Separation Pay & VA Disability Compensation

I received a letter saying that separation pay will soon be deducted from my VA disability compensation. Can VA really do this?

Unfortunately, in most cases the answer is ‘yes.’ VA is legally required to withhold your disability compensation pay if you received separation pay when you separated from the military and then were later awarded disability compensation. This includes involuntary or voluntary separation pay, severance pay, and what was formerly called “readjustment pay” (now included under severance pay). There are some exceptions to this rule for Disability Severance Pay (“DSP”) (see questions below). VA uses the term recoupment to describe this process of deducting separation pay from other benefits (like disability compensation or retirement pay).

Does VA recoup my separation pay based on the pre– tax amount or after-tax amount?

While disability pay is tax-free, separation or severance pay requires the veteran to pay federal taxes on the amount received. In general, VA will only recoup the after-tax amount from your disability payments. That is, VA will deduct from your disability pay the amount of separation pay left over after federal taxes (usually 25% of the payment) have been paid. This way, VA will not withhold beyond the amount of money that you actually received at separation.

This is not true for the recoupment of all types of separation pay during all time periods. To make sure it’s true for your situation, see the chart below.

When can VA recoup my separation or severance pay? And how much?

Different types of separation pay have different rules for recoupment. Additionally, the laws around separation and severance pay recoupment have changed over the years, leading to different rules for veterans who 1) received separation pay before/after a certain time period, or 2) were granted service connection for disability compensation before/after a certain time period.

This chart from the VA’s procedure manual (the M21) can help clarify whether your pay will be recouped (usually it will) and whether VA will recoup the pre-tax or after-tax amount from your disability compensation.

I served in a combat zone and got Disability Severance Pay. Will VA recoup my DSP?

It depends on when you were separated from service. Thanks to the passage of a Public Law on the issue, VA is not allowed to recoup disability severance pay from VA disability compensation if you…

• Separated from service on or after January 28, 2008, and
• Incurred the disability for which you received the disability severance pay in the line of duty in a combat zone or during combat-related operations.

Meeting the second requirement requires official recognition that you were in a combat zone and were harmed in an armed conflict. DoD (not VA) decides whether a disability was incurred in the line of duty in a combat zone or during combat-related operations. This information is usually included in the decision letter regarding your disability severance pay.

I have multiple service-connected disabilities, but I only received Disability Severance Pay for one? How much will VA recoup?

When you receive disability severance pay, DoD will specify which disability (or disabilities) the disability severance pay is intended to cover. If you are later granted service connection for disabilities that are not related to your disability severance pay, VA is not allowed to withhold more than the amount to which you are entitled based on the non-severance-pay disability/disabilities. Essentially, VA can’t recoup the disability severance pay from the money you get for disabilities that were service connected after separation.

Can I get a waiver for the recoupment (like I can with debt owed to VA)?

Unfortunately, VA debt is different from VA recoupment and VA will not consider waivers for separation pay recoupment.