“Jackpot! I’ve Been Offered a HUGE Severance Payment.” DJ says, “Don’t Take It.”

Hello, from Fort Knox.


This week I’m going to talk about disability severance pay.  Once you have completed all of your medical boards and received a disability rating from your branch of service and that rating is 20% or less, you are offered a severance payment and a discharge.


Should you accept this payment and the discharge?  Well, I did mention last week that you had the options.  Also, the title of this article does say, “Don’t take it.”  Sometimes accepting the money is the only real option you have available to you.  Many times, though, there are other factors to consider.  I’ll describe those options shortly.


Let’s first talk about how severance payments are computed.  I like to talk about money, if you haven’t noticed throughout these articles.  Please also remember that you are only offered severance if you have a 20% or lower disability rating from your branch of service (BOS).  The rating you have from the Veterans Administration is totally separate and does not count as part of the consideration for severance.  Once you are offered your BOS rating, here is what happens.


Defense Finance and Accounting Service (DFAS) will compute your severance using the following formula.  Take two months of your active duty base pay and multiply it by your number of equivalent active duty years. What is equivalent active duty?  Very simple.  It is just your total retirement points divided by three hundred sixty.  The minimum number of years for the purpose of this calculation is six years for combat-related injuries and three years for other injuries.  The maximum number of active duty years is nineteen.


For you algebra folks out there, the formula would look like this.


(Active duty base pay X 2) X (Retirement Points ÷ 360) =  Severance Pay


Remember in previous articles when I talked about VA offsets to drill pay or retired pay?  The same applies here.  VA compensation will be applied against the amount of the severance.  You will also have to face the taxman at the end.


If you are receiving a severance for a combat-related injury and also receiving VA compensation for that same injury, it is possible to exclude the severance pay from taxation (at least on the federal level).  The is the result of what is called the “St Clair Decision” in 1991.  In order to take advantage of this exclusion and if you’re still in the current tax year, send your PEB findings and VA decision letter to DFAS.  They will compare those documents and determine whether the injuries are the same.  If you received a severance in a previous tax year, send those same documents to the IRS.  I would recommend going to a local office rather than trying to do it over the phone and by mail.


Back to taking a severance.


As you can imagine, the amounts of these severance payments can be substantial (tens or even hundreds of thousands of dollars).  It would only be natural for someone to be tempted when this sort of money is offered to them. If you take the money, though, you will lose a great many benefits which you have probably earned.


The key word in severance is sever (for those English enthusiasts out there) and that is exactly what happens when you accept this payment.  You have been severed from military service.  It’s like hitting the delete key on a computer.  Your service is gone.  You have no retirement benefits, no VA compensation, no Tricare, nothing.  You have been bought out.  Have a nice day.


But, D.J., you can recover a deleted file. Is there a way to recover “deleted” service?

As with so many things, it depends.  Let’s say you are eligible for VA compensation or wish to get medical assistance from the VA.  They will provide such compensation and assistance (dramatic pause goes here) after you have repaid the severance pay.  If you’re going to receive VA compensation, the VA will withhold that compensation until sufficient time has passed to recoup all of the severance. This can be several years.


If you’re trying to recover military retirement benefits, the same recoupment rule would apply (another dramatic pause) if the branch of service will allow you to do this.


If you have earned any sort of lasting benefit from military service (particularly financial payments), it may be a good idea to consider refusing severance pay.  This is particularly true if you have fifteen or more years of military service (and you’re currently a reservist).  If this is you then you can request transfer to the Retired Reserve.  At least this way you would still be eligible for retired pay at age sixty and have Tricare benefits.  Of course, you will need to figure out the best choice for your situation.


That is all for this week.



Thanks for joining me today and, of course, thank you for your service.



St. Clair Decision Information Letter

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