Can a Voluntary Separation Incentive Payment (VSIP) Be More than $25,000? 

The Voluntary Separation Incentive Payment is a lump-sum payment made to eligible employees who choose to separate from federal service voluntarily. The amount of the incentive payment is typically based on the employee’s years of service and salary, with a maximum cap set by the Office of Personnel Management (OPM).

OPM Maximum for VSIP Set by Congress

In 1994, the VSIP limit was set at $25,000, but this amount is only for the VSIPs paid by the Office of Personnel Management (OPM). For the lump-sum incentive to be more than that, the employing agency must provide the additional amount, which is in turn must also be approved by OPM before it can be offered. While there have been reports that several employees across multiple agencies (including HHS and USPS) have been offered a VSIP of $25,000 or less, only the SEC (Securities and Exchange Commission) is known to have OPM approval to offer payments higher than that, as much as $50,000. Earlier in the year, employees at the FCC were offered “early out” retirements through VERA, which allowed younger individuals to be eligible for retirement,  but there was no VSIP offered. 

Eligible for Early Retirement Under VERA, Also Eligible for the VSIP? 

The following conditions must apply to your situation if you want to be eligible for a VSIP: 

• Serving position without time limit
• Employed for at least three continuous years
• Serving in a position identified by agency as eligible for VSIP offer
• VSIP has been applied for and agency has approved lump sum amount
• Not an annuitant in reemployment phase (phased retirement)
• Not eligible for a disability retirement
• No prior VSIPs received from U.S. federal government
• During 36-month period before VSIP, no student loan repayment benefit received
• During 24-month period preceding VSIP offer, no recruitment or relocation bonus was received
• During 12-month period preceding VSIP, no retention bonus was received

VERA: Are Your Eligible for this Program?

Determining eligibility for early retirement under VERA involves assessing several criteria, including age, years of service, and the agency’s VERA plan. Employees need to be at least 50 years old with 20 years of service, or any age with 25 years of service, to qualify for an “early-out” through VERA. Normally, FERS employees aren’t eligible for retirement until they reach their minimum retirement age (MRA, between 55 and 57) with at least 30 years. The agency’s VERA plan will outline specific eligibility requirements, answering the question “is my position covered”? and the process for applying. Employees should review their service records and consult with their agency’s human resources department to confirm their eligibility for early retirement.

Can You Apply for a VSIP if You Have a Notice of Involuntary Separation?

Receiving a notice of involuntary separation does not automatically disqualify an employee from applying for a VSIP. However, the circumstances surrounding the notice, such as whether it is due to misconduct, can affect eligibility. Employees who receive a notice of involuntary separation for reasons other than misconduct may still be eligible for VSIP, depending on their agency’s policies. If the amount of severance pay available to feds is less than the offered incentive for optional retirement, then taking the VSIP and retiring instead of tendering resignation from the employing federal agency is probably the smarter choice. 

Talk with a Fed-Expert Financial Planner. 

What are the Financial Implications of Taking a VSIP?

How is the Lump-Sum Payment Calculated?

The calculation for an employee’s VSIP is based on their salary and years of service, with a maximum limit set by the OPM. The calculation typically involves multiplying the employee’s basic pay by a factor determined by their years of service. Employees can use a VSIP calculator provided by their agency to estimate their potential payment. It is important to note that the lump-sum payment is subject to federal income tax, along with possible state and local taxes, which can affect the net amount received.

Try our Federal Retirement Calculator and estimate your FERS retirement income amount. 

What are the Tax Implications of Receiving a VSIP?

Receiving a VSIP has several tax implications, as the lump-sum payment is considered taxable income. Employees will need to report the payment on their federal income tax return and may be subject to withholding taxes. Depending on the amount of the payment and the employee’s overall income, the VSIP could impact their tax bracket and liability. Employees should consult with a tax advisor to understand the full implications and plan accordingly.

Is Repayment Required if You Return to Federal Service?

If an employee who has received a VSIP returns to federal service 5 years, they will be required to repay the incentive payment. This repayment requirement is intended to prevent employees from taking advantage of the program and then returning to federal employment shortly thereafter. Employees considering a return to federal service should be aware of this obligation and factor it into their decision-making process.

Frequently Asked Questions about VSIP

Can You Take a VSIP and Still Receive Severance Pay?

No. Those who accept a VSIP are not eligible to receive severance pay, as the VSIP serves as an alternative to severance. The VSIP is designed to provide a financial incentive for voluntary separation, whereas severance pay is typically offered in cases of involuntary separation. Employees should carefully review their agency’s policies and consult with human resources to understand the implications of accepting a VSIP. A discontinued service retirement might be an option for those who were involuntarily separated from their federal job so long as it wasn’t an involuntary separation for misconduct. 

What Happens if You Change Your Mind After Accepting a VSIP?

Once an employee accepts a VSIP and the separation date or retirement date is finalized, it is generally difficult to rescind the decision. Agencies may have specific policies regarding changes to VSIP agreements, but these are typically limited to exceptional circumstances. Employees should thoroughly consider their decision before accepting a VSIP, as reversing the process can be challenging and may not be permitted.

How Does Taking a VSIP Affect Social Security and Medicare?

Taking a VSIP can affect an employee’s Social Security and Medicare benefits, particularly if they choose to retire early. The reduction in years of service and potential changes in income can impact the calculation of Social Security benefits. Additionally, employees who retire before reaching Medicare eligibility age may need to secure alternative health insurance coverage. It is important for employees to evaluate how a VSIP will affect their long-term financial and healthcare plans. Although the FERS supplement to Social Security is available to those who retire early under VERA, they will not receive it until reaching their MRA.