ProFeds Founder, Chris Kowalik, compares Early Out offers, Cash Incentives, and Discontinued Service Retirements.
Key takeaways:
- Tools available to agencies during a Reduction-in-Force
- Explanation of the various programs and who qualifies
- What benefits employees can receive with each program
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Prefer to read instead? A Transcript of this Webinar is Below:
Originally released on 3/7/2025
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In good government fashion, the Reduction in Force is riddled with acronyms, whether it’s a VERA, the Voluntary Early Retirement Authority, the VSIP, the Voluntary Separation Incentive Program, or the DSR, the Discontinued Service Retirement, it is no wonder that federal employees are confused about what to expect in a RIF.
Reduction in Force – Comparing VERA vs. VSIP vs. DSR
Of course, these are all downsizing tools that the government has at their disposal to be able to utilize when they need to reduce the size of the government. There are a lot of similarities between these different tools, but there are plenty of differences as well and certainly better to know before you’re surprised.
Hi, I’m Chris Kowalik of ProFeds and welcome to the FedImpact Podcast where we offer candid insights on your federal retirement. You guys know this show is all about helping you to have a really clear understanding of how benefits work so you can make great decisions and live the retirement that you want, but boy, it’s awfully confusing these days.
VERA
Let’s start with the VERA. This is the Voluntary Early Retirement Authority, or the slang for it is taking an early out. Couple of things that we want to know here. The first is the V is for voluntary. You are simply given an offer by your agency in an attempt to identify the people who are happy to go if given the opportunity, and you will voluntarily accept this offer.
In order to do this, to even be given the offer, you will need to meet some age and service year requirements. You need to be at least age 50 with at least 20 years of service, or any age with 25 years. Now, oftentimes we get questions, does that include military service? And the answer’s yes, as long as you had five years of federal service, any military service that you buy back on top of that can certainly count to help you meet those rules.
Under a VERA or an early out, you’re going to get your pension right away. We have a whole video on how the pension is calculated, but just know that if you’re leaving five years earlier than you were originally supposed to, if you were going to be fully eligible, your pension is naturally going to be lower than what it would be had you kept working for another five years. But the formula is exactly the same.
If you take a VERA, there will be no severance pay that’s paid to you because severance pay is for involuntary separations and we’ve already determined that this is a purely voluntary early out that you would be taking. There’s a lot of confusion about this Special Retirement Supplement and how this works. Remember, this is the program that looks a lot like Social Security, but it’s paid prior to the age of 62.
Someone who goes out on a VERA, or an early out, is entitled to the supplement, but it will not start until that person has reached their minimum retirement age. If you are 50 and you take the VERA, your minimum retirement age would be 57.
For those seven years you will not get the Special Retirement Supplement, but starting at 57 all the way up until you turn 62, you will receive that. There may be a little bit of a delayed execution of the supplement, but you are entitled to receive it between your MRA and age 62.
FEHB
Next step is FEHB. Of course this is a big benefit that a lot of federal employees are concerned about with respect to keeping it in retirement. Couple of things that we need to know. For FEHB, there’s normally a five-year rule that you have to be enrolled in it on the day you retire and five years prior.
There is a special waiver available for employees who are going to take an early out under the VERA if they do not meet the five-year rule. But the rule still stands that you have to have already been enrolled in the FEHB plan before your agency got VERA authority.
It’s not like once you’re offered an early out you can enroll in FEHB and then be able to keep it. You had to have already been in it when you received the early out offer. It’s just that five-year rule that has the automatic waiver by OPM. If you take an early out, they will automatically grant the health benefits waiver to you if you don’t meet those five years.
FEGLI
Next step is FEGLI. This is the life insurance. You must be enrolled in FEGLI in any parts that you wish to keep on the day that you retire and five years prior. And there is no waiver whatsoever for life insurance. If you want to be able to keep it, you had to have met that rule.
TSP
Next up is the TSP. We have a whole video on the TSP where I’m going to go into finer detail on that, but you will have immediate access to your TSP. You might have some penalties associated with it based on your age, but I encourage you, go watch that video where I go into greater depth and I talk about some of the exceptions to penalties and all of that to make sure that you know you have that money available to you.
But just because it’s available to you doesn’t mean the IRS wants you to take it, and that’s where those penalties come into play. I mentioned the TSP in this particular section because I’ve received a number of inquiries from federal employees believing that if they took an early out, they did not have access to TSP even with penalty, they didn’t think they had access to TSP until they were 59 and a half, and that is not true and so want to make sure you know you have access to TSP. But go watch that video and we’ll get you spun up on all of those rules.
VSIP
The next tool that we’re going to talk about is the Voluntary Separation Incentive Payment, or VSIP. This would be casually known as a cash buyout where they’re just going to pay you some cash and get you to leave.
Again, the V in VSIP stands for voluntary. Very important that we realize this is purely voluntary to take this. You have to decide whether the cash buyout is worthwhile to you, and it very well may be. There are plenty of people who get a VSIP that were already planning to retire, and so they’re like, “Cool, I got some extra money.” But the VSIP is one of the ways that the government is seeking out people who are voluntarily willing to leave with just a little extra incentive.
There are some rules with respect to who can get VSIPs. One of them is that you had to have been a federal employee for three years. And there are plenty of other requirements. We’ll link to that in the show notes if you want to go take a peek at all the different rules.
But generally speaking, we’re looking at three years as a government employee. For most agencies, they are allowed to offer $25,000 in cash to incentivize employees to go ahead and leave. There are certain agencies, specifically the Department of Defense, that is allowed to offer up to 40,000.
There’s some talk of changing that amount to 40,000 across the board for all agencies, but as of right now, we’re still sitting at the 25,000 mark for most agencies. The VSIP can be done in connection with a Voluntary Early Retirement Authority, or the early out. It is quite possible that those two things happen at the same time, or they may be part of a layered approach that an agency takes to be able to try to incentivize people at different levels to be able to go.
But there is one thing that you will certainly not receive if you get a VSIP, and that is a severance package. Remember, the V in VSIP stands for voluntary. You’re getting the cash to voluntarily leave. Severance packages are reserved for those who are involuntarily separated. Definitely important that we realize that each have their qualities, but they’re very different in nature.
With respect to VSIP, you’re still allowed to keep your FEHB. You still have the five-year rule with respect to being enrolled for five years. You will get an automatic waiver for the five-year portion of that, but you’ll still need to have been enrolled in FEHB before the offer is given to you.
FEGLI
Next is the life insurance under FEGLI, same rules as before. There is a five-year rule and there are no waivers. If you have not held onto FEGLI for the five years immediately prior to your departure from federal government, you will not have the opportunity to keep that coverage in retirement.
You may be able to convert it to a private policy, there are some special exceptions there, but definitely important to think about. And then again, just like we did under the VERA, we’ll mention that the TSP will be available to you. You can see all those details in that video on the TSP to see when penalties may apply and when you can avoid them.
DSR
The last piece that we’re going to talk about is the Discontinued Service Retirement. This is the involuntary version of an early out. The government wants you to go ahead and go. Same rules. Age 50 with 20 years or any age with 25 will give you the check in the box that you are eligible for a Discontinued Service Retirement.
There are some rules with respect to other positions that may be available that your agency offers up to you, but we’re going to assume for purposes of this video that you’ve exhausted all of those other placement offers from the agency, and you are now being given the pink slip, so to speak, for exiting the federal government.
With a Discontinued Service Retirement, your pension will begin immediately. I can’t promise it will get to you right away. It’ll take a little bit of time to get some of those things sorted out, but it is considered an immediate pension.
And there is no severance if you take a Discontinued Service Retirement. I want to be very clear. Even though this is an involuntary removal from government service, you are receiving an immediate pension, and so no severance would be paid at that time.
The Special Retirement Supplement, just like we had for early outs, that is payable to those who take a Discontinued Service Retirement, and it is payable at the same timeline that we saw under the VERA. Once you reach your minimum retirement age, for most of you, it’s probably 56 to 57 at this point, you will have an opportunity to begin the Special Retirement Supplement at that time.
There may be a little bit of a delay of when that starts if you happen to be pretty young and taking that DSR, but you’ll have an opportunity certainly to begin it just like you would have had you been fully eligible at your minimum retirement age.
FEHB & FEGLI
Next up are FEHB and FEGLI, same kind of rules that we’ve talked about before. We still have the five-year rule for both plans, but for FEHB, there’s an automatic waiver if you take that Discontinued Service Retirement, which is a nice perk, if you will.
Say you just recently moved over to your own plan, you were under your spouse’s private sector plan and a few years ago you switched over to FEHB. Now you at least have an opportunity to carry that into retirement. And just like we have on the other two programs, the TSP will be available to you under the Discontinued Service Retirement. But check out that video to see all the details.
What happens if there are neither one of those three things that you’re able to do? You don’t get to 50 with 20 or any age with 25, so you’re not eligible for the VERA or the DSR, the early out or the Discontinued Service Retirement, and your agency simply doesn’t offer the VSIP. Then what? Well, what happens at that point is a pure layoff where there’s no cash incentive for you to voluntarily go and there’s no pension for you right away. A severance package would be created.
We have a whole video on the calculation of the severance package and how that works, but that’s certainly an element of the RIF and it’s an unfortunate part of the RIF process because those are people who just haven’t had an opportunity to stick around long enough to be able to earn some of the bigger benefits that they’re usually afforded.
A quick recap. VERA and VSIP are voluntary ways that the government’s going to try to encourage as many people to voluntarily leave the government service. And DSRs and severance packages are the other tools that are used in an involuntary manner to get people to go when the voluntary efforts have been exhausted.
Keep that in mind. There’s always a lot to think about. Some of you might say, “Listen, I’m not really interested in doing either one of those. I’d like to stick it out to get a full retirement, a normal full retirement like I had planned on.” And others of you are delighted that there’s now an opportunity to be able to go a little sooner. You can wrestle with that feeling all you want. But whatever you do, you need to know your numbers.
Get Connected & Next Steps
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