Separation Pay for Military Reserve Retirement
Separation pay is used by all branches of the military and is used for several different purposes. It can be used to reduce the size of a force that has grown too large or to limit the number of people with a particular skill that has become obsolete or overly-popular. Separation pay is essentially a buy-out – when someone accepts separation pay, it is as if all their military service is erased since they agree to forfeit all military benefits in return.
There are four basic types of separation pay. The most common type is a lump-sum payment called readjustment pay, also known as separation pay. To be eligible for readjustment pay, a service-member must complete at least six, but less than twenty, years of active duty service. Furthermore, he or she must have received an honorable discharge and have been involuntarily separated due to a reduction in force. Any service member accepting readjustment pay must also agree to serve at least three years in the reserve component.
A service-member can receive either half or full separation pay. Full separation pay is calculated by multiplying the years of active duty by one year of base pay, then multiplying the product by 0.1 ([years of active duty x one year base pay] x 0.1). Half separation pay is calculated by multiplying a service-member’s full separation pay by 0.5.
Another type of separation pay is voluntary separation incentive, or VSI, however the program stopped taking new applicants as of October 1, 2001. A service-member granted VSI will receive an annual payment of their separation pay. To be eligible for VSI, a service-member must have completed between six and 19 years of active duty service, with at least five years of continuous active duty service, and be in a rate or rank that has more people in it than are needed to maintain force readiness. If you take VSI, you must remain in a Reserve Component for the entire time you are receiving VSI payments unless you are involuntarily transferred to another status (Standby Reserve or Retired Reserve). VSI payments will stop if you do not maintain reserve status. VSI is available when the service-member requested separation from active duty, but he or she must be ineligible to receive any other form of separation pay.
VSI is calculated by multiplying the years of active duty service by one year of base pay, then multiplying the product by 0.025 ([years of active duty service x one year of base pay] x 0.025). This means that VSI is less profitable than readjustment separation.
The next type of separation pay is disability severance pay, also known as DSP. To be eligible for DSP, a service-member must be found unfit for duty because of an illness, injury, or disability, and have less than 20 years of active duty service. Unlike other forms of separation pay, there is no lower limit for the number of years on active duty service. Furthermore, he or she must have an overall IDES (VA) disability rating of less than 30%.
To calculate DSP, a service-member should multiply two months of base pay by his or her equivalent active duty, found by dividing his or her retirement points by 360 (two months base pay x [retirement points/360]).
Finally, the last type of separation pay is a one-time lump sum payment made on a member’s last day in the military known as special separation benefit, or SSB. Although SSB was discontinued on December 31, 2001, it still affects many veterans. To qualify for SSB, the veteran must have served for at least six years of active duty before December 1991, and have less than twenty years of total time spent on active duty. Furthermore, he or she must have at least five years if continuous active duty service immediately prior to his or her separation, and have been separated because they held a rank or position with more people than necessary.
Special Separations Benefit is calculated by multiplying on year of base pay by 0.15, and then multiplying the product by the veteran’s years of service ([one year base pay x 0.15] x years of service).
Service members should be aware that all types of separation payments are buy-outs of military service. Service-members who accept separation pay forfeit any rights to VA compensation or military retirement. If a veteran later decides to apply for either of these programs, the DOD and VA can force him or her to repay the entirety of their awarded separation pay. Although separation pay can be the right fit for some service-members faced with a discharge from the military, it is usually not the most profitable route to take when leaving the armed forces. We encourage you to contact the experienced attorneys at Citizen Soldier Law before making this important decision.