Recoupment of Separation Payments

When a member separates from Service they may receive a separation payment. Laws and regulations require that DFAS recoup certain payments from a member’s retired pay.

The follow types of separation payments are subject to recoupment: Special Separation Bonus (SSB), Voluntary Separation Incentive (VSI), Readjustment Payments (READJ Pay), Separation Payments (SEP Pay), and Severance Payments (SEV Pay).

Taxability

When you were paid your separation payment, you received a certain dollar amount and the government withheld taxes and sent a portion of the separation payment to the IRS on your behalf as required by law. The IRS used the taxes paid on your behalf to figure your overall tax liability in the year of your separation payment. Your personal circumstances at the time of the separation payment determined whether you received a refund of any taxes withheld and paid to the IRS.

When someone who has previously received separation payment retires, the law requires the gross amount of the separation payment to be recouped through a reduction in military retired pay. The required gross recoupment includes the amount paid to you plus the amount withheld for taxes and paid to the IRS on your behalf. The separation payment recoupment reduces your retired pay before taxes are computed on your current retired pay. As a result, your overall taxable retired pay income is reduced by the amount of your monthly recoupment.

Laws and Regulations

The laws requiring recoupment can be located at 10 U.S.C. §§ 1174, 1174a.  The Department of Defense (DoD) Financial Management Regulation (FMR), Volume 7B, Chapter 4 further explains the law and the requirement to recoup gross amount of Special Separation Bonus (SSB) as well as the required rate of recoupment