Recoupment of Separation Benefits

Overview

In This Section

This section contains the following topics:

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1. General Information About Separation Benefits

Introduction

This topic contains general information about separation benefits, including

• prohibition against the duplication of benefits
• determining whether a Veteran received separation benefits
• how VA updates its systems of record with a Veteran’s service information
• determining whether VA has already recouped separation benefits a Veteran received
• readjustment pay under former
• 10 U.S.C. 3814a, and
• 10 U.S.C. 687
• effect of Public Law (PL) 87-509 on readjustment pay
• non-disability severance pay
• separation pay under 10 U.S.C. 1174
• Reservists’ Involuntary Separation Pay (RISP) and Reservists’ Special Separation Pay (RSSP)
• Special Separation Benefit (SSB) and Voluntary Separation Incentive (VSI)
• differences between SSB and VSI
• Department of War's (DOW’s) responsibility for adjusting VSI
• indicators on DD Form 214, Certificate of Uniformed Service, of a Veteran’s Receipt of SSB or VSI
• VSP
• indicators on DD Form 214 of a Veteran’s receipt of VSP, and
• Voluntary Retirement Incentive (VRI).

Change Date

September 2, 2026

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 War (DOW), 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

• readjustment pay under former 10 U.S.C. 3814a, see M21-1, Part VI, Subpart ii, 2.1.e
• readjustment pay under former 10 U.S.C. 687, see M21-1, Part VI, Subpart ii, 2.1.f
• non-disability severance pay, see M21-1, Part Part VI, Subpart ii, 2.1.h
• separation pay under 10 U.S.C. 1174, see M21-1, Part VI, Subpart ii, 2.1.i
• RISP and reservists’ special separation pay (RSSP), see M21-1, Part VI, Subpart ii, 2.1.j
• SSB and Voluntary Separation Incentive (VSI), see M21-1, Part VI, Subpart ii, 2.1.k - n
• VSP, see M21-1, Part VI, Subpart ii, 2.1.o and p
• Voluntary Retirement Incentive (VRI), see M21-1, Part VI, Subpart ii, 2.1.q, and
• disability severance pay, see M21-1, Part VI, Subpart ii, 2.3.

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

Use the table below to identify sources that will typically reveal whether a Veteran received separation benefits and, if the source identifies the amount of the separation benefit, whether that amount is verified.

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Notes:

• If it is unclear whether a Veteran received separation benefits, follow the instructions in M21-1, Part VI, Subpart ii, 2.2.b.
• Use the separation code, narrative reason, and remarks on a Veteran’s DD Form 214 to assist in determining if a Veteran is eligible for separation benefits.

References: For more information on using

• Share, see the Share Online Help
• VBMS-A, see the VBMS Awards User Guide
• VBMS Core, see the VBMS Core User Guide, and
• VIS, see the VIS User Guide.

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

DOW transmits service information electronically to VA after a service department discharges a service member from active duty. The systems referenced in M21-1, Part VI, Subpart ii, 2.1.b, are updated with relevant discharge information.

Exception: If a Veteran received a type of separation benefit that VA is not responsible for recouping, the amount of this benefit is not captured.

Reference: For more information on the electronic transfer of military service information from DOW to VA, see M21-1, Part III, Subpart i, 1.B.3.

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, or by reviewing the MILITARY PAYMENT DATA tab under the VETERAN – FINANCIAL INFORMATION screen in VBMS) 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 the amounts 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 or VBMS.

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 or by reviewing the HISTORICAL INFORMATION page in VBMS Core. 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 Online Help
• VBMS Core, see the VBMS Core 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

• determining whether VA must recoup readjustment pay, see M21-1, Part VI, Subpart ii, 2.2.d, and
• the effect of Public Law (PL) 87-509 on readjustment pay under former 10 U.S.C. 3814a, see M21-1, Part VI, Subpart ii, 2.1.g.

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,
• notify the Veteran of the evidence necessary to establish eligibility in accordance with 38 CFR 3.159(b), and
• develop for the evidence in accordance with
• M21-1, Part III, Subpart i, 2.C, and
• 38 CFR 3.159(c).

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

DOW 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 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

• VAOPGCPREC 12-1996, and
• M21-1, Part VI, Subpart ii, 2.2.d.

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 DOW 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 DOW pays SSB and VSI.

Scroll sideways to see the full table.

Reference: For more information on DOW’s responsibility for adjusting VSI, see M21-1, Part VI, Subpart ii, 2.1.m.

VI.ii.2.1.m. DOW’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, DOW reduces VSI to offset the amount of VA compensation. DOW 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 DOW, 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.

Scroll sideways to see the full table.

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 DOW 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.

Scroll sideways to see the full table.

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 DOW 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

• general information about recouping separation benefits
• verifying the amount of the separation benefit
• conditions under which claims processors may not use AskDFAS to obtain confirmation of the amount of a Veteran’s separation benefit
• determining whether and how much to recoup
• exceptions to policies for recouping separation benefits
• service departments’ practice of withholding Federal income tax
• calculating the after-tax amount of separation benefits
• handling separation benefits when compensation becomes greater than pension
• recouping separation benefits after a Veteran becomes entitled to military retired pay (MRP)
• adjusting the amount of compensation VA is withholding, and
• recouping separation benefits (other than disability severance pay) from a Veteran with multiple periods of service.

Change Date

September 2, 2026

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
• 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.c, then begin the withholding for separation benefits effective the retired pay cutoff date.)

Note: VA may not apportion any disability compensation it is withholding for the recoupment of separation benefits except when the apportionment is due to incarceration of the Veteran. In the case of incarceration following conviction for a felony, the withholding will be discontinued, and benefits will be payable to the apportionee, in accordance with M21-1, Part VI, Subpart iv, 2.A.5.

References: For more information on

• the circumstances under which VA might withhold less than all of a Veteran’s monthly compensation, see
• M21-1, Part VI, Subpart ii, 2.2.k
• M21-1, Part VI, Subpart ii, 2.3 (disability severance pay)
• M21-1, Part VI, Subpart ii, 2.4 (VSP awarded to Air Force, Navy, and Marine Corps Veterans), and
• M21-1, Part VI, Subpart ii, 2.7 (extreme financial hardship)
• compensation payable for disabilities incurred after receipt of separation benefits, see M21-1, Part VI, Subpart ii, 2.2.k
• handling an apportionment claim when VA is withholding a Veteran’s monthly compensation to recoup separation benefits, see M21-1, Part VI, Subpart iv, 2.A.5
• recoupment of separation benefits and/or payment of apportionments during incarceration, see M21-1, Part VI, Subpart iv, 1.A.4.c, and
• the recoupment of separation benefits after a Veteran becomes entitled to MRP, see M21-1, Part VI, Subpart ii, 2.2.i.

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

Follow the instructions in the table below to verify the amount of the separation benefit a Veteran received.

Scroll sideways to see the full table.

References: For more information on

• requesting access to VIS, see the Veterans Information Portal (VIP) VIS Access Procedure and User Guide
• using VIS, see the VIS User Guide, and
• using AskDFAS, see the AskDFAS User Guide.

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.

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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.

Scroll sideways to see the full table.

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

• separation benefits, in general, see 38 CFR 3.700(a), and
• disability severance pay, see M21-1, Part VI, Subpart ii, 2.3.

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.

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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, DOW’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.

Scroll sideways to see the full table.

Notes:

• There is no need to make the calculations described in this block when
• VIS is used 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.

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.

Scroll sideways to see the full table.

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.

Scroll sideways to see the full table.

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

• contacting an RPC, see M21-1, Part VI, Subpart ii, 4.C.2.f
• establishing system diaries, see the VBMS Awards User Guide, and
• the recoupment of separation benefits when a Veteran has multiple periods of service, see M21-1, Part VI, Subpart ii, 2.2.k.

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 CURRENT AND HISTORICAL AWARD INFORMATION page in VBMS.

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 CURRENT AND HISTORICAL AWARD INFORMATION page in VBMS.

Reference: For more information on the rating activity’s responsibility to identify the period of service during which a service-connected (SC) disability was incurred, 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

• identifying severance-pay disability(ies) using the Physical Evaluation Board (PEB) report
• general policies regarding withholdings to recoup disability severance pay
• definition of initial, compensable disability rating
• handling reduced disability ratings and disability severance pay
• disability severance pay for disabilities incurred in a combat zone or during combat-related operations
• determining whether a disability was incurred in a combat zone or during combat-related operations
• withholding compensation when the Veteran did not receive severance pay for all SC disabilities
• example of the assignment of a 100-percent disability rating to a non-severance-pay disability
• withholding an amount that is most advantageous to the Veteran, and
• changes in the disability ratings of multiple severance-pay disabilities.

Change Date

September 2, 2026

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.

Scroll sideways to see the full table.

References: For more information on using

• STR Assist, see the VBMS User Guide, and
• DPRIS, see the DPRIS User Guide. (Registration is required.)

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 under 38 CFR 3.324, no withholding is necessary for these disabilities until VA assigns a compensable rating to one or more of the disabilities, 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.

Scroll sideways to see the full table.

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, 2021. The Veteran filed a higher-level review 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 CURRENT AND HISTORICAL AWARD INFORMATION page in VBMS.

References: For more information on

• handling withholdings when the initial disability rating is 100 percent under 38 CFR 4.28, 4.29, or 4.30, see M21-1, Part VI, Subpart ii, 2.3.b, and
• CUEs, see M21-1, Part X, Subpart ii, 5.A.

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, 2020.
• 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 2022 and concurrently reduces the amount of compensation it is withholding to correspond with the new rating.
• In August 2024, 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 iv, 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
• DOW 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.
• DOW – 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 DOW 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 War (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 War (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, 2024, 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.

Scroll sideways to see the full table.

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.

Scroll sideways to see the full table.

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 CURRENT AND HISTORICAL AWARD INFORMATION page in VBMS. 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, Navy, and Marine Corps Veterans, including

• history behind the current
• Air Force recoupment schedule for VSP, and
• Navy and Marine Corps recoupment schedule for VSP
• instructions for preparing an award that recoups VSP, and
• recoupment of VSP from an incarcerated Air Force, Navy, or Marine Corps Veteran’s compensation.

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.

Scroll sideways to see the full table.

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.

Scroll sideways to see the full table.

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.

Scroll sideways to see the full table.

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 iv, 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

• determining the appropriate effective date for commencing the recoupment of separation benefits, and
• preparing a decision notice after commencing the recoupment of separation benefits.

Change Date

September 2, 2026

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.

Scroll sideways to see the full table.

Reference: For more information on preparing an award that withholds compensation to recoup separation benefits, see the VBMS Awards User Guide.

VI.ii.2.5.b. 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

• retroactive adjustments that require special handling
• adjusting an award based on a reduction in the combined disability rating, and
• status of a recoupment balance when VA stops paying compensation.

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 and Adjustments of a Withholding Because of Extreme Financial Hardship

Introduction

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

• processing requests for adjustment of a withholding because of extreme financial hardship
• processing an award when an adjustment of withholding due to extreme financial hardship is in effect, and
• exhibit of the template for requesting an advisory opinion on adjustment of a separation pay withholding.

Change Date

September 2, 2026

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.

Scroll sideways to see the full table.

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. Processing an Award When an Adjustment of Withholding Due to Extreme Financial Hardship Is in Effect

Use the table below to determine the proper withholding when processing an award that results in the monthly compensation amount increasing or reducing, and an adjustment of separation pay withholding due to extreme financial hardship is in effect.

Scroll sideways to see the full table.

Important: When processing a proposed reduction, the rates described in the table above must be accurately reflected in the notice of proposed adverse action.

References: For more information on

• notice of proposed adverse action, see M21-1, Part X, Subpart ii, 3.A, and
• preparing a decision notice, see M21-1, Part VI, Subpart i, 1.B.

VI.ii.2.7.c. 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.]