fixed lump sum of $14,850 once a year for 30 years. At this point I had 15 years and 2 months active duty. Here’s the deal: I was required to stay in the Air Force Reserves, in Inactive Status subject to Recall to Active Duty at any time, to receive the VSI. I had to update my status once a year with HQ, Air Force Reserves in CO. (health issues, marital status, employment, contact info… etc). I left active duty and many years passed with no issues, and I continued to receive my VSI each May 15. In October 2009, at the age of 55, I returned to Active Duty (reservist on active duty) for three years as an ALO to coordinate Close Air Support. I attended the ALO School at Nellis AFB and was assigned to Shaw AFB, SC. I had two deployments (To Afghanistan and the U.A.E.) , and was promoted to Major. I returned to civilian life in late 2012 and to my regular job. In August 2014 I reached the age of 60, and was notified by the Air Force Reserve HQ that I had reached mandatory retirement age and was eligible to apply for retirement pay. I had 39.5 years of service (18.2 years active duty and balance as a reservist) and had earned 6,675 retirement points, or about $3500 per month in retired pay. I started collecting my retirement pay in May 2015, and at the same time the Air Force paid me my annual VSI. Yesterday I received a letter from the Air Force stating that DFAS would start collecting back ALL… every cent…. of the $350.000 in VSI that I had earned, back to the day I separated in May 1992, by deducting 30% of my retirement pay for the next 22 years. (I would be 83 years old before it is paid). This is ridiculous for many reasons. First, VSI was never called or referred to as any type of retirement pay, either verbally or in writing. It was simply incentive pay to leave active duty due to overages in certain career fields, and the Congressional Hearing on Base Closures, which was all the rage in at that time. In fact, I could have taken a lump sum of $160,00 that was offered in lieu of the annual payments, with NO obligation to remain in the inactive Reserves. I asked the finance clerk at the time how it worked. He stated: “The Air Force doesn’t care which deal you take. They can pay you the lump sum of $160,000 now, or they will take the same money and put it in an annuity plan that will grow with the stock market and make the annual payments over 30 years. Your choice except the annuity plan requires you to stay in the inactive reserves and subject to recall.” My DD Form 214 from May 1992 simply lists in the additional comments blocks the following ” VSI payments of $14,850 annually for 30 years” and “on inactive reserve status for the period of VSI payments, subject to recall to active duty.” So the Air Force knew my age at that time, 37 years old, and also knew that I would reach age 60 before 30 years would pass, and be retired from the Reserves. VSI was all a scam from the beginning as they made payments to me knowing that they would keep me on the books as a reservist, and start collecting all the money back when I reached age 60. It’s incredible !! And they did all this with an investment of less than $160,000 ( I am still due VSI payments until age 67, which of course they never intended to pay me) while collecting back over $350,000 from my hard earned retirement until I am an elderly old man. They are WORSE THAN THE MAFIA. This is why I am lawyer shopping !!!!!!!

  33. Roger Heater,CDR,USNRon 27 Jun 2015 at 5:14 pm

    I would like to state that there has been some that I can identify that have been trying to change the amount of recoupment. Carol Shea-Porter, Representative of New Hampshire’s 1st district has in the past submitted at least two and maybe more bills. HR 3314 was the last one I know of that probably died in committee but to say that no one is interested in changing the recoupment law is not totally true. Also Sen. Jeanne Shaheen also from New Hampshire also offered a bill on the senate side in 2009 both bills tried to limit the recoupment to 25% as I recalled. If my memory serves me correctly Representative Shea-Porter was one of those who contributed greatly to getting the law changed to at least a 40% recoupment while her goal was always for a 25% pay back. I think the bill name is appropriate,”H.R. 3314 (113th): Military Retired Pay Fairness Act of 2013″, ” (B)

    The amount deducted under subparagraph (A) from a payment of retired or retainer pay may not exceed 25 percent of the amount of the member’s retired or retainer pay for that month unless the member requests or consents to deductions at an accelerated rate. The Secretary of Defense or the Secretary of Homeland Security, as applicable, shall consult with the member regarding the repayment rate to be imposed, taking into account the financial ability of the member to pay and avoiding the imposition of an undue hardship on the member and the member’s dependents.”

    I haven’t found a veterans group yet that is at least interested in TRYING to address what I consider really wrong with VSI and SSB recoupment. I think 25% of the net payment is fair and not the current 40% of the gross. I do not agree with many of the statements made by MOAA concerning the recoupments either. The first thing sounded when a request is made is, there is no money, the budget doesn’t allow it or the mood on the hill is to cut. I have been hearing this for 36 years, I’ve heard that song and have seen that dance before.

  34. Jeffrey Baldwinon 27 Jul 2015 at 3:58 pm

    I would like someone to change the law of only giving officers only 6 months to be out of the military once they are twice non-select. In my case I had so much terminal leave I was out the month after I was notified. I had 14 years and 8 months of active duty time. Four months short of applying for early retirement. Six months is not long enough after serving your whole adult life and attempting to move your family and find another job. It needs to be at least 12 months. I asked Chuck Schumer about it when he was in my home twon last year and I was totally blown off. His response was “we will get right on that” Polititions say they care about Soldiers, some do, with most its just lip service.

  35. Danielon 19 Aug 2015 at 3:34 am

    I am wondering if recoupment applies to my situation . I am being involuntarily separated due to Medical. I only got 20 percent from the Air Force so I am NOT retiring. I have 10 years of service and will be receiving separation pay. Since I am NOT going to collect any retirement but I have a 60 percent rating with the va I will be collecting disability, will recoupment apply in this situation? Or does it only apply when you are receiving retirement benefits Vs va only.

  36. Shane Ostrom, CFP®on 19 Aug 2015 at 7:38 am

    Daniel, you will need to contact DFAS (, 800-321-1080) to confirm that your type of medical separation pay will be recouped from your VA comp. Yours is a different circumstance from the type of separation pays this article is about. Best I can tell, your medical separation pay will be withheld from your VA comp. See this DOD Financial Management Reg, Vol 7A, Chap 35, page 24-27 ( The policy of recoupment for your case is based on the law that you can’t be paid twice for the same event (double dip). You would be getting paid twice (Service and VA) for the same disabilities. Shane

  37. Laronon 29 Aug 2015 at 10:15 am

    I was let go for HYT in 2003 from the Navy. For whatever reason an audit was done on my account when it was determined I was being let go. I had a 1 year extension in place for advancement purposes and the first payday after the extension took place in didn’t receive pay. I was told I was overpaid 7500 (give or take) from 1998 in “A” school. I was deployed and all money in my account my wife had. She asked about the money when I was deployed and was told it was DLA and travel expenses. Didn’t think anything else about it. Back to 2003, when I didn’t get the pay and was told I had to pay it back. There was a time when payments were worked out, but was told since I was being let go the Navy was getting it back. I didn’t get paid the last 8 months of service. Zero! I was given a severance check (which they took the 28% taxes out of plus what left I owed). It’s was 22k and I ended up with 10k when all was said and done. I lost everything and had to file bancrupcy. I went into the Navy reserves and eventually the Army reserves, and was finally able to get back active with the Coast Guard. I enlisted indefinitely with an out date of Nov 19, 2024. Well, the CG implemented HYT and I was unable to advance due to new rules with points and sea time. I have one more check left, unable to find work and a single parent. I am on terminal leave and have been for 2 months. I moved out of the area as soon as I could and am not able to see any doctors due to Tricare having a policy that won’t let a person change primary if you are on terminal. 8m out of meds, my anxiety is through the roof and Noone will help. Retire pay won’t talk to me until I’m out. Disability won’t talk to me until I’m out. From what I’ve read they may take that severance back and of so I will not have any money next month and will undoubtedly be homeless my thanksgiving. How does the military get away with so much and turn that back on so many people that have giving so much of themeselves? My contract should of been honored and there should be more heads up when being let go.

  38. Dave Cabanon 01 Sep 2015 at 1:43 pm

    I understand that individuals that gets volutary separation pay or those that fails to meet standards and get separated, should pay back if they rejoin and get some retirement benefits.

    Now, I completely disagree that individuals that get involuntary separation due to personel cuts (funding constraints) should pay back the money.

    This individuals were meeting all military standars, it was not their choice to leave the service and even more, they still chose to continue to serve our country in the Reserve or Guard.

    Can someone explain this to me?

  39. alton pincoon 07 Sep 2015 at 11:06 am

    can a service member who re-pay all (full amount) SSB funds can now apply for retirement , with full access to commissary,px ,medical prilivages if so what forms do I need to get started thanks ( SFC.)

  40. Shane Ostrom, CFP®on 08 Sep 2015 at 7:16 am

    Alton, If you are a Service member paying back SSB from your retired pay, you are already retired with full benefits. If you are paying back SSB from VA disability comp and you are not retirement eligible, paying back SSB doesn’t make you retirement eligible. Serving 20 years (+) or being medically retired makes you retired with all the associated benefits.

  41. alton pincoon 08 Sep 2015 at 7:19 pm

    follw up re-buddle to shane Ostorm CFP I have a ssg frend of mine we wer assign to the same unit, he got out the same time I did, we lost contac for a couple of years, final link back , now we talk often because of his automotive business he brought up the question about SSB ,then he told me, how he paid back all the money he got,from SSB,, and a CSM from the pentagon told him he can re- apply for retirement which he did, it was approve , now he has all benefits required for retirement ;; he had 16 yrs in the ARMY

  42. LaShaan Simonson 14 Nov 2015 at 1:20 pm

    I received a gross amount of 18958.80 in November 1996, i wad told o wouldn’t get my disability pay until it was paid back, fine no problem. January 1 2008 i start getting my pay automatically because everything has been paid by being recoup. Today November 14, 2015 i get a letter saying my money was being recouped at the pre tax instead of post tax raterate decreasing the amount due to $13,650.34 … does this mean I have to pay back the difference thru my disability pay, even though it’s not my fault? I rely on this money and I’m not sure what to do. They never stated in the letter how much well be taken out monthly, I’m just really lost …

  43. Shane Ostrom, CFP®on 16 Nov 2015 at 6:48 am

    Please read some of the earliest posts and my responses. I cover the recoupment process and tax issues in those posts. Shane

  44. Capt Brownon 20 Nov 2015 at 4:58 pm

    While I do not agree with the repayment of involuntary separation pay it is undeniably a fact right now. However here is my question, I was forced to sign a 3 year commitment with the IRR in order to receive my separation pay. My VA disability rating is high enough that I will repay my separation pay in about 18 months. Since my debt has been repaid am I then released from my IRR commitment?

  45. Shane Ostrom, CFP®on 24 Nov 2015 at 2:54 pm

    Capt Brown, you’ll need to check with a personnel specialist about your contract requirements. Shane

  46. Maryon 09 Feb 2016 at 9:00 pm

    I know tax questions were asked and answered when the servicemember had retirement to pay back separation pay but if the service member is having their separation pay recouped from VA disability compensation and they were separated due to reduction in force can that still use the IRS pub 525 & 529 to deduct the recouped amount?

  47. Shane Ostrom, CFP®on 10 Feb 2016 at 8:02 am

    Mary, to deduct something off your taxes means you paid income taxes on some income in the past and later something happens where you didn’t have to pay the past income taxes. You paid income taxes on separation pay as you should have. Now the VA is withholding compensation from your tax-free VA comp for an equivalent after-tax amount of your separation pay. The key term being VA comp is being “withheld”; in other words not paid to you. Not paying you is not a taxable event. I’m not paying you anything right now and you and I have no taxable event. Hope this helps…Shane

  48. Ric Con 09 May 2016 at 11:28 pm

    I was involuntarily separated at 17 years in received 36,000 half separation pay. I had a large portion recouped at 15,000 due to a bonus I received, but had to pay back due to not making it to 20 years. My total payout after taxes was 14,600. The question I have prior to getting out, I did the va bdd claim for disability which is pending. Will the VA do a second recoupment as well on the same half separation pay. Seems far from double dipping on my part.

  49. Roon 14 Sep 2016 at 11:19 pm

    This ‘recoupment’ seems far from fair, especially when it concerns involuntary separated Veterans, Combat Veterans, Disabled veterans. How is this even a law? Our Military men and women deserve every penny they get retired or not. If you serve 15 years, three deployments two of which are Combat and are involuntarily separated because of unpromotability or downsizing, and they offer you severance pay to help you on the outside, how is it you must pay it all back. Future Disability cant be determined so it should not have anything to do with the VA. Its no wonder there are so many homeless Disabled Veterans, they all have to pay back severance/separation pay before they can get their disability, its ridiculous!!! HOW is separation pay and Disability pay the same?? any other government employee does NOT have to pay back their severance if they become future disabled, its discrimination! And a slap in the face to our country’s heroes. DISGRACEFUL.