VSIP: Voluntary Separation Incentive Payment (Federal Buyout)
Understanding VSIP buyouts for federal employees. Learn about payment amounts, tax treatment, and when to accept a separation incentive.
Key Takeaways
- 1VSIP provides up to $25,000 lump sum payment
- 2Payment is taxable as regular income
- 3Must leave federal service to receive VSIP
- 4Can combine VSIP with VERA for early retirement
- 5Repayment required if you return to federal service within 5 years
- 6Not available to all employees - agency must offer
- 7Time-limited offers require quick decisions
What Is VSIP?
A Voluntary Separation Incentive Payment (VSIP) is a lump-sum payment to encourage federal employees to leave voluntarily during workforce restructuring.
- Also called a "buyout" or "separation incentive"
- Authorized by agency through OPM approval
- Employee must voluntarily separate or retire
- One-time lump sum payment
- Requires signed agreement with repayment clause
- Often offered alongside VERA for eligible employees
Voluntary but Time-Limited
VSIP offers are voluntary - you choose whether to accept. However, offers are typically open for only 30-60 days. Missing the deadline means missing the money.
VSIP Payment Amounts
The maximum VSIP payment is set by law at $25,000, but agencies may offer less.
| Factor | Details |
|---|---|
| Maximum amount | $25,000 (statutory cap) |
| Calculation | Severance pay formula OR agency-set amount |
| Severance formula | Basic pay × years of service (up to $25,000) |
| Minimum | No minimum - agency sets amount |
| Full-time vs part-time | Part-time employees may get prorated amount |
VSIP Calculation Example
If your agency uses the severance formula: $80,000 annual salary ÷ 52 = $1,538/week × 20 years = $30,769. However, the max is $25,000, so you'd receive $25,000.
VSIP Tax Treatment
VSIP payments are fully taxable as ordinary income in the year received.
- **Federal income tax**: Subject to normal tax rates
- **State income tax**: Taxable in most states
- **FICA taxes**: Subject to Social Security and Medicare tax
- **Withholding**: Agency withholds taxes from payment
- **Supplemental rate**: May be withheld at 22% federal flat rate
- **Not eligible for rollover**: Cannot go into IRA or TSP
Tax Planning
A $25,000 VSIP could push you into a higher tax bracket. If retiring in December, the payment is taxed that year. Consider timing carefully.
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Combining VSIP with VERA
When both are offered, combining VSIP and VERA provides the best outcome for eligible employees.
- **VERA benefit**: Retire early without annuity reduction
- **VSIP benefit**: Up to $25,000 lump sum
- **Combined**: Early retirement + cash bonus
- **FERS Supplement**: Still eligible with 20+ years
- **FEHB**: Keep health insurance if 5-year rule met
- **TSP**: Full access plus $25,000 cash
Ideal Combination
If you're offered both VERA and VSIP and were planning to retire soon anyway, this combination can be very attractive - full annuity plus a cash bonus.
When to Accept VSIP
Deciding whether to accept VSIP requires careful consideration of your situation.
- 1Are you eligible for VERA too? (If so, combine them)
- 2Were you planning to leave federal service anyway?
- 3Do you have another job lined up?
- 4Is a RIF likely if you don't accept?
- 5Can you afford to retire or find other work?
- 6What would you do with $25,000? (emergency fund, debt, invest)
- 7Will you need to return to federal work within 5 years?
Repayment Risk
If you accept VSIP and return to federal employment within 5 years (including contractor positions that become federal), you must repay the entire VSIP amount.
Using Your VSIP Payment Wisely
A $25,000 VSIP payment (after taxes, roughly $18,000-$20,000) can boost your retirement transition when invested wisely.
- After taxes, VSIP provides $18,000-$20,000 net
- Consider investing in diversified retirement assets
- TSP rollover to IRA provides more options
- Gold IRA offers inflation protection for retirement
- VSIP + TSP rollover can build substantial portfolio
- Augusta Precious Metals helps federal retirees with IRA strategies
Frequently Asked Questions
1Can I negotiate the VSIP amount?
No. VSIP amounts are set by the agency and apply equally to all employees in the covered positions. You cannot negotiate a higher amount.
2What if I take VSIP and then get rehired as a contractor?
Contractor positions don't require VSIP repayment. However, if that contractor position is later converted to federal, you would need to repay the VSIP.
3Is VSIP included in my high-3 salary calculation?
No. VSIP is a separation payment, not salary. It does not count toward your high-3 for FERS annuity calculation.
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