Is a buyout worth taking?

This column was originally published on Jeff Neal’s blog, ChiefHRO.com, and was republished here with permission from the author.

President Donald Trump’s budget proposals have a lot of federal workers talking about buyouts. I constantly hear people telling me they are praying for a buyout offer and will head for the door as soon as they can. Some of the comments I see on my blog, in emails from readers, and on sites such as Federal News Radio and Fedsmith say something similar. With so many people talking about buyouts, now is a good time to think about what taking a buyout really means.

How much is a buyout worth?

When Voluntary Separation Incentive Payments (VSIP) came into being in the Federal Workforce Restructuring Act of 1994, they were intended to help agencies reduce the federal workforce by 273,000 employees by the close of FY1999, while minimizing the need for reduction in force. It is hard to argue with the idea that having employees leave voluntarily with some cash is a much better alternative than booting people from their jobs. Buyout amounts were based on an employee’s severance pay eligibility or $25,000, whichever was less. Back then, buyouts were fairly generous. In 1994, the pay for an employee at GS-12, step 4, in the Washington, D.C. metro area was $46,202. A $25,000 buyout was 54 percent of that person’s annual pay. Fast forward to today and that GS-12 is making $87,693. The $25,000 buyout is only $28.5% of annual pay, making the relative value of a buyout about half of what it was in 1994. Congress recognized the problem and made a partial fix in the 2017 Defense Authorization Act, which raised the buyout cap to $40,000 for employees of the Department of Defense. Provisions of the 2016 Defense Authorization Act changed the RIF rules for Defense and made performance ratings the primary driver of RIF retention standing. Neither of those changes apply to the non-Defense workforce.

The amount of a buyout is the lesser of your severance pay allowance or $25,000. Computation of severance pay is covered by 5 CFR §550.707. It begins with calculating a basic allowance, then making adjustments based on age, premium pay, and other considerations. Here is what the regulation says:

(a) Basic severance pay allowance. Except as provided in paragraph (b) of this section, the basic severance pay allowance consists of the following:

1. One week of pay at the rate of basic pay for the position held by the employee at the time of separation for each full year of creditable service through 10 years;
2. Two weeks of pay at the rate of basic pay for the position held by the employee at the time of separation for each full year of creditable service beyond 10 years; and
3. Twenty-five percent of the otherwise applicable amount for each full 3 months of creditable service beyond the final full year.

(b) Basic severance pay allowance for employees with variable work schedules or rates of basic pay. In the following circumstances, the weekly rate of basic pay used in computing the basic severance pay allowance must be determined based on the weekly average for the last position held by the employee during the 26 biweekly pay periods immediately preceding separation, as follows:

• For positions in which the number of hours in the employee’s basic work schedule (excluding overtime hours) varies during the year because of part-time work requirements, compute the weekly average of those hours and multiply that average by the hourly rate of basic pay in effect at separation.

• For positions in which the rate of annual premium pay for standby duty regularly varies throughout the year, compute the average standby duty premium pay percentage and multiply that percentage by the weekly rate of basic pay (as defined in § 550.103) in effect at separation.

• For prevailing rate positions in which the amount of night shift differential pay under 5 U.S.C. 5343(f) varies from week to week under a regularly recurring cycle of work schedules, determine for each week in the averaging period the value of night shift differential pay expressed as a percentage of each week’s scheduled rate of pay (as defined in § 532.401 of this chapter), compute the weekly average percentage, and multiply that percentage by the weekly scheduled rate of pay in effect at separation.

• For positions with seasonal work requirements, compute the weekly average of hours in a pay status (excluding overtime hours) and multiply that average by the hourly rate of basic pay in effect at separation.

• For positions held by firefighters compensated under subpart M of this part, where the firefighter has a recurring cycle of variable workweeks within his or her regular tour of duty (as defined in § 550.1302), compute the weekly average of hours in the regular tour of duty and determine the weekly rate of basic pay based on the average workweek and the rate of basic pay in effect at separation.

(c) Age adjustment allowance. The basic severance pay allowance is augmented by an age adjustment allowance consisting of 2.5 percent of the basic severance pay allowance for each full 3 months of age over 40 years.

(d) Lifetime limitation. The severance pay fund is limited to that amount which would provide 52 weeks of severance pay (taking into account weeks of severance pay previously received, as provided in § 550.712).

For most employees at mid-career or later, the severance pay amount is more than $25,000, so the amount of a buyout is capped at that amount. Folks with only a few years of service may find that their buyout is much less than $25,000.

Am I eligible?

This is the government, so of course there are restrictions. First among them is that you have to have been continuously employed in the executive branch for at least 3 years. An employee who worked for 10 years, took a break, then returned 2 years ago is not eligible for a buyout. Other employees who are not eligible include reemployed annuitants, people who have taken a buyout in the past, employees who have received a relocation or recruitment bonus in the past 24 months, or those who have received student loan repayments in the most recent 36 months. OPM’s excellent Guide to Voluntary Separation Incentive Payments includes much more detail on who is eligible.

Is there any reason not to take a buyout?

Maybe. Let’s look at a few examples where taking the buyout may not be a good idea.

Severance pay is a better deal. Severance pay is often more than $25,000 and can be up to a full year of pay. If your severance eligibility is much more than $25,000 and you are very likely to be separated in a RIF, waiting to be separated can be a much better option. However, that option is not without risk. If you really want to leave, but a RIF does not happen, or you get a RIF offer of another job within two grades of your current grade level, you may miss the opportunity for a buyout and miss the severance pay too. If you become eligible for early or optional retirement before a RIF occurs, you lose your eligibility for severance pay. This is one of those situations where the payoff can be great, but there may be no payoff at all. Are you a gambler?

You want to stay in government. If you are not ready to leave federal employment, taking a buyout can be a bad idea. Employees who accept a buyout and return to the government within 5 years must repay the entire amount of the buyout. There is no pro-rated repayment, and the requirement is that you pay it all on the first day of reemployment. “All” means just what it says. If you received a $25,000 payment and paid $10,000 in taxes, you repay the entire $25,000, not just the $15,000 you got after taxes. There is a provision in the regulations that allows OPM to waive repayment of the buyout, but the requirements are very tight (you have to be the only qualified applicant) and no one should count on that being approved. If you take a buyout, plan on staying away for 5 years or writing a big check if you come back early.

Your severance pay eligibility is less than $25,000. For example, if you are a 27-year-old employee with 5 years of service, making $70,000 per year, your severance pay/buyout would be 5 weeks of pay — $6,730. If you do not have another job lined up and you need to work, taking a buyout and hoping for the best may not be wise.

Are there good reasons to accept a buyout?

For some folks, a buyout is a great option. If you are eligible for retirement and are ready to retire, the extra cash is a better going away gift than that plaque that will collect dust in your garage. Ready to retire is the key consideration here. I am always surprised by the number of people who think about retirement only near the end of their careers. The problem is more acute for folks who are combining a buyout with early retirement. Early retirees often have no idea what they are going to do in their post-retirement life. Do you have enough income so you do not have to get another job? If not, do you know what the job market is like? Can you realistically get a new job when you need it? If you know the answers to those questions and planned to retire soon anyway, taking the money and walking away can feel great.

People who do not like government work or simply are ready for a career change may also see a buyout as the nudge they need to take a chance on something else. As with retirees, you should have a good idea what you will do next. Many federal employees have significant skills that are very marketable, but others do work that does not translate well to the private sector. Do not assume you can walk out of a federal job and into something in the private sector that pays the same.

Is a better offer coming?

Probably not. In every cycle of government downsizing in the past 40 years, someone starts spreading the rumor that the law on early retirement will change and the age reduction penalty for early retirement will go away. Or that the buyout amount will increase. Or that some other unicorn will exist. The age reduction penalty is not going away. The buyout cap may increase (as it has for Defense), but it may not. If it does, there is no guarantee your agency will offer buyouts again. Deciding to leave a job is a big deal and the decision to do it should be based on reality rather than rumors.

Prepare before the offer is made

Whatever you may be thinking about buyouts, now is a good time to start thinking about your options and what you will do if your agency offers you a buyout. When agencies offer buyouts, the time allowed for considering your options and making a decision is limited. In many cases it is a quick turnaround, with employees being asked to make decisions within a few days or weeks. When there are more takers than an agency wants, some agencies decide which buyouts to approve based on which applications were received first. That means many people jump on the offer the day it is made. Agencies may want the employees who accept buyouts to be off the payroll quickly. If you want to be ready to respond quickly, it helps to know ahead of time what your decision will be.

Jeff Neal is a senior vice president for ICF and founder of the blog, ChiefHRO.com. Before coming to ICF, Neal was the chief human capital officer at the Homeland Security Department and the chief human resources officer at the Defense Logistics Agency.

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