I Have to Pay Back My Separation Pay!
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.
Sounds like double talk, to me. A governmental reasoning.
The bottom line – If you’re in the military, navy or coast guard and you’re going to get screwed sooner or later for your service. I AM paying back what I paid in taxes. I did the math and no matter how DFAS holds up smoke and mirrors, the SM gets hosed every freakin month!! MOAA did not help with any of this because there weren’t enough fish to fry and I quit MOAA. You’re part of the problem instead of listening and being part of the solution. Oh yeah … I left and took VSI, where are my 15 points a year for membership in the reserves so I can reapply for Reserve Retirement at age 60. (None of my post 9-11 service counts for early reserve retirement since I retired on 31 Dec 2007.) No one has answers, just their hands in my pockets. Trying finding anyone at AR PERSCOM that can answer a question .. you’ll get a voice mail that is full or never answered.
Sep pay wasn’t meant to help us transition, it was meant to act as an incentive to meet congressionally mandated manning levels an avoid a regular post Vietnam style RIF. Was this a thrid grade term paper?? Geez!!
It’s unfortunate that this article does not clearly explain differences in separation pay. Here’s one example: separation pay received by an officer who is twice passed over for promotion, upon serparating and on the same day the officer receives a DD-214 and the separation pay, sees an in-service Reserve Recruiter and joins the Reserve as a drilling Reservist. All of this officer’s active duty time counts for qualification for Reserve Retirement at Age 60. And, after separation from active duty, as long as this officer serves 8 or more years in the active Reserve and ultimately obtains 20 or more qualifying years of Reserve military service, he or she can apply for and receive their earned Retired Pay at Age 60 with no penalty and without having to pay back a penny to anyone. There are numerous and various situations as to how and when a soldier becomes eligible for, receives, or refuses separation pay — addressing this subject should specifically and categorically address each and every one.
I agree with the repayment of separation pay, however, I have an issue with it.
You stated that “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.”
The problem is by paying back the entire gross amount, the Federal government has the full amount back, plus what you paid in taxes. In my case that is around $30,000.
Interestingly, if you qualify for VA benefits and no military retirement from which the separation pay can be collected, the VA only collects back the net amount of the separation pay received. That is the Federal law.
FYI, I was a Army National Guard officer on active duty when I reached my 30 year mandatory removal date and was involuntarily separated from active duty; receiving separation pay due to involuntary separation. I was also 55 years old and not able to draw my retired pay until age 60.
At this point, DFAS has now collected more than the net amount I received.
If the VA only collects back the net, why does DFAS collect back the gross amount?
The law says what I received will be collected back from my military retired pay. That I understand. But by collecting back the net plus what I paid in taxes means the gross plus taxes is like paying interest and the law does not say we have to pay interest on separation pay that is paid back.
FYI, several years ago there was an article in which an individual stated he received paperwork from the finance office at Fort Lewis that said the U.S. Supreme Court ruled that military separation pay was not taxable. I would like to know if that is true.
Unfortunately, the above was not fully explained when I received my separation pay. If it had been, I would not have taken my separation pay.
Thank you for any assistance you can provide.
Sam Young
What percentage of your retired pay is withheld to pay back the separation pay?
I’d like to see the MOAA experts in this area address the having to pay back the taxes issue. That is the government collecting our money twice. Once is fair, twice appears to be theft.
I have addressed this to my congressman.
This is a very strange situation. A friend of mine took SSB and ended up paying back only the NET amount rec’d before getting her VA benefits. I took VSI and I have to pay back the GROSS amount out of my retirement. At first the rate of recoupment from retirement was 74% of my retirement check but now it’s 40%. I stopped VA comp because for every dollar of VA I rec’d I lost $1 in retirement and $1 in VSI payments. Like I stated earlier MOAA has been MIA on this issue and ignored our requests for assistance. The MOAA tax “experts” do not see our point of view. VSI should have been considered a “loan” since it would be paid back and not taxed at all. If it was in lieu of retirement why is it paid on a W2 vice a 1099? Like I said, you can ask all the questions but there is no SME with any answers. From DA to DFAS, Congress to the Senate, they pull some weird answer out their third point of contact and pass it on.
I agree with you for quitting MOAA. All these guys do up there at MOAA is suck up to the members of congress trying to get additional benefits for every damn thing immaginable, instead of selectively picking and choosing their battles on issues that we really need to fight for. In the mean time they’ve helped to drive the cost of military benefits up to such rediculous levels that they’re not sustainable anymore. Another classic example retired 0-6′s and Flag Officer’s showing their gross incompetence and mismanagement abilities. These clowns are worthless when it comes to making a real difference.
The government is so damn strapped for resources, that they will use any means, lie or tactic to try and recover money off the backs of our poor G.I.s who were mislead again and again.
Best of luck fighting your battle.
I agree with Sam Young. I paid back by NET separation pay and was receiving my full retirement pay – which means that DFAS agreed that I had paid back in full. Now I am notified that I have to pay back the taxes. Seems like double taxation to me. I also don’t understand why only NET separation pay is collected, if you are receiving only VA benefits, but GROSS separation pay is collected if you are paying with retirement pay. I don’t understand why DFAS determined, in 2008, that I had paid back my separation pay and then in 2010 began collecting separation again. I, too, have contacted my congressman, but I also believe that no one, MOAA, Congress, etc. seems interested in sorting this out. I believe that MOAA could be a big help in sorting out all of the discrepancies. As a MOAA member, I am asking you to do this.
The basic unfairness of the system is that the separation allowance is taxed on it’s payment. If the reservist pays it back from income received, it will be paid from post-tax income, essentially the separation allowance may be taxed twice; first when initially paid and later when repaid.
If at all possible, arrange through DFAS to take the recoupment from retired payments BEFORE the income tax is withheld. That way it is taxed only once. I do not know it that method is still possible, but more than worth while if it is.
My blurb was to explain the law and the DOD policies, it wasn’t the MOAA position. I added the MOAA position to the blurb to complete the story.
You’ll also note I bulked up the explanation of the taxation issue and the new repayment rate capped at 40%.
Regarding quitting MOAA because of this one issue. We are the leading military organization leading the charge for military benefits. That’s not us saying it. That’s stated among people in the know on the Hill, it’s noted in The Hill newspaper, and by our leadership of the Military Coalition. We are the fourth largest military organization in the country with almost 400,000 members. My point is not a MOAA commercial but to ask, if you aren’t with us, who is fighting for you? The more members we can bring to the battle, the better our chances for success. Even if we haven’t been successful, at this point, on your one cause doesn’t mean we won’t be successful. Us losing members certainly won’t help.
One other thing, we fight for the troops and their families, past and present. Membership means a lot more than one issue. We are officers taking a leadership position to support the troops. Our efforts help Service members and their families of all ranks. Some of these comments smack of a “I’m taking my bat and ball and going home because you won’t play by my rules…” attitude.
We spent over a dozen years fighting for and writing the draft legislation for the Post 9-11 GI Bill before we finally earned Congressional support and got it through. Some organizations taking credit weren’t even around when we started the effort. This is one of numerous success storied over the past 10 years alone. We also have $24 million outstanding in grants and no-interest loans working to help the dependents of Service members of all ranks pay for college.
There are too many other issues to list in this comment where we support Service members. I just want people who read this to realize that MOAA is much much more than this separation pay issue; all for a measly $31 a year.
Okay, here goes. I’m a Viet-nam vet who was RIF’d in 1972 with 12 + years enlisted and commissioned service. As part of my final pay I was given $10,000 in “re-adjustment pay” although it was not reflected as such in my final DD214. Around 1974/75 I joined the National Guard and later the Army Reserve serving enough years to qualify for retirement at age 60 (2003). Although the $10K was not witheld from my retirement pay it was recovered by the VA when I was awarded disability compensation in 1995.
The VA recovered this money strictly on my say so that I had received it. They were unable to confirm with DFAS that I owed any money at all.
I have always felt that the re-adjustment pay that I received should not have been witheld from my VA compensation or retirement pay.
Any comments on this????
Shane, I am not dropping out of MOAA, but I am asking MOAA to assist us addressing this issue.
I know what the law says for DFAS collects, but am including it here in the event others reading this do not know the law.
U.S. Code, Title 10 – Armed Forces, Subtitle A – General Military Law, Part II – Personnel, Chapter 59 – Separation, Section 1174 – Separation pay upon involuntary discharge or release from active duty, Subparagraph (h) – Coordination with Retired or Retainer Pay and Disability Compensation, subparagraph (1) states that a service member who has received separation pay and who later qualifies for retired pay under this title will have deducted from each payment of retired pay so much of the pay until the deducted amount is “equal to the total amount of separation pay, severance pay, and readjustment pay received”.
Apparently, DFAS-Military and Annuity Pay Office reads that as the gross amount of separation pay and not the net amount.
My DD 214 shows the gross amount I was to receive. I received that amount less taxes. Which means the Federal government already has almost 1/3rd of my separation pay. For DFAS to collect the gross from my retired pay means I am paying the Federal government the 1/3rd it already collected in taxes plus the gross amount. I believe that is an incorrect interpretation of the law and I am being penalized for taking the separation pay.
I understood up front that I would have to repay the separation pay I received if I received retired pay and had no problem with that. I was NOT told DFAS would collect the gross in addition to the taxes already withheld. If it was only 1 or 2 thousand dollars I would not be as concerned, but it is over $30,000 and I am upset about that.
So, would can MOAA do and what can I do?
Oh yes, did the U.S. Supreme Court ever declare that separation pay was not to be taxed/
Thank you.
In the 1970′s, I received separation pay after being twice passed over for promotion. I reverted to enlisted status and served to 20 years and retirement. The government collected back the gross amount of my separation pay before commencing my retired payments. When I filed my tax return that year, I explained to the IRS that what the government had done was make me a loan (the separation pay) and therefore the transaction was not compensation and so not taxable. I deducted the amount of the taxes that I had paid on the “loan”. This was fully and openly submitted to the IRS with my tax return. They never challenged it.
I also sued the Air Force over the pass over. They corrected my military records to show that I had served that final 4 years in my commissioned status as a Captain. And I was compensated (taxable) for the difference between my enlisted pay and what I would have been paid as a Captain. (But that’s another story.)
Unless I’m missing something, the amount of taxes actually KEPT by the govt (as opposed to the amount initially withheld) depends on the person’s income tax situation for the year they received the Pay.
It’s possible someone could have had taxes withheld from Sep Pay, but because of their overall taxable income for that year, together with tax deductions, etc., actually received most (or less likely, ALL) of the amount withheld back in a tax refund.
While the initial percentage withheld for taxes would be standard, the amount of that withholding kept by the govt or refunded to the person will vary with individual tax situations.
I wonder if anyone could give the chapter-and-verse on the rules that govern the case that COL Belanger laid out? It fits me, and I’m confused.
On the tax issue…
The Service pays a gross (pre-tax) amount of separation pay to the member. Just like every company pays a salary in gross amounts in a paycheck. Let’s say $30,000 for example.
Service member pays tax because it is income and receives a net amount, say $24,000. Just like a paycheck. We all pay taxes on income.
Service member earns retired pay later.
Separation pay and retired pay both paid on same service time. By law, this is not allowed. Many disagree with several aspects of this concept but this is the way it is at this time. Separation pay now considered an “advance of retired pay.”
The Service paid member $30,000 of “advanced retired pay.” The Service didn’t pay $24,000. The hole in the Service books is for $30,000.
If you owned a store and you advanced an employee $30,000 in pay and they paid taxes on the advance because it is income, you’d want back your $30,000; that’s what you are owed. So you would dock the employee’s pay until the $30,000 was recoupped. No money would be exchanged during the recouping period so no taxes are paid. The employee is not paying back the money. The employee got the money and kept it. The employee just got paid early and gave up future pay to get the advance.
You haven’t paid taxes twice because the advanced amount is being “withheld” from your retired pay. You aren’t “paying back” so to speak, you took an advance on future pay. Taxes are paid for money paid. Having money withheld means no one is being paid; no money is exchanged between parties. You aren’t paying taxes for having money withheld from you. You simply got paid early and now you’re not getting paid for the amount you got early. No one pays taxes on money you’re not paid.
On the issue of tax withholding: I was given an involuntary separation pay of $30,000, and paid taxes on it. Now they are recouping that money from my retirement pay, but they are taking it PRE-TAX, which means even though they are “withholding” $1420 per month, it’s only (only!) making a difference of $1200/month in my retirement pay; this is their way of acknowledging that I already paid tax on the money.
I was involuntarily separated from active duty and later joined the Reserves and received my 20-year letter. I am not due to receive retired pay until I reach 60 which will be 10 years from now. I now receive VA compensation of 80 percent at the 100 percent rate for being unemployable. They have been recouping my separation pay for years and will continue for probably the next dozen or so years until it is finally paid off. When I reach age 60 and receive retirement pay will I have to have my separation pay recouped again?
No.
Shane, your 11 September explanation is very much appreciated and appears to be on target. I have been thinking about it for the past 12 hours and can see your point.
Thank you for considering our singular points of view and providing informative feedback.
While part of me (the pocketbook) does not want to agree with you, mentally I am coming around to the accuracy of what you say. While I may not like paying back the gross amount AND the taxes initially paid on the gross, it does appear to be the correct thing to do.
To my fellow receipients of separation pay, I wish the finance folks had explained this to us at the time we were offered separation pay. It would have greatly assisted our decision to accept or reject the separation pay.
Sam
Sam, The right thing to do is DFAS revises the W2s for the past years and we file a 1040X and get our tax money back but DFAS won’t do that. (I asked, it just blew their little bean counting minds.) In these days of giving money to any illegal that crosses the border and pops a kid or doesn’t work for 99 weeks at a whack it just pisses me off that I am paying back money I never received. No matter how you slice it, there is no SME in PERSCOM or DFAS. I still have a reserve obligation until age 72 for accepting VSI and therefore I should also get 15 points a year and at age 60. I should and will reapply for reserve retirement. I will have more points and be at the current pay scale. I know that DFAS and PERSCOM will be like retards chasing butterflies when I drop that paperwork but it is very entertaining watching these idiots who are wrapped tighter than an airport sandwich lie make up the rules as they “think” they should be!! They couldn’t tell us back then because they had no idea then and remain clueless now. They (PERSCOM) never mentioned that VA would also being screwing us out of that benefit. A SM who spent 3 years gets to keep his VA compensation for disability but one that served 30 + years and five deployments loses it because he reached retirement after being plucked out of civilian life four times! Geeez!! DFAS PTSD = Paying ‘Til Servicemember Dies …
What ever happened to Contract Law. When I accepted the terms ” early out” with the incentive of a cash bonus, it was an offer/acceptance transaction with myself and the US Government. I fulfilled my part of the agreement and the Congress was able to meet targeted numbers under the Clinton Administration. I have a 40% Disability from the VA and now must pay back ALL of the Bonus. They offered the incentive and I exited the military….. end of story. My physical disability has NOTHING to do with a legal contract between me and the government. Simple ” breach of contract. The government did not meet the contractual obligations – I did. Someone has to see this as a simple case of misrepresentation and fraud to the serving members of the US military. Shame on Uncle Sam. Does our seperation payback REALLY put a dent in the overall budget v billions spend on bank bailouts, paying lobbyists, design of a new bomber/next generation fighter jet………
I hope someone, someday takes on this unpopular task and makes things right with this issue.
If DFAS paid 28% for me in taxes when I received my separation pay and want the gross back, then the IRS should pay my taxes back I paid on gross.
Perhaps I missed this in the conversation, so to clarify: If I am passed over twice, become separated involuntarily, and receive separation pay, will I have to paythat back if I join the Reserves and eventually retire? Also, if I receive disability from the VA, will they begin taking that money back from my disability pay?
You all have good points.
I am awaiting a response from DFAS via my congressman regarding this issue. That will help me identify a direction to pursue this unfortunate chain of events.
I knew I would have to pay back what I received. Unfortunately, the pay clerks at out-processing did not address the taxes and payback of the gross not the net.
I have recently been medically retired from the air force and recieved a seperation pay. After recieving the separation pay I submitted a disability claim to the VA and recieved 70%. Now that I have recieved the disability the VA is taking a portion of the disability to pay back to separation pay, about 50% of the amount. Now the problem is that i’m recieving letters from the DOD that is in a threatening nature stating that I need to pay back the separation pay, which i’m already doing through the VA. I have called the DOD and told them that i’m paying it back and have proof through my bank account and a letter from the VA stating that they are taking a portion of the disability to pay back the sep pay, but the DOD personnel arn’t listening and say that they have no record of this. My credit score is already being affected and they are threatening get a collection agency involved. I just don’t understand i’m already paying it back and it will all be payed off by Sep. 1, 2011…. somebody please help!!!!!
The taxes that were taken out of my involuntary seperation pay…can I get that money back when I file my taxes? Anyone know the answer. thanks
No you can’t. Those taxes are considered payroll taxes since the pay is considered advanced retired pay.
Where in public law does it say that separation pay is an advance of retired pay? It is interesting to note that the DFAS pay manual treats separation pay and retired pay as two separate entities.
Another interesting tidbit…why is VSI reported on a W-2 if it’s an advance on retired pay but retired pay is a 1099-R? Could it be because we performed a service to “earn” VSI, (left active duty and stayed in the selected reserve?) If so we earned it under contract it should not be taken back. Now I still can’t get anyone to add my retirement points (15 per year) on my record after retiring from active duty. Since I am still receiving VSI, I am holding up my part of the contract by remaining eligible for recall until my VSI runs out. I have not been legally, informed in writing, that I am off the hook for the remaining years. Any thoughts from the gallery??
Another point: Mr. Ostrom is not entirely correct. You can claim your repayment under certain circumstances as a claim of right. The goverment’s position that this is an advance on retired pay IS NOT in public law anywhere. Their argument is that if you retire you didn’t use the funds to “transition.”
Bull…in my case I retired from the Reserves (a part-time job) and became eligible for retired pay 18 1/2 years after I received my separation bonus. I was without a job for 4 months immediately after separation and did use those funds to pay for my “transition.”
Also interesting to note that where the IRS has disallowed the deduction for a claim of right…the IRS lost those cases on appeal to the circuit courts. They are 0 for 2.
If you are going to go the claim of right route I would strongly suggest you consult a tax attorney before doing so.
The whole SSB/VSI payment recoupment should be stopped period and any service member that received it, be paid back in full. I took an SSB in 1992 during the draw-down. I had around 9 years 3 months active duty NAVY and then had to go into the IRR for 3 years as part of the SSB requirement.
I have seen it said in different places, that it was for folks who had 15+ years to try to get some of them to leave before 20. Maybe that came after I took it.
I do not expect to get things for free, however as part of me taking the SSB I couldn’t be on any type of medical hold and there was a limited time window to take the bonus and leave the service. I wanted to get out anyway for my family and sea duty tour lengths and such anyway, so instead of taking a selective reenlistment bonus, I took some money and got out instead.
After I left the service I tried to go back into the reserves and was denied due to hearing loss and a contracture in my hand. The Navy rated me 10% disabled due to the contracture, problem is I had already had a surgery on it once before I ever left active duty, so a nice catch 22 there.
If I would have taken medical hold…no SSB and I wanted to get out anyway due to wanting to move on. The SSB was to help out the service member as well as the different branches that made it available, so the government is just as much at fault in this whole mess, and they should have had no medical waivers and such before giving SSB.
They are currently recouping my SSB before I will ever start getting the 10% disability payment.
I really don’t need or care about the 10% money, but feel for the Veterans that are being denied retirement pay, etc.
I just wanted to post my case as another example of how SNAFU’ed the government is and how laughable it is that now they want to take over even more control of nationwide healthcare…good luck with that!
DFAS takes “BEFORE” tax dollars from your retired pay for repayment of the separation pay. If you are not in the situation of paying back VSI than you would have to pay taxes on that portion of your retired pay like anyone else. It is a wash; you are not paying taxes like you normally would have to. Actually in my case these many years later it is an advantage. I am in a much higher tax bracket then in 1996-2007 when I received the yearly payments and due to inflation the dollar is worth less. Plus you had use of that money all those years.
No one is getting screwed, it was made very clear that my VSI would have to be paid back if I ever earned at regular retirement. I have not received anything from the VA yet, if they take “net” then no issue. I am not sure how they calculated the “net “.
There is no reason I can think of that the taxpayer should be required to pay any military member two retirements for the same period.
These comments are based on my situation and VSI
I am having a hard time finding information on an estimate of how much taxes will be taken out of my husbands Separation pay. We were not planning on him getting out so his separation pay will be our only income until a new career is found so I am seriously stressing not having even an estimate of how much taxes will be taken out. Any help will be greatly appreciated. God bless.