Federal severance pay and your TSP after a layoff

Severance is for the involuntary exit that does not end in a retirement. It takes a covered agency, a qualifying appointment, and a regularly scheduled tour of duty. You also need 12 months of continuous service, and a separation that is not for unacceptable performance or conduct.

The 12-month clock is stricter than it looks. Your continuous service can span several positions, but it cannot contain a single break of more than three calendar days. That is the same three-day threshold that governs your leave date and your insurance, now appearing in a third rulebook.

A resignation can still count as involuntary. Resign after a specific written notice of separation and severance survives. So does a resignation after a general reduction-in-force notice that meets several conditions of its own.

That path has a trapdoor. If the notice is cancelled before your separation takes effect, the resignation reverts to voluntary and the severance goes with it.

This is the rule that surprises people who assume a layoff means both a pension and a payout. An employee is ineligible for severance if they are eligible upon separation for an immediate annuity from a federal civilian retirement system or the uniformed services.

Read the word eligible carefully. The test is whether you qualify for the annuity, not whether you claim it. You cannot decline a Discontinued Service Retirement in order to take the severance instead.

So the two benefits sort people rather than stack. Clear the DSR bars, age 50 with 20 years of service or any age with 25, and you get an immediate annuity for life. Fall short of them and severance is the benefit that catches you.

A military retirement can trigger the same exclusion, which catches people who never think of it as a federal annuity. If you are drawing or eligible for one, raise it with your HR office rather than assuming severance is coming.

Severance is counted in weeks of your basic pay, and it comes in two parts. The basic allowance pays one week for each full year of service through 10 years, then two weeks for each year beyond 10. Leftover months count too, at a quarter of the applicable rate per full three months.

Age then multiplies that total. If you are over 40, the age adjustment adds 2.5 percent of the basic allowance for every full three months of age past your fortieth birthday.

OPM publishes a worked example. Take Dana, earning an example $1,500 a week, with 20 years and 4 months of service, aged 45 years and 8 months. Her basic allowance is $45,750, and the age adjustment adds $25,162.50, for a fund of $70,912.50.

That is 47.275 weeks of pay, which brushes against the ceiling. An employee may not receive more than 52 weeks of severance pay in their lifetime, so a long-serving employee over 40 can reach the cap and stop there. Figures here are OPM's illustration; see our assumptions for the values our calculator uses.

Not as a cheque on your last day, which is the assumption that wrecks budgets. Severance accrues day by day, and payments are made at the same pay period intervals your salary would have been paid. The money arrives on the old rhythm without the old job.

Tax comes out along the way. Severance payments are subject to income and Social Security tax withholding, so the weeks you were counting are worth less in hand than the fund total suggests.

The payments run until the fund is exhausted and then stop. There is no residual, no lump-sum settlement of the balance, and no option to accelerate it.

This shapes the gap between jobs more than the headline number does. A fund worth 47 weeks pays out across roughly 47 weeks, so it behaves like a temporary salary rather than a cushion you can deploy at once.

Taking another federal job ends the payments. If you accept a position with the federal government or the District of Columbia government, severance terminates, and your agency records how many weeks you actually received.

One kind of appointment pauses rather than ends it. A nonqualifying time-limited appointment suspends severance for the life of that appointment, and the payments resume without being recomputed when it ends.

The weeks you used follow you for the rest of your career. Become entitled again later and the new allowance is recomputed on all your creditable service and your current age. It is then reduced by the weeks you already drew.

That makes the 52-week ceiling a lifetime running total rather than a per-layoff allowance. Someone separated twice over a long career does not start fresh the second time.

A layoff hits the TSP differently from a retirement, and the difference is your age. Most people separated before retirement eligibility are under 55, which means the exception that lets federal retirees take penalty-free withdrawals does not reach them. Withdrawals carry the 10 percent early penalty on top of tax.

An outstanding TSP loan is the urgent item. The repayment clock starts at separation and runs 90 days, and an unpaid balance is declared a taxable distribution after that. The deadline arrives while severance is trickling in and no salary is.

Your account itself is not going anywhere. You can leave the balance in the TSP after you separate, which preserves the low costs and the G Fund, and decide about a rollover once the dust settles.

One decision does not belong in this window at all. Cashing out your FERS contributions is a separate question with permanent consequences, covered in taking a FERS refund. To see where a separation leaves your overall plan, run your free readiness score.