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Updated Jun 14, 2024

In This Section

 This section contains the following topics:
Topic Topic Name
1 General Information About Separation Benefits
2 Determining the Amount to Recoup and Withhold From Monthly Payments
3 Instructions Unique to the Recoupment of Disability Severance Pay
4 Recouping Voluntary Separation Pay (VSP) Awarded to Air Force, Navy, and Marine Corps Veterans
5 Taking Award Action To Withhold Compensation
6 Adjusting an Award From Which the Department of Veterans Affairs (VA) Withheld or Is Withholding Compensation
7 Processing Requests for Adjustment of a Withholding Due to Extreme Financial Hardship

1.General Information About Separation Benefits

Introduction

 This topic contains general information about separation benefits, including

Change Date

 April 11, 2024

VI.ii.2.1.a. Prohibition Against the Duplication of Benefits

 38 CFR 3.700 prohibits the Department of Veterans Affairs (VA) from paying compensation to a Veteran who also received certain separation benefits from the
  • Department of Defense (DoD), or
  • Department of Homeland Security (if the Veteran served in the Coast Guard).
These separation benefits include:
  • readjustment pay under former 10 U.S.C. 687 and 3814a
  • non-disability severance pay under former 10 U.S.C. 359, 360, 859, and 860
  • separation pay under 10 U.S.C. 1174
  • reservists’ involuntary separation pay (RISP)
  • special separation benefit (SSB) under 10 U.S.C. 1174a
  • voluntary separation pay (VSP) under 10 U.S.C. 1175a, and
  • disability severance pay under 10 U.S.C. 1212.
References:  For more information on

VI.ii.2.1.b.Determining Whether a Veteran Received Separation Benefits

 A review of one or more of the following will typically reveal whether or not a Veteran received separation benefits:
  • application for VA compensation or pension
  • DD Form 214, Certificate of Release or Discharge From Active Duty
  • documentation in the Veteran’s claims folder, such as
    • responses to requests for information/records submitted through
      • the Personnel Information Exchange System (PIES) or
      • AskDFAS (Defense Finance and Accounting Service), and/or
    • letters from
      • the Coast Guard (if the Veteran served in the Coast Guard)
      • DFAS Retired and Annuity, and/or
      • DFAS Military Pay Operations
  • the MISCELLANEOUS INFO tab on the VETERANS IDENTIFICATION screen in the Beneficiary Identification and Records Locator Subsystem
  • the DISCHARGE PAY tab on the MILITARY PAYMENT INFORMATION screen in the Veterans Benefits Management System (VBMS) – Awards (VBMS-A), and/or
  • the MILITARY PAYMENTS tab on the MILITARY INFORMATION screen in Share.
Notes:
  • The presence of an amount in the SEPARATION PAY field on the MILITARY PAYMENTS tab in Share is only an indicator the Veteran received some type of separation benefit.  It is not a reliable indicator of whether this benefit is the same “separation pay” described in 10 U.S.C. 1174.
  • Use the spreadsheet titled Separation Program Designator (SPD) Codes to determine whether – based on the SPD code that appears in Block 26 of the Veteran’s DD Form 214 – the Veteran was eligible for any of the separation benefits named on the spreadsheet.  If eligibility did not exist, it is safe to conclude the Veteran was not awarded any of them.
  • If it is unclear whether or not a Veteran received separation benefits, follow the instructions in M21-1, Part VI, Subpart ii, 2.2.b.
Reference:  For guidance in accessing information in VA’s systems of record, see the

VI.ii.2.1.c.How VA Updates Its Systems of Record With a Veteran’s Service Information

 The table below describes how VA updates its systems of record with service information from a Veteran’s DD Form 214, to include the amount and type of separation benefit the Veteran received, if any.
Stage Description
1 When a service department discharges a service member from active duty, it sends a copy of the DD Form 214 to the Austin Data Processing Center (DPC).
2 The DPC creates a Veterans Assistance Discharge System (VADS) record containing service information it pulls from the DD Form 214.
3 A computer interface with VADS updates the systems referenced in M21-1, Part VI, Subpart ii, 2.1.b with relevant service information for each discharged Veteran.
Exception:  If a Veteran received a type of separation benefit that VA is not responsible for recouping, the Austin DPC does not enter the amount of this benefit into the VADS record. Reference:  For more information on VADS, see the Share User Guide.

VI.ii.2.1.d.Determining Whether VA Has Already Recouped Separation Benefits a Veteran Received

 Before establishing a withholding to recoup a Veteran’s separation benefit, check the corporate record (by clicking on the MILITARY button in Share and selecting the MILITARY PAYMENTS tab) to ensure VA has not already completed recoupment. If the corporate record shows recoupment is complete, claims processors must ensure the amount of benefits VA recouped matches the amount of the separation benefit the Veteran received.  If they do not match, treat the separation benefit currently at issue as unrecouped. Exception:  If VA completed its recoupment of a Veteran’s separation benefit in the Benefits Delivery Network (BDN) (prior to conversion to VETSNET), such recoupment will not be evident in Share. If a Veteran had a master record in BDN, claims processors may view data from the record by clicking on the PRECONVSN MASTER RCD button in Share.  Claims processors may not rely on data displayed on the STATUS (M11) screen, however, to determine whether VA finished recouping a Veteran’s separation benefit.  Instead, claims processors must review entries in the Offset – Recoupment section of BDN award prints in the claims folder to make this determination. Notes:
  • If VA began recoupment of a Veteran’s separation benefit in BDN and continued recoupment after conversion to VETSNET, the balance of the separation benefit that was pending recoupment at the time of conversion will appear in the ORIGINAL BALANCE field on the
    • SEPARATION PAY tab, or
    • DISABILITY PAY tab (if the separation benefit is disability severance pay).
  • The SEPARATION PAY tab and DISABILITY PAY tab are located on the AWARD ADJUSTMENTS screen in VBMS-A.
Important:  If a determination cannot be made as to whether VA has recouped a separation benefit, ask the local finance activity to assist in making the determination by performing a financial audit. References:  For more information on using
  • Share, see the Share User Guide, and
  • VBMS-A, see the VBMS Awards User Guide.

VI.ii.2.1.e.Readjustment Pay Under Former 10 U.S.C. 3814a

 Readjustment pay under former 10 U.S.C. 3814a was paid to regular officers below the rank of major who were discharged during a reduction in force.  The authority for making these payments expired at the end of 1977. If a Veteran received readjustment pay under former 10 U.S.C. 3814a, the date of entitlement to VA compensation dictates whether recoupment is required. References:  For more information on

VI.ii.2.1.f.Readjustment Pay Under Former 10 U.S.C. 687

 Readjustment pay under former 10 U.S.C. 687 was paid to reserve officers who were involuntarily released after completing at least five years of active service but did not qualify for retirement.  The authority for making these payments was repealed effective September 15, 1981. If a Veteran was involuntarily released from active duty as a reservist on or after July 9, 1956, and had completed continuous active duty of at least five but not more than 18 years, carefully review the records described in M21-1, Part VI, Subpart ii, 2.1.b to determine whether the Veteran elected
  • VA compensation or lump sum readjustment pay, or
  • deferred action on lump sum readjustment pay.
If the evidence of record does not contain the information required to make a determination, follow the instructions in M21-1, Part VI, Subpart ii, 2.2.b. Reference:  For more information on the effect of PL 87-509 on readjustment pay under former 10 U.S.C. 687, see M21-1, Part VI, Subpart ii, 2.1.g.

VI.ii.2.1.g.Effect of PL 87-509 on Readjustment Pay

 PL 87-509, enacted June 28, 1962, liberalized the former law that required Veterans to make a one-time, irrevocable election between VA compensation and readjustment pay.  The prior election no longer precludes payment of compensation if a Veteran is otherwise eligible. On or after June 28, 1962, if
  • a claims folder is encountered in which the Veteran’s claim for compensation was previously barred under the former law, compensation may now be awarded, subject to
    • recoupment of the readjustment pay, and
    • the effective dates for liberalizing legislation, as provided in 38 CFR 3.114(a), and
  • potential eligibility for compensation exists based on the former claim, but there is insufficient evidence to make a decision,

VI.ii.2.1.h.Non-Disability Severance Pay

 DoD awarded non-disability severance pay to certain individuals, under former 10 U.S.C 359, 360, 859, and 860, who involuntarily separated from service, usually due to their failure to meet standards of performance.  This benefit is subject to recoupment unless the Veteran established entitlement to VA compensation before September 15, 1981. Note:  PL 96-513 repealed former 10 U.S.C. 359, 360, 859, and 860, effective September 15, 1981. Reference:  For more information on the recoupment of non-disability severance pay, see

VI.ii.2.1.i.Separation Pay Under 10 U.S.C. 1174

 Separation pay under 10 U.S.C. 1174
  • replaced readjustment pay, effective September 15, 1981
  • is paid to regular and reserve officers who
    • involuntarily separate from service after completing at least five years of active duty, but
    • do not qualify for retirement, and
  • is also paid to regular enlisted members under PL 101-510, Section 501 (enacted November 5, 1990), who
    • involuntarily separate from service after completing six years of active duty, and
    • do not qualify for retirement.
Reference:  For more information on determining the amount of separation pay to recoup, see M21-1, Part VI, Subpart ii, 2.2.d.

VI.ii.2.1.j.RISP and RSSP

 PL 102-484, Section 4418, provided for the payment of RISP to certain reservists who are involuntarily released from the Selected Reserve. PL 102-484, Section 4416, provided for the payment of RSSP to reservists with at least 20 years of service who are not yet old enough to retire.  Payments are made annually for up to five years or until the reservist turns sixty. In VAOPGCPREC 9-1996, VA’s General Counsel held that VA is
  • required to withhold disability compensation in order to recoup the amount of RISP a Veteran received, provided the compensation is for a disability incurred in or aggravated by service prior to the date of receipt of RISP, and
  • not required to withhold disability compensation to recoup the amount of RSSP a Veteran received.
Note:  For award-processing purposes, treat RISP as separation pay.

VI.ii.2.1.k.SSB and VSI

 PL 102-190, Sections 661 and 662, enacted December 5, 1991, added SSB under 10 U.S.C. 1174a and VSI under 10 U.S.C. 1175 as separation benefits to facilitate the downsizing of the armed forces.  Service departments used these two exit-bonus incentive programs through December 31, 2001, to encourage service members, who might otherwise face involuntary separation or denial of reenlistment, to separate voluntarily. To qualify for SSB or VSI, a service member must have
  • separated on or before September 30, 1995
  • served
    • on active duty for more than six years but fewer than 20 years as of December 5, 1991, and
    • at least five years of continuous active duty immediately prior to separation, and
  • agreed to serve in the Ready Reserve.

VI.ii.2.1.l.Differences Between SSB and VSI

 One of the primary differences between VSI and SSB is the manner in which DoD pays each benefit.  The most important difference, however, is that VA is not responsible for recouping VSI from a Veteran’s disability compensation. The table below describes how DoD pays SSB and VSI.
If the Veteran elected … Then DoD pays the Veteran …
SSB a lump sum amount equal to 15 percent of annual basic pay, multiplied by years of active service.
VSI annual installments equal to 2.5 percent of basic pay, multiplied by years of service. Payments commence upon discharge and recur on each anniversary date of discharge thereafter. Note:  In general, the total number of payments equals twice the number of years of active service, provided the Veteran continues to serve in a reserve unit for the duration of the payments.
Reference:  For more information on DoD’s responsibility for adjusting VSI, see M21-1, Part VI, Subpart ii, 2.1.m.

VI.ii.2.1.m.DoD’s Responsibility for Adjusting VSI

 When a Veteran who elected to receive VSI subsequently establishes entitlement to VA compensation based on the same period of service, DoD reduces VSI to offset the amount of VA compensation.  DoD does not make deductions for VA compensation that are based on an earlier period of service than that for which VSI is payable. Important:  VA takes no special actions, such as notifying DoD, when it awards compensation to a Veteran who receives VSI. Note:  DFAS, located in Cleveland, Ohio,
  • administers all VSI payments, regardless of the branch of service, and
  • offsets VSI payments based upon data it receives from the Hines Information Technology Center.

VI.ii.2.1.n.Indicators on DD Form 214 of a Veteran’s Receipt of SSB or VSI

 Where applicable, a Veteran’s DD Form 214 usually contains information that indicates receipt of SSB or VSI and its respective amount. The table below shows where this information is located on the form and how it might appear.
Block on DD Form 214 Information the Block Contains
26 and 28 Separation codes (Block 26) and narrative reasons for separation (Block 28). Examples:
Code Narrative Reason
CB Early Release Program–SSB
FCB Voluntary Resignation for Early Release Program–SSB
KCB Voluntary Discharge for Early Release Program–SSB
MCB Voluntary Release/Transfer to Another Service Component for Early Release Program–SSB
CA Early Release Program–VSI
FCA Voluntary Resignation, Other, for Early Release Program–VSI
KCA Voluntary Discharge for Early Release Program–VSI
MCA Voluntary Release/Transfer to Another Service Component for Early Release Program–VSI
18 (Remarks) Estimate of the amount of SSB or VSI the Veteran received or is receiving. Examples:
  • SSB – $27,500 paid lump sum
  • VSI – $4,310 annually for 12 years
Important:
  • Service departments have not historically been consistent in their use of codes and narrative reasons on DD Form 214.
  • Because the amount of separation benefits shown on DD Form 214 is not always accurate, it must be verified through the means described in M21-1, Part VI, Subpart ii, 2.2.b.

VI.ii.2.1.o.VSP

 10 U.S.C. 1175a provides for the payment of VSP to service members voluntarily separated from active duty due to restructuring or a reduction in force. VA must recoup VSP from disability compensation unless the Veteran
  • was eligible to retire (20 or more years of active service), to include transfer to the Fleet Reserve or Fleet Marine Corps Reserve, at the time DoD awarded VSP
  • is eligible to receive combat-related special compensation, or
  • receives a waiver from the Secretary of the service department.
Exception:  For exceptions to the requirement to recoup VSP from Air Force, Navy, and Marine Corps Veterans, see M21-1, Part VI, Subpart ii, 2.4. Note:  Upon receipt of a waiver for a Veteran whose disability compensation VA is already withholding for the recoupment of VSP, discontinue the withholding and release all previously withheld compensation.

VI.ii.2.1.p.Indicators on DD Form 214 of a Veteran’s Receipt of VSP

 Where applicable, a Veteran’s DD Form 214 usually contains information that indicates receipt of VSP and its amount. The table below shows where this information is located on the form and how it might appear.
Block on DD Form 214 Information the Block Contains
26 One of the following separation codes:
  • KCN
  • MCN, or
  • FCN.
28 Narrative reason for separation. Example: Service member initiated discharge/release with VSP as authorized under Title 10 U.S.C. 1175a.
18 (Remarks) Estimate of the amount of VSP the Veteran received.
Important:
  • Service departments have not historically been consistent in their use of codes and narrative reasons on DD Form 214.
  • Because the amount of separation benefits shown on DD Form 214 is not always accurate, it must be verified through the means described in M21-1, Part VI, Subpart ii, 2.2.b.

VI.ii.2.1.q.VRI

 VRI is a payment DoD offers to encourage voluntary retirement by officers who have served for more than 20 years. VRI is not subject to recoupment from VA benefits. Reference:  For more information on VRI, see 10 U.S.C. 638b.

2.Determining the Amount to Recoup and Withhold From Monthly Payments

Introduction

 This topic contains instructions for determining the amount of separation benefits to recoup and the amount to withhold from monthly compensation payments, including

Change Date

 April 11, 2024

VI.ii.2.2.a.General Information About Recouping Separation Benefits

 After VA determines recoupment of separation benefits is necessary and the amount that is subject to recoupment, it must withhold some or all of the Veteran’s monthly compensation until recoupment is complete. Except as noted in M21-1, Part VI, Subpart ii, 2.2.k, and M21-1, Part VI, Subpart ii, 2.3.g, the amount VA withholds each month includes any of the following to which the Veteran is entitled:
  • additional compensation for dependents, and
  • special monthly compensation (SMC).
Important:  VA may not
  • recoup separation benefits from a Veteran’s compensation if the disability on which the compensation is based was incurred or aggravated during a period of service that follows the period(s) of service for which the Veteran received separation benefits
  • apportion any disability compensation it is withholding for the recoupment of separation benefits
  • withhold Medal of Honor pension to recoup separation benefits, or
  • withhold compensation (for the purpose of recouping separation benefits) to which a Veteran is not entitled because of receipt of military retired pay (MRP).  (When processing an award that requires the establishment of a withholding for MRP and recoupment of separation benefits, withhold payment for MRP until the retired pay cutoff date referenced in M21-1, Part VI, Subpart ii, 4.B.2.b, then begin the withholding for separation benefits effective the retired pay cutoff date.)
References:  For more information on

VI.ii.2.2.b.Confirming the Amount of the Separation Benefit

 The records described in M21-1, Part VI, Subpart ii, 2.1.b typically show the amount of the separation benefit a Veteran received.  Because this amount is not always accurate, however, regional offices (ROs) must confirm the amount by following the instructions in the table below.
Step Action
1 Access the DFAS/CG PAYMENTS tab in the Veterans Information Solution (VIS).
2 Do the fields below the Non-Recurring Pay at Separation Information heading contain data?
  • If yes, go to the next step.
  • If no, go to Step 7.
Note:  Sixty to ninety days may pass between the date a Veteran is awarded separation benefits and the date corresponding updates are made to VIS.
3 Follow the instructions in the table below.
If … Then …
the letter P appears in the PAY TYPE CD field under the Non-Recurring Pay at Separation Information heading go to Step 4. Note:  In this situation, only the projected amount of the separation benefit is displayed in the fields under the Non-Recurring Pay at Separation Information heading.
the letter P does not appear in the PAY TYPE CD field under the Non-Recurring Pay at Separation Information heading
  • confirm the amount of the separation benefit using the data shown in the fields under the Non-Recurring Pay at Separation Information heading, and
  • go to Step 5.
  • the letter P appears in the PAY TYPE CD field of one row under the Non-Recurring Pay at Separation Information heading, and
  • the letter V appears in the PAY TYPE CD field of a subsequent row under the same heading
  • confirm the amount of the separation benefit using the data shown in the fields of the row under the Non-Recurring Pay at Separation Information heading that has the letter V in the PAY TYPE CD field, and
  • go to Step 5.
Exception:  Disregard the instructions in this cell and go to Step 7 if there is reason to believe the amount of the separation benefit displayed in the referenced row is incorrect because, for example, the amount displayed is
  • a negative amount, or
  • much higher or much lower than the amount to which a similarly situated Veteran would be entitled.
Note:  There exists a dollar limit to the amount of the separation benefit detailed in a single row under the Non-Recurring Pay at Separation heading.  When this limit is exceeded, another row will appear under the same heading that displays the remaining amount of the separation benefit.  In this situation, add together the amounts in both rows to determine the total amount of the separation benefit.
4 Postpone award processing for 30 days then repeat Steps 1 through 3. Important:  As an alternative to postponing award action, claims processors may go to Step 7.
5 Navigate to the REPORTS tab in VIS and download a copy of the Veteran DFAS/CG Payments report.
6 Upload a copy of the Veteran DFAS/CG Payments report to the Veteran’s electronic claims folder (eFolder) and disregard the remaining steps in this table.
7 Did the Veteran receive the separation benefit from the Coast Guard?
  • If yes, go to Step 9.
  • If no, go to the next step.
8 Do any of the conditions described in the left column of the table in M21-1, Part VI, Subpart ii, 2.2.c exist?
9
  • Call the Coast Guard Customer Care Branch (866-772-8724).
  • Provide the branch with the following information:
    • Veteran’s name and Social Security number, and
    • caller’s name and contact information.
  • Ask the branch to provide the following information:
    • type of separation benefit the Veteran received
    • date the Veteran received the separation benefit
    • gross amount of the separation benefit, and
    • amount of Federal income tax withheld.
Note:  The branch typically responds to requests within 10 to 15 days.
10 Did the branch respond within 30 days?
  • If yes, disregard the remaining steps in this table.
  • If no, follow up with the branch by telephone.
11 Did the branch respond within 30 days of the follow-up telephone call referenced in Step 10?
  • If yes, disregard the remaining steps in this table.
  • If no, go to Step 19.
12 Review the Veteran’s claims folder to determine whether a claims processor has already submitted a request for confirmation of the amount of the separation benefit through the AskDFAS website.
13 Has a claims processor already submitted the request referenced in Step 12?
  • If yes, go to the next step.
  • If no, go to Step 17.
14 Was confirmation of the amount of the separation benefit obtained through AskDFAS?
  • If yes, disregard the remaining steps in this table.
  • If no, go to the next step.
15 Has at least 45 days passed since the claims processor submitted the request referenced in Step 12?
  • If yes,
    • request an update on the status of the request through the AskDFAS website, and
    • go to the next step.
  • If no, return to Step 14 after the 45-day response period ends.
16 Was confirmation of the amount of the separation benefit obtained through AskDFAS within 15 days of the date of the request for a status update?
  • If yes, disregard the remaining steps in this table.
  • If no, go to Step 19.
17 Submit a request for confirmation of the amount of the separation benefit through the AskDFAS website. Important:  Do not postpone promulgation of a rating decision while waiting for a response to the request referenced in the preceding paragraph.
  • Promulgate the rating decision using the unverified amount of the separation benefit, if available.
  • If no amount is of record (in, for example, Share or on the Veteran’s application for benefits or DD Form 214),
    • use $99,999.00 as the amount of the separation benefit, and
    • establish end product (EP) 290 to control for a response to the request submitted through AskDFAS.
18 Was confirmation obtained within 45 days?
  • If yes, disregard the remaining step in this table.
  • If no,
    • request an update on the status of the request through the AskDFAS website, and
    • go to Step 16.
19 Request assistance in confirming the amount of the separation benefit from Compensation Service’s Military Pay Staff by sending an encrypted e-mail to VAVBAWAS/CO/MILPAY.
  • Enter Need Assistance in Verification of [type of separation benefit] in the subject line of the e-mail.
  • Include in the body of the e-mail
    • the Veteran’s name and file number, and
    • a description of the attempts to obtain confirmation of the amount of the Veteran’s separation benefit through AskDFAS or the Coast Guard Customer Care Branch.
Notes:
  • If the Military Pay Staff does not respond to the e-mail within 15 days, follow up with a second e-mail.
    • Enter 15-Day Follow-Up:  Need Assistance in Verification of [type of separation benefit] in the subject line of the e-mail.
    • Include in the body of the e-mail the date and time of the original e-mail.
  • Upload a copy of all sent and received e-mails into the Veteran’s eFolder.
References:  For more information on

VI.ii.2.2.c.Conditions Under Which Claims Processors May Not Use AskDFAS to Obtain Confirmation of the Amount of a Veteran’s Separation Benefit

 Because certain records that DFAS requires to confirm the amount of a Veteran’s separation benefit are no longer accessible, there are conditions under which the submission of a request for said confirmation through AskDFAS will always result in a negative reply.  The table below describes those conditions and the actions claims processors must take instead of attempting to obtain confirmation through AskDFAS.
If the Veteran received separation benefits based on discharge from … Then …
the Air Force Reserve in October 1999 use (for award-processing purposes) the amount of separation benefits recorded on the Veteran’s
  • DD Form 214, or
  • application for VA benefits.
Notes:
  • If differing amounts were recorded on the referenced documents, use the amount recorded on the Veteran’s application for VA benefits.
  • If no amount was recorded on either of the referenced documents, request assistance from Compensation Service’s Military Pay Staff by sending an e-mail to VAVBAWAS/CO/MILPAY.
active duty in the Air Force prior to 1972
active duty in the Army prior to 1972
  • the Navy prior to 1977
  • the Marine Corps Reserve prior to 1983, or
  • active duty in the Marine Corps prior to 1969
 request confirmation of the amount of the Veteran’s separation benefit by submitting Standard Form 180, Request Pertaining to Military Records, to the National Personnel Records Center (NPRC). Notes:
  • The form contains instructions for its completion and submission.
  • Send follow-up requests to NPRC every 90 days until confirmation is obtained or NPRC provides a negative response.
Reference:  For more information on submitting Standard Form 180 to NPRC, see the National Archives website.

VI.ii.2.2.d.Determining Whether and How Much to Recoup

 The following factors determine whether and how much of a Veteran’s separation benefits VA must recoup from disability compensation:
  • type of separation benefit
  • date of entitlement to VA compensation, and
  • date of receipt of the separation benefit.
The table below shows how these factors affect recoupment of the various types of separation benefits.
Type of Separation Benefit Date of Entitlement to VA Compensation Date of Receipt of the Separation Benefit Amount of Pay VA Recoups
  • readjustment pay under former 10 U.S.C. 3814a, or
  • non-disability severance pay
 prior to September 15, 1981 n/a none
on or after September 15, 1981 on or before September 30, 1996 pre-tax amount
after September 30, 1996 after-tax amount
readjustment pay under former 10 U.S.C. 687 prior to September 15, 1981 n/a 75 percent of pre-tax amount
on or after September 15, 1981 on or before September 30, 1996 pre-tax amount
after September 30, 1996 after-tax amount
SSB n/a PL 105-178 provides for recoupment of the after-tax amount of SSB a Veteran receives, regardless of the date of receipt. after-tax amount
n/a on or before September 30, 1996 pre-tax amount
after September 30, 1996 after-tax amount
disability severance pay for a disability VA initially rated at least 10-percent disabling n/a on or before September 30, 1996 pre-tax amount
after September 30, 1996 after-tax amount
Exceptions:  For exceptions to the policies described in the table above, see M21-1, Part VI, Subpart ii, 2.2.e. References:  For more information on the recoupment of

VI.ii.2.2.e.Exceptions to Policies for Recouping Separation Benefits

 The table below contains exceptions to the policies described in M21-1, Part VI, Subpart ii, 2.2.d regarding the recoupment of separation benefits.
If … Then …
a Veteran received VSP from the Air Force, Navy, or Marine Corps follow the instructions in M21-1, Part VI, Subpart ii, 2.4.
  • a Veteran received disability severance pay on or after January 28, 2008, for a disability incurred in a combat zone or during combat-related operations, and
  • VA rated the disability at least 10-percent disabling
 follow the instructions in M21-1, Part VI, Subpart ii, 2.3e.
  • a Veteran received disability severance pay after September 30, 1996, for a disability that was not incurred in a combat zone or during combat-related operations
  • VA rated the disability at least 10-percent disabling, and
  • VA discovers the Veteran’s service department
    • did not withhold Federal income tax from the disability severance pay, or
    • withheld the tax but later refunded it
 recoup the gross/pre-tax amount of disability severance pay the service department paid the Veteran.

VI.ii.2.2.f.Service Departments’ Practice of Withholding Federal Income Tax

 Service departments always withhold Federal income tax from RISP, VSP, SSB, and separation pay under 10 U.S.C. 1174.  Often, however, DoD’s database does not contain the amount of Federal income tax service departments withheld from these types of separation benefits.  In these cases, VIS will show $0.00 as the Federal income tax withholding. Follow the instructions in M21-1, Part VI, Subpart ii, 2.2.g, in the situation described in the preceding paragraph or anytime VA has verified the gross amount of a Veteran’s separation benefit but has not yet verified the amount of Federal income tax the service department withheld. Important:  If the separation benefit a Veteran received is disability severance pay, and VIS shows $0.00 as the Federal income tax withholding, the Veteran’s service department
  • did not withhold Federal income tax, or
  • withheld the tax but subsequently refunded it.

VI.ii.2.2.g.Calculating the After-Tax Amount of Separation Benefits

 To calculate the after-tax amount of a Veteran’s separation benefit,
  • use the table below to determine which flat-tax rate was in effect on the date the Veteran received the benefit
  • multiply the gross amount of the separation benefit by the appropriate flat-tax rate, and
  • subtract the product from the gross amount of the separation benefit.
Effective Date Flat-Tax Rate
December 31, 1993, and earlier 20 percent
January 1, 1994 28 percent
August 7, 2001 27.5 percent
January 1, 2002 27 percent
May 28, 2003 25 percent
January 1, 2018 22 percent
Notes:
  • There is no need to make the calculations described in this block when
    • claims processors use VIS to verify the amount of a Veteran’s separation benefit, and
    • VIS displays the amount of Federal income tax the Veteran’s service department withheld.
  • A request for the adjustment of a recoupment balance, based on an assertion that the Federal income tax a Veteran paid on a separation benefit was incorrectly reported to or calculated by VA, must be supported by credible evidence showing the amount of Federal income tax the Veteran actually paid.
  • If questions arise regarding calculation of the after-tax amount of a Veteran’s separation benefit, request assistance by sending an e-mail to VAVBAWAS/CO/MILPAY, which is the corporate mailbox of Compensation Service’s Military Pay Staff.
Reference:  For up-to-date information about the flat-tax rate for supplemental wages, see the Internal Revenue Manual, Part 4, 23.8.4.

VI.ii.2.2.h.Handling Separation Benefits When Compensation Becomes Greater Than Pension

 Follow the instructions in the table below when all four of the following conditions exist:
  • a Veteran received separation benefits that have not yet been entirely recouped
  • the Veteran is receiving pension
  • entitlement to compensation is established and compensation would be the greater benefit, and
  • the amount of compensation payable to the Veteran is actually less than the amount of pension payable because VA must withhold all or part of the Veteran’s compensation in order to recoup the separation benefits.
Step Action
1 Attempt to contact the Veteran by telephone and explain that compensation is not the greater benefit because VA must withhold all or part of it in order to recoup the separation benefits the Veteran received.
2 Was the attempt to contact the Veteran by telephone successful?
  • If yes, go to Step 3.
  • If no,
    • document the actions taken to contact the Veteran with a system note
    • continue the Veteran’s pension award
    • draft a letter to the Veteran that
      • explains why VA chose to continue the pension award
      • advises the Veteran to contact VA in order to elect compensation instead of pension, if desired, and
      • informs the Veteran that VA will convert the award to compensation and begin recouping the separation benefit if eligibility to pension ceases to exist in the future, and
    • disregard the remaining step in this table.
3 Did the Veteran confirm election of compensation?
  • If yes,
  • If no,
    • document telephone contact with the Veteran on VA Form 27-0820
    • upload VA Form 27-0820 to the Veteran’s eFolder
    • continue paying the Veteran pension
    • inform the Veteran that VA will convert the award to compensation and begin recouping the separation benefit if eligibility to pension ceases to exist in the future, and
    • notify the Veteran in a decision notice that VA made no changes to benefits.
Note:  VA must withhold the entire benefit if the Veteran elects compensation. Therefore, VA should give the Veteran the opportunity to be fully informed of all the facts before beginning a withholding.

VI.ii.2.2.i.Recouping Separation Benefits After a Veteran Becomes Entitled to MRP

 If a Veteran becomes entitled to MRP after receiving separation benefits, the retired pay center (RPC) must recoup the gross amount of separation benefits it paid to the Veteran from MRP.  If these same separation benefits are subject to recoupment by VA because of the Veteran’s entitlement to disability compensation, VA and the RPC become mutually responsible for their recoupment. Exceptions:
  • The RPC is not responsible for recouping a retired Veteran’s separation benefits if the Veteran waives MRP in order to receive disability compensation.
  • The RPC does not recoup disability severance pay if a Veteran who received this benefit returns to active duty and later becomes entitled to MRP.
The table below describes how VA and the RPC work together when both departments are responsible for recouping a Veteran’s separation benefits.
If … Then …
an RPC establishes an MRP account for a Veteran who received separation benefits the RPC is responsible for notifying the station of origination (SOO) of the
  • Veteran’s entitlement to MRP, and
  • amount of separation benefits the RPC
    • has already recouped, if any, and
    • will continue to recoup each month from the Veteran’s MRP.
The SOO must then
  • provide the RPC with the amount of separation benefits VA
    • has already recouped, if any, and
    • will continue to recoup each month if continued recoupment is necessary
  • estimate the date on which recoupment of the separation benefit by VA and DoD should be complete, and
  • establish a system diary that will expire on that date.
an RO discovers that a Veteran who received separation benefits that are subject to recoupment by VA is now receiving MRP the RO is responsible for
  • notifying the RPC of the amount of separation benefits VA
    • has already recouped, if any, and
    • will continue to recoup each month if continued recoupment is necessary
  • asking the RPC to provide the amount of
    • separation benefits it has already recouped, if any, and
    • MRP it is withholding each month to recoup the separation benefit
  • estimating the date on which recoupment of the separation benefit by VA and DoD should be complete, and
  • establishing a system diary that will expire on that date.
Note:  Upon expiration of the system diary referenced in the above table, the SOO must
  • collaborate with the RPC to determine the exact date on which recoupment of the Veteran’s separation benefit was complete, and
  • adjust the Veteran’s award accordingly.
References:  For more information on

VI.ii.2.2.j.Adjusting the Amount of Compensation VA Is Withholding

 The rules for withholding VA compensation to recoup separation benefits have changed over time.  If the recoupment of separation benefits was correctly initiated under former rules, do not adjust a Veteran’s award for the sole purpose of bringing it into compliance with current rules, unless the Veteran (or representative) specifically requests it. Should the need arise to adjust the amount of compensation VA is withholding for the reason described above, make the adjustment prospectively, effective the date in the LAST PAID DATE field on the AWARD INFORMATION tab in Share.

VI.ii.2.2.k.Recouping Separation Benefits (Other Than Disability Severance Pay) From a Veteran With Multiple Periods of Service

 Important:  The information in this block applies to the recoupment of all types of separation benefits except disability severance pay. Separation benefits are not paid for a particular period of service.  Rather, the payment is for all periods of service that preceded the separation for which a separation benefit was paid.
  • Disability compensation payable for disabilities incurred during any period of service that preceded the separation for which a separation benefit was paid is subject to withholding for the purpose of recouping that separation benefit.
  • Disability compensation payable for disabilities incurred during a period of service that follows the separation for which a separation benefit was paid is not subject to withholding for the purpose of recouping that separation benefit.
Example: Scenario:
  • A Veteran has three periods of service:
    • 1980 to 1985
    • 1990 to 1995, and
    • 2000 to 2005.
  • The Veteran received a separation benefit at the end of the second period of service.
  • In 2010, the Veteran files a claim for disability compensation for a knee disorder, a back disorder, and a skin disorder.
  • The rating activity determines
    • the knee disorder was incurred during the first period of service
    • the back disorder was incurred during the second period of service, and
    • the skin disorder was incurred during the last period of service.
Action:  Withhold disability compensation payable for the knee and back disorders (subject to the limitations discussed in M21-1, Part VI, Subpart ii, 2.1.j). Notes:
  • In scenarios similar to the one described in this block, the rating activity is responsible for identifying (on the rating decision Codesheet) the period of service during which each disability had its onset.
  • If an adjustment to a withholding becomes necessary because VA establishes service connection (SC) for a disability incurred after a Veteran received separation benefits, adjust the withholding prospectively, effective the date in the LAST PAID DATE field on the AWARD INFORMATION tab in Share.
Reference:  For more information on the rating activity’s responsibility to identify the period of service during which certain service-connected (SC) disabilities had their onset, see M21-1, Part V, Subpart iv, 1.C.5.c and d.

3.Instructions Unique to the Recoupment of Disability Severance Pay

Introduction

 This topic contains instructions that are unique to the recoupment of disability severance pay, including

Change Date

 April 11, 2024

VI.ii.2.3.a.Identifying Severance-Pay Disability(ies) Using the PEB Report

 Before recouping disability severance pay, it is necessary to identify the disability(ies) for which the Veteran received this benefit.  The best source for this information is the Veteran’s Physical Evaluation Board (PEB) report, which is normally included in service treatment records (STRs). If the PEB report is not included in the Veteran’s STRs, it might be located in service personnel records.  Use the table below to determine how to submit a request for the PEB report.
If the Veteran separated from the … Then submit a request through …
  • Coast Guard prior to October 1, 2006
  • Army prior to October 1, 1994
  • Navy prior to January 1, 1995
  • Air Force prior to October 1, 2004, or
  • Marine Corp prior to January 1, 1999
 PIES, using request code O50. Exception:  Use request code O11 when processing a claim outside of VBMS.
  • Space Force
  • Coast Guard on or after October 1, 2006
  • Army on or after October 1, 1994
  • Navy on or after January 1, 1995
  • Air Force on or after October 1, 2004, or
  • Marine Corp on or after January 1, 1999
 the Defense Personnel Records Image Retrieval System (DPRIS), using request code AG5.
References:  For more information on using

VI.ii.2.3.b.General Policies Regarding Withholdings to Recoup Disability Severance Pay

 Generally, if a Veteran received disability severance pay, VA must withhold from monthly compensation an amount equal to the monthly compensation payable for the disability(ies) for which the Veteran received disability severance pay.  VA continues to withhold this amount until it has recouped the amount specified in M21-1, Part VI, Subpart ii, 2.2.d. Important:
  • The monthly withholding may never exceed the monthly amount of compensation payable based on the initial, compensable rating, as defined in M21-1, Part VI, Subpart ii, 2.3.c, that VA assigns the severance-pay disability(ies).
  • If a Veteran has multiple, severance-pay disabilities, each rated 0-percent disabling, and VA assigns a 10-percent disability rating to them under 38 CFR 3.324, no withholding is necessary for these disabilities until VA assigns a compensable rating to one or more of them, individually.
  • Withhold the additional benefits payable because of application of the bilateral factor if
    • the initial, compensable rating included application of the bilateral factor, and
    • entitlement to the bilateral factor was based exclusively on severance-pay disabilities.
Exception:  If VA initially assigns a severance-pay disability a temporary 100-percent rating under 38 CFR 4.28, 4.29, or 4.30,
  • VA must withhold all of the Veteran’s monthly compensation until entitlement to the temporary 100-percent rating ends, and
  • monthly withholdings thereafter may never exceed the monthly amount of compensation payable based on the disability rating VA assigns the severance-pay disability(ies) immediately after entitlement to the temporary 100-percent rating ends.
Examples:  The table below contains examples of how to apply the policies set forth in this block.
If VA initially rated the severance-pay disability … And VA subsequently … Then VA continues to withhold from the Veteran’s monthly compensation …
20-percent disabling rates the same disability 30-percent disabling the amount payable for a disability rated 20-percent disabling.
50-percent disabling assigns a temporary 100-percent rating to the same disability under 38 CFR 4.28, 4.2s9, or 4.30 the amount payable for a disability rated 50-percent disabling.
0-percent disabling assigns a temporary 100-percent rating to the same disability under 38 CFR 4.28, 4.29, or 4.30 nothing, until it assigns the disability a compensable rating.
Notes:
  • The Exception and Examples in this block assume the Veteran received disability severance pay for all SC disabilities. If the Veteran has other SC disabilities that were not subject to disability severance pay, see M21-1, Part VI, Subpart ii, 2.3.g–i.
  • Upon the assignment of a compensable evaluation (other than a temporary 100-percent rating under 38 CFR 4.28, 4.29, or 4.30) to a severance-pay disability that was initially rated 0-percent disabling, send a notice of proposed adverse action to the Veteran before reducing benefits.
Reference:  For more information on sending notice of a proposed adverse action, see M21-1, Part X, Subpart ii, 3.A.

VI.ii.2.3.c.Definition:  Initial, Compensable Disability Rating

 For the purpose of this section, initial, compensable disability rating means the first disability rating VA assigns to a disability that is 10 percent or higher, except 100-percent ratings under 38 CFR 4.28, 4.29, or 4.30. If VA assigns a compensable disability rating for the first time, and subsequently increases the rating effective the same date it assigned the first one, the very first rating VA assigned is still considered the “initial, compensable disability rating” for the purpose of this section. Example:  VA assigned a Veteran’s SC back disorder a 10-percent disability rating, effective April 21, 2011.  The Veteran filed a legacy appeal of the decision, and VA later increased the rating to 20 percent, effective the same date it had assigned the 10-percent rating. Result:  The initial, compensable disability rating in this example is 10 percent. Exception:  If VA increases an initial, compensable disability rating from the same effective date based on clear and unmistakable error (CUE), the new rating replaces the first one and becomes the initial, compensable disability rating.  When adjusting the withholding in these cases, make the adjustment prospectively, effective the date in the LAST PAID DATE field on the AWARD INFORMATION tab in Share. References:  For more information on

VI.ii.2.3.d.Handling Reduced Disability Ratings and Disability Severance Pay

 If VA reduces the disability rating it initially assigned to a severance-pay disability, it must make a corresponding adjustment in the amount of compensation it withholds each month (to recoup disability severance pay) to reflect the new rating. Important:  The new rating does not become the initial disability rating (as defined in M21-1, Part VI, Subpart ii, 2.3.c), unless VA determines the initial rating was clearly and unmistakably erroneous. Example:
  • VA assigns an initial disability rating of 30 percent to a severance-pay disability, effective April 21, 2006.
  • Two years later, improvement in the disability is demonstrated during a routine review examination.
  • VA reduces the disability rating for the severance-pay disability to 10 percent in December 2008 and concurrently reduces the amount of compensation it is withholding to correspond with the new rating.
  • In August 2010, VA increases the disability rating for the severance-pay disability to 50 percent.  It concurrently increases the withholding to an amount that corresponds with the initial disability rating of 30 percent.
Note:  If, in addition to the severance-pay disability, a Veteran has at least one SC disability that was not subject to receipt of severance pay (hereafter referred to as a “non-severance-pay disability”), follow the instructions in M21-1, Part VI, Subpart ii, 2.3.g–i to ensure the method chosen to calculate the withholding is most advantageous to the Veteran. Reference:  For information pertaining to the recoupment of severance pay from an incarcerated Veteran’s award, follow the instructions in M21-1, Part VI, Subpart iii, 1.A.4.c.

VI.ii.2.3.e.Disability Severance Pay for Disabilities Incurred in a Combat Zone or During Combat-Related Operations

 PL 110-181, as implemented in 38 CFR 3.700(a)(3), prohibits the recoupment of disability severance pay from VA compensation if the Veteran
  • separated from service on or after January 28, 2008, and
  • incurred the disability severance pay disability in the line of duty in a combat zone or during the performance of duty in combat-related operations.
Exception:  The provisions of this block may apply to a Veteran who separated from service prior to January 28, 2008, if
  • the Veteran incurred a disability in the line of duty in a combat zone or during the performance of duty in combat-related operations, and
  • DoD subsequently
    • placed the Veteran on the Temporary Disability Retirement List (TDRL)
    • later removed the Veteran from TDRL on or after January 28, 2008, and
    • awarded the Veteran disability severance pay for the same disability.
Important:
  • Prior to August 5, 2014, the “combat-related operations” requirement was met only if the disability in question was the result of armed conflict.  On or after this date, the requirement is met if the disability is combat-related.
  • DoD – not VA – decides whether a disability was incurred in the line of duty in a combat zone or during combat-related operations.
Reference:  For more information on determining whether DoD paid disability severance pay that is not subject to recoupment under 38 CFR 3.700(a)(3), see M21-1, Part VI, Subpart ii, 2.3.f.

VI.ii.2.3.f.Determining Whether a Disability Was Incurred in a Combat Zone or During Combat-Related Operations 

 Each of the following represents an indicator that a Veteran incurred a disability in the line of duty in a combat zone or during combat-related operations.  Disability severance pay the Veteran received for such a disability is not subject to recoupment.
  • The text in Block 28 of DD Form 214 indicates the disability
    • was incurred in a combat zone, or
    • (if the Veteran separated from service on or after August 5, 2014) is combat-related.
  • The Veteran separated from service on or after August 5, 2014, and the PEB report or separation orders indicate the disability is the result of a combat-related injury.
  • The Veteran’s PEB report or separation orders contain the following statement:  Disability was incurred in a combat zone or incurred during the performance of duty in combat-related operations as designated by the Secretary of Defense (NDAA 2008, Sec 1646).
    • If the statement is followed by the word Yes, the statement is true, and the severance pay the Veteran received for the disability is not subject to recoupment.
    • If the statement is followed by the word No, the statement is not true, and the severance pay the Veteran received is subject to recoupment.
    • If the statement is followed by neither Yes nor No, the statement is true, and the severance pay the Veteran received for the disability is not subject to recoupment.
  • A letter from DFAS or the Coast Guard indicates the Veteran has been removed from TDRL and paid disability severance pay on or after August 5, 2014, for a combat-related disability.  (If the Veteran was removed from TDRL and paid disability severance pay prior to August 5, 2014, the letter must state the disability was incurred in a combat zone or include the following statement:  Disability was incurred in a combat zone or incurred during the performance of duty in combat-related operations as designated by the Secretary of Defense (NDAA 2008, Sec 1646).
  • One or more of the following are present in the description of the disability on a PEB report or separation orders:
    • Combat Zone
    • CZ
    • Czone
    • Armed Conflict
    • AC
    • (CR-AC)
    • CR-CZ, or
    • CR (if the Veteran separated from service on or after August 5, 2014).
Important:  The content of the CMBT RELATED CD field on the DFAS/CG PAYMENTS screen in VIS is not a reliable indicator of whether or not a Veteran incurred a disability in the line of duty in a combat zone or during combat-related operations.

VI.ii.2.3.g.Withholding Compensation When the Veteran Did Not Receive Severance Pay for All SC  Disabilities

 If VA has awarded SC for both severance- and non-severance-pay disabilities, VA may not withhold an amount greater than that to which the Veteran is entitled based on the non-severance-pay disability(ies).  This includes the additional amount of compensation payable for
  • dependents (if the non-severance-pay disabilities alone have a combined rating of at least 30 percent), and/or
  • SMC (if the SMC is based on non-severance-pay disabilities alone).

VI.ii.2.3.h.Example:  VA Assigns a 100-Percent Disability Rating to a Non-Severance-Pay Disability

 Scenario:  In a decision on a Veteran’s original claim for benefits, VA awards SC for
  • a severance-pay disability rated 50-percent disabling, and
  • a non-severance-pay disability rated 100-percent disabling.
Result:  VA may not withhold any compensation to recoup the Veteran’s disability severance pay while the non-severance-pay disability is rated 100-percent disabling. Note:  The result in this example is the same, regardless of whether or not VA assigned the 100-percent rating on a temporary basis under 38 CFR 4.28, 4.29, or 4.30.

VI.ii.2.3.i.Withholding an Amount That Is Most Advantageous to the Veteran

 When calculating the monthly amount of VA compensation to withhold from a Veteran with both severance and non-severance-pay disabilities, always use the withholding that pays the Veteran the higher rate of compensation. Example:  VA assigns a combined disability rating of 70 percent to a married Veteran based on a
  • severance-pay disability rated 50-percent disabling, and
  • non-severance-pay disability rated 40-percent disabling.
Two methods exist for calculating how much of the Veteran’s compensation VA should withhold each month: Method 1:  Withhold the amount of compensation payable for the severance-pay disability, to include the additional amount for a spouse. Method 2:  Pay the Veteran the amount payable for the non-severance-pay disability, to include the additional amount for a spouse, and withhold everything else. Result:  The table below shows the calculations for each of the two methods, using rates from the December 1, 2006, compensation rate table for a Veteran with a spouse only.  Because Method 2 provides the Veteran with a higher rate of compensation in this example, use that method to determine how much of the Veteran’s compensation to withhold.
Method 1
$1,232.00 Start with the rate payable for a combined disability rating of 70 percent.
  – 781.00 Withhold the amount payable for the severance-pay disability.
     451.00 Pay the remaining amount to the Veteran.
Method 2
$1,232.00 Start with the rate payable for a combined disability rating of 70 percent
  – 556.00 Pay the Veteran the amount payable for the non-severance-pay disability.
     676.00 Withhold the difference between the two rates.
Note:  If, in the example above, VA subsequently awarded the Veteran a total evaluation based on individual unemployability, the amount of the withholding under Method 2 would remain the same. This is because VA calculates the withholding based on the actual disability rating assigned to the severance-pay disability, not the rate payable because VA found the Veteran individually unemployable.

VI.ii.2.3.j.Changes in the Disability Ratings of Multiple Severance-Pay Disabilities

 If the disability ratings assigned to two or more severance-pay disabilities change, compare the combined disability rating VA initially assigned to the severance-pay disabilities with the current combined disability rating. If the initial, combined disability rating is less than or equal to the current combined disability rating for the same disabilities, withhold compensation at the rate payable for the initial combined disability rating rather than considering the changes in the ratings assigned to each individual disability. The table below contains two examples of situations in which VA would withhold compensation at the rate payable for the initial, combined disability rating of 40 percent.
Initial Disability Rating Current Disability Rating – Example #1 Current Disability Rating – Example #2
Disability A – 20% Disability A – 10% Disability A – 10%
Disability B – 10% Disability B – 30% Disability B – 30%
Disability C – 10% Disability C – 0% Disability C – 20%
Combined – 40% Combined – 40% Combined – 50%
Note:  If, during a routine review of a claims folder, it is discovered that VA failed to comply with the instructions in this block and withheld compensation at a rate other than it should have been, prospectively adjust the withholding to the correct rate effective the date in the LAST PAID DATE field on the AWARD INFORMATION tab in Share.  If the adjustment will reduce the amount of net compensation payable to the Veteran, follow the due process procedures found in M21-1, Part X, Subpart ii, 3.A.

4.Recouping VSP Awarded to Air Force, Navy, and Marine Corps Veterans

Introduction

 This topic contains information about recouping VSP awarded to Air Force Veterans, including

Change Date

 April 11, 2024

VI.ii.2.4.a.History Behind the Current Air Force Recoupment Schedule for VSP

 On October 17, 2007, the Secretary of the Air Force issued a blanket waiver of the requirement to recoup VSP from VA compensation for service members released from active duty on or after that date. Six months later, on April 30, 2008, the Department of the Air Force replaced the blanket waiver with a recoupment schedule for service members released from active duty on or after the latter date. Follow the instructions in the table below upon receipt of a claim for VA compensation from an Air Force Veteran who received VSP.
If the Veteran was separated from the Air Force … Then …
before October 17, 2007 recoup VSP from VA compensation unless the Veteran received an individual waiver.
between
  • October 17, 2007, and
  • April 29, 2008
 do not recoup VSP from VA compensation.
on or after April 30, 2008 recoup VSP according to the recoupment schedule below.
If the Veteran’s combined disability rating is … Then withhold from monthly payments …
10 or 20 percent 100 percent of VA compensation.
30, 40, or 50 percent 75 percent of VA compensation.
60, 70, 80, 90, or 100 percent 50 percent of VA compensation.

VI.ii.2.4.b.History Behind the Current Navy and Marine Corps Recoupment Schedule for VSP

 On November 2, 2023, the Assistant Secretary of the Navy (Manpower and Reserve Affairs) issued a memorandum informing VA that recoupment of VSP from Veterans of the Navy and Marine Corps shall be made in accordance to a schedule that mirrors the schedule established for Veterans of the Air Force.  However, the recoupment schedule is for Veteran’s initially awarded disability compensation effective on or after November 2, 2023. Follow the instructions in the table below upon receipt of a claim for VA compensation from a Navy or Marine Corps Veteran who received VSP.
If initial disability compensation awarded is effective … Then recoup VSP …
before November 2, 2023 from VA compensation unless the Veteran received an individual waiver.
on or after November 2, 2023 according to the recoupment schedule below.
If the Veteran’s combined disability rating is … Then withhold from monthly payments …
10 or 20 percent 100 percent of VA compensation.
30, 40, or 50 percent 75 percent of VA compensation.
60, 70, 80, 90, or 100 percent 50 percent of VA compensation.

VI.ii.2.4.c.Instructions for Preparing an Award That Recoups VSP

 Follow the instructions in the VBMS Awards User Guide for preparing an award that recoups separation benefits if a Veteran received VSP from the
  • Air Force, and separated before October 17, 2007, or
  • Navy or Marine Corps, and the initial disability compensation awarded is effective before November 2, 2023.
Follow the instructions in the table below if
  • a Veteran received VSP from the Air Force, Navy, or Marine Corps
  • the Veteran’s combined disability rating is higher than 20 percent, and
  • the Veteran separated from the
    • Air Force on or after April 30, 2008, or
    • Navy or Marine Corps, and initial disability compensation awarded is effective on or after November 2, 2023.
Step Action
1 Select the RATING button on the RECORD DECISIONS screen.
2 Select the COMBINED RATING AWARD tab.
3 Verify that the combined disability rating (displayed in the column labeled SC%) is at least 30 percent.
4 Select the MILITARY PAYMENT INFORMATION button on the RECORD DECISIONS screen.
5 Select the DISCHARGE PAY tab.
6 Click on the ADD button.
7 Select Separation Pay from the DISCHARGE PAY TYPE drop-down box.
8 Enter the gross and after-tax amounts of VSP in the GROSS AMT and AFTER TAX AMT fields, respectively.
9 Enter the date the Veteran separated from service in the RAD DATE field.
10 Click on the DONE button.
11 Click on the OK button.
12 Select the AWARD ADJUSTMENTS button on the RECORD DECISIONS screen.
13 Select the SEPARATION PAY tab.
14 Select Separation Pay from the SEPARATION PAY TYPE drop-down box.
15 Enter the amount of VSP in the ORIGINAL BALANCE field.
16 Enter the effective date of the award in the AWD EFF DT field.
17 Click on the DONE button.
18 Select the OTHER ADJUSTMENTS tab.
19 Click on the ADD button.
20 Select Preserve Net Rate from the ADJUSTMENT REASON drop-down box.
21 Determine the amount of disability compensation VA must withhold by referring to the recoupment schedule shown in the table in M21-1, Part VI, Subpart ii, 2.4.a or b, as applicable. Important:  If the amount VA must withhold includes a fraction of a cent (such as $792.0975) drop the fraction of the cent (to $729.09 in the instant example).
22 Subtract the amount of disability compensation VA must withhold (as determined in Step 21) from the amount of disability compensation that is otherwise payable to the Veteran.
23 Enter the result of the calculation described in Step 22 in the ADJUSTMENT AMOUNT field.
24
  • Enter the effective date of the award adjustment in the FROM DATE field.
  • Click on the DONE button.
Note:  If multiple award lines must be changed, repeat the actions described in Steps 19 through 24.
25 Click on the GENERATE AWARD button.

VI.ii.2.4.d.Recoupment of VSP From an Incarcerated Air Force, Navy, or Marine Corps Veteran’s Compensation

 If VA is recouping an Air Force, Navy, or Marine Corps Veteran’s VSP from disability compensation, using the recoupment schedule in either M21-1, Part VI, Subpart ii, 2.4.a or b (as applicable), and that Veteran’s disability compensation becomes subject to reduction due to incarceration,
  • temporarily abandon the recoupment schedule
  • continue recoupment of VSP, but at the reduced rate specified in M21-1, Part VI, Subpart iii, 1.A.2.a, and
  • resume recoupment according to the recoupment schedule after incarceration ends.

5.Taking Award Action to Withhold Compensation

Introduction

 This topic contains information on taking award action to withhold compensation, including

Change Date

 January 2, 2019

VI.ii.2.5.a.Determining the Appropriate Effective Date for Commencing the Recoupment of Separation Benefits

 Use the table below to determine the appropriate effective date for commencing the recoupment of separation benefits from a Veteran’s disability compensation.
Type of Award Effective Date to Commence Recoupment
initial or supplemental effective date of compensation award
running date in the LAST PAID DATE field on the AWARD INFORMATION tab in Share

VI.ii.2.5.b.Instructions for Preparing an Award That Withholds Compensation to Recoup Separation Benefits

 Follow the instructions in the VBMS Awards User Guide to prepare an award that withholds compensation to recoup separation benefits.

VI.ii.2.5.c.Preparing a Decision Notice After Commencing the Recoupment of Separation Benefits

 After taking award action to begin recouping a Veteran’s separation benefits, prepare a decision notice that informs the Veteran
  • of the pre-tax amount of the separation benefits
  • of the gross amount of the monthly award of compensation
  • of the amount of compensation VA is withholding for recoupment of separation benefits
  • of the net amount of the monthly award of compensation, if any, and
  • VA will continue withholding compensation until recoupment is complete.
Important:
  • If VA is withholding all of a Veteran’s compensation to recoup separation benefits, the decision notice must also inform the Veteran to notify VA of any address changes and that failure to do so could result in
    • a reduction or discontinuation of benefits, and/or
    • delayed or undeliverable future payments of compensation.
  • If a Veteran is already receiving compensation when VA learns recoupment of separation benefits is necessary, give the Veteran notice of proposed adverse action, as discussed in M21-1, Part X, Subpart ii, 3.A, before initiating recoupment.
Reference:  For more information on decision notice requirements, see M21-1, Part VI, Subpart i, 1.B.1.

6.Adjusting an Award From Which VA Withheld or Is Withholding Compensation

Introduction

 This topic contains information on adjusting an award from which VA is withholding compensation, including

Change Date

 March 25, 2013

VI.ii.2.6.a.Retroactive Adjustments That Require Special Handling

 Follow the instructions in the user guide titled How to Identify an Out-of-System Payment and Adjust Priors for an Audit Error Worksheet (AEW) if
  • VA completed recoupment of a Veteran’s separation benefits prior to the conversion of the award to VETSNET, and
  • a retroactive adjustment of the Veteran’s award from a date prior to completion of the recoupment is now necessary.

VI.ii.2.6.b.Adjusting an Award Based on a Reduction in the Combined Disability Rating

 If, while VA is withholding all of a Veteran’s compensation to recoup separation benefits, VA decides a decrease in the Veteran’s combined disability rating is in order, the provisions of 38 CFR 3.105(e) still apply. Even though the Veteran is not receiving compensation, VA must
  • send a notice of proposed adverse action to the Veteran, and
  • allow the Veteran 60 days to provide evidence showing why VA shouldn’t take the proposed action.
Reference:  For more information on notifying a Veteran of a proposed adverse action under 38 CFR 3.105(e), see M21-1, Part X, Subpart ii, 4.B.

VI.ii.2.6.c.Status of a Recoupment Balance When VA Stops Paying Compensation

 When VA stops paying a Veteran compensation from which it had been recouping separation benefits, any amount VA has not yet recouped
  • remains as a charge against any future award of compensation, and
  • is subject to recoupment from any future award of compensation.
Exception:  The principle set forth in this block does not apply when the Veteran dies before VA finishes recouping separation benefits.  The recoupment balance does not remain as a charge against survivors benefits VA subsequently pays based on the Veteran’s service.

7.Processing Requests for Adjustment of a Withholding Because of Extreme Financial Hardship

Introduction

 This topic contains information on processing requests for adjustment of a withholding because of extreme financial hardship, including

Change Date

 February 10, 2022

VI.ii.2.7.a.Processing Requests for Adjustment of a Withholding Because of Extreme Financial Hardship

 The table below contains instructions for processing a request that VA adjust the amount of a withholding (that is or VA has proposed to put in place to recoup separation benefits) because of extreme financial hardship. Notes:
  • There is no prescribed form for making the request referenced in this block.
  • VA will accept a request from a Veteran or a VA-recognized representative or fiduciary.
Step Action
1 Establish EP 290, Separation Pay Hardship Request.
2 If the Veteran received disability severance pay, go to the next step.  Otherwise, go to Step 4.
3
  • Notify the Veteran that the withholding associated with receipt of disability severance pay is not subject to reduction because of financial hardship.
  • Go to Step 10.
4 Is the amount or proposed amount of the withholding to recoup separation benefits less than the full amount of disability compensation to which the Veteran is otherwise entitled?
  • If yes, go to the next step.
  • If no, go to Step 6.
5
  • Notify the Veteran that VA may not reduce the amount of the withholding because VA is withholding less than the full amount of disability compensation to which the Veteran is entitled.
  • Go to Step 10.
6 Is the Veteran’s combined disability rating at least 30 percent?
  • If yes, go to Step 8.
  • If no, go to the next step.
7
  • Notify the Veteran that VA may not reduce the amount of the withholding because the combined disability rating is less than 30 percent.
  • Go to Step 10.
8 Is the Veteran experiencing extreme financial hardship, as discussed in M21-1, Part X, Subpart i, 1.3.a?
  • If yes,
    • append the Hardship flash to the Veteran’s record, and
    • go to Step 11.
  • If no, go to the next step.
Important:  The information VA Form 5655, Financial Status Report, requires for completion is essential in making the determination discussed in this step.
  • Unless the Veteran submitted the form (or the information the form requires) with the request, request its completion by the Veteran before making the determination discussed in this step.
  • If the Veteran fails to complete and return the form within 30 days, go to the next step.
9 Notify the Veteran that VA has rejected the request because the evidence of record does not show extreme financial hardship.
10 Clear the EP 290 and disregard the remaining steps in this table.
11
  • Prepare a request for an advisory opinion from Compensation Service in accordance with the template shown in M21-1, Part VI, Subpart ii, 2.7.b.
  • Route the advisory opinion request to Compensation Service as a request for an advisory opinion, according to the instructions in M21-1, Part X, Subpart v, 1.A.1.g.
  • Go to the next step after receiving a response from Compensation Service.
12 Did Compensation Service determine that a reduction in the amount of the withholding is in order?
  • If yes, go to Step 14.
  • If no, go to the next step.
13
  • Notify the Veteran that VA has rejected the request for a reduction in the amount of the withholding.  Include in the decision notice the reason Compensation Service provided for rejecting the request.
  • Follow the instructions in Step 10 of this table.
14 Is a withholding to recoup separation benefits already in place?
  • If yes, go to Step 16.
  • If no, go to the next step after the due process period has ended.
Note:  Follow the instructions in M21-1, Part X, Subpart ii, 3.B.3, if the Veteran requests a hearing during the due process period.
15 Does the evidence of record show the establishment of a withholding to recoup separation benefits is in order?
  • If yes, go to the next step.
  • If no,
    • notify the Veteran VA will not establish the withholding it proposed, and
    • take no further action.
16 Select the AWARD ADJUSTMENTS button on the RECORD DECISIONS screen.
17 Select the SEPARATION PAY tab.
18 Select Separation Pay from the SEPARATION PAY TYPE drop-down box.
Note:  The action described in this step causes the system to automatically populate the ORIGINAL BALANCE field with the after-tax amount of the Veteran’s separation benefit. 19 Enter the first day of the month following the current month in the AWD EFF DT field. Important:  The award adjustment referenced in this table must not result in a retroactive award of benefits to the Veteran. 20 Click on the DONE button. 21 Select the AWARD ADJUSTMENTS button on the RECORD DECISIONS screen. 22 Select OTHER ADJUSTMENTS on the AWARD ADJUSTMENTS screen. 23 Select Preserve Net Rate from the ADJUSTMENT REASON drop-down box. 24 Enter the amount of the adjustment in the ADJUSTMENT AMT field. Note:  The amount of the adjustment is typically the amount by which Compensation Service decided to reduce the withholding due to financial hardship. Example: Scenario:
  • VA is withholding all of a Veteran’s disability compensation to recoup separation benefits the Veteran received.
  • Because extreme financial hardship has been demonstrated, Compensation Service decides it is appropriate to pay the Veteran $100.00 of the compensation VA is currently withholding.
Action:  Enter 100.00 in the ADJUSTMENT AMT field. 24
  • Enter the first day of the month following the current month in the FROM DATE field.
  • Click on the DONE button.
Notes:  If multiple award lines must be changed, repeat the actions described in Steps 22 through 25. 25 Click on the GENERATE AWARD button. 26 Notify the Veteran of the action taken. Reference:  For more information on notifying beneficiaries of a VA decision, see M21-1, Part VI, Subpart i, 1.B.

VI.ii.2.7.b.Exhibit:  Template for Requesting an Advisory Opinion on Adjustment of a Separation Pay Withholding

 Below is the template that must be used when requesting Compensation Service provide an advisory opinion on an adjustment to the amount of a separation pay withholding based on extreme financial hardship.
DEPARTMENT OF VETERANS AFFAIRS [RO name] [RO address] [current date] Executive Director                                                                 In Reply Refer To: Compensation Service (214C)                                               [RO number] Department of Veterans Affairs                                             [File number] Central Office                                                                         [Veteran’s name] 810 Vermont Ave. NW Washington, DC 20420   SUBJECT:  Request for an Advisory Opinion on Separation Pay Recoupment FINANCIAL HARDSHIP EVIDENCE
  • Date VA Form 5655, Financial Status Report, or equivalent information received:
  • Other evidence of hardship (list source and date received):
INCOME AND EXPENSE INFORMATION
  • Monthly VA compensation (before Separation Pay Adjustment):
    • Current withholding amount, if applicable:
  • Other sources of income (wages, Social Security, retirement, etc.):
    • Total monthly net income:
    • Total monthly expenses:
    • Monthly discretionary income (total monthly net income less total monthly expenses):
    • Monthly amount Veteran indicates can be contributed towards separation pay recoupment:
SEPARATION PAYMENT INFORMATION
  • Type of separation payment received (noting that disability severance pay is not subject to reduction):
  • Date of separation payment:
  • Gross amount of separation pay:
  • Net amount of separation pay (gross amount less Federal income taxes):
  • Source of Confirmation of Separation Payment Information (VIS, AskDFAS, etc):
RECOMMENDATION:  [Provide a recommendation and/or comments regarding the adjustment amount to be applied toward recoupment of separation pay.]