H.R. 7256, Federal Workforce Early Separation Incentives Act of 2026

Bill Summary

H.R. 7256 would permanently increase the limit on voluntary separation incentive payments (VSIPs) to six months of a recipient’s pay at the rate in effect immediately before separation.

Estimated Federal Cost

The estimated budgetary effects of H.R. 7256 are shown in Table 1. The effects of the legislation on direct spending fall within budget functions 550 (health) and 600 (income security). The effects of the legislation on spending subject to appropriation would likely fall within many functions, depending on which agencies offer VSIPs. Historically, about 60 percent of VSIPs have involved employees of the Department of Defense (budget function 050).

Basis of Estimate

For this estimate, CBO assumes that H.R. 7256 will be enacted near the end of fiscal year 2026.

Background

Under current law, federal agencies can offer employees an incentive payment to voluntarily separate from federal service. The limit on those payments, known as VSIPs, is $25,000 or the amount an employee would receive under the severance pay formula, whichever is less. Using information from the Office of Personnel Management (OPM) and Department of Defense (DoD), CBO estimates that 1,800 employees would accept VSIPs each year under current law.

If they are eligible to do so, some employees who accept VSIPs choose to retire from federal service. When that happens, they may continue to participate in the Federal Employees Health Benefits (FEHB) program, which provides health insurance coverage to federal employees and retirees. The federal government pays a portion of the FEHB premiums. For retired employees, those payments are classified as direct spending. For current employees, those payments are classified as discretionary spending.

Direct Spending

H.R. 7256 would increase the maximum amount that federal agencies can pay employees to voluntarily leave the workforce. In CBO’s estimation, that increase would induce an additional 1,300 employees to accept VSIPs each year. Of those, about half would choose to retire, CBO estimates, and about 70 percent of those who choose to retire would elect to continue participating in FEHB. Those additional retirements would increase direct spending outlays for retirement annuities and health insurance premiums for retired federal employees. In total, CBO estimates that enacting H.R. 7256 would increase direct spending by $393 million over the 2026-2036 period.

Federal Retirement Annuities. CBO estimates that the larger VSIPs offered under H.R. 7256 would incentivize some employees to retire an average of one and a half years earlier than they would have under current law. On the basis of information from OPM and DoD, CBO estimates that, in each year from 2027 to 2036, 650 employees would retire and begin receiving their annuity earlier.

Because they would be based on fewer years of service, the annuities of people who accept the VSIPs and subsequently retire would be smaller than they would be otherwise. The size of the annuity reduction would depend on several factors including an individual’s salary at retirement, the retirement system under which they are covered, and how much earlier they retired as a result of the bill. Because those annuities would begin sooner, the net effect of those early retirements would increase direct spending for retirement annuities by $287 million over the 2026‑2036 period, CBO estimates.

Federal Share of Retiree FEHB Premiums. The earlier retirements resulting from H.R. 7256 would also increase the federal government’s contributions for annuitants’ health insurance premiums under the FEHB program. In CBO’s projections, the government’s share of those premiums for each retiree averages about $12,000 in 2026, rising to about $19,000 in 2036. CBO estimates that paying those premiums for, on average, one and a half more years than under current law would increase direct spending by $106 million over the 2026-2036 period.

Spending Subject to Appropriation

H.R. 7256 would permanently increase the maximum value of lump-sum payments that federal agencies can offer to employees as an incentive to separate voluntarily from federal service. Those VSIPs are paid from agencies’ discretionary appropriations. The proposed change would increase the cost of voluntary separations that would have occurred under current law and would also increase the number of people who choose to voluntarily separate from federal service. CBO estimates that implementing H.R. 7256 would increase the cost of VSIPs by $1.6 billion over the 2026-2036 period, assuming appropriation of the estimated amounts.

Using information from DoD and OPM about the historical number of VSIPs, CBO estimates that under current law about 1,800 employees will receive a VSIP each year. CBO expects that employees who would otherwise have received a VSIP under current law would see their payments under H.R. 7256 increase by roughly $33,000 in 2027 to $51,000 in 2036, following projected growth in federal salaries. The incremental increase in VSIPs for employees who would have separated under current law would cost $749 million over the 2026‑2036 period.

Further, CBO estimates that larger VSIPs under H.R. 7256 would induce about 1,300 additional employees to separate from the federal workforce each year. The amounts paid to those people would range from about $58,000 in 2027 to $76,000 in 2036. In total, those additional payments would cost $866 million over the 2026-2036 period. (Some of the additional separations would likely be retirements; the cost of those earlier retirements are discussed under the “Direct Spending” heading.)

Increasing the number of people who separate from federal service could have other effects on personnel costs. For example, if an agency hired lower paid employees to replace those who separated, it might save on personnel costs, even after considering the costs of hiring and training those new employees. Those potential savings could be offset by other personnel decisions, such as promoting current employees into vacated, higher-paying positions; hiring additional people to fill agency needs in other areas; or providing bonuses to high-performing employees.

Without a reduction in the amount of work required, CBO assumes agencies would reallocate any resources made available by reducing their workforce to support other activities and to comply with their missions rather than allow those resources to lapse. Therefore, CBO does not estimate any changes in spending subject to appropriation resulting from other personnel decisions that may stem from the increase in voluntary separations.

Uncertainty

This estimate is subject to considerable uncertainty. A primary source of uncertainty is how agencies and employees would respond to the increase in the maximum payout for VSIPs. In particular, the extent to which agencies would use VSIPs to restructure their workforces is unknown. In addition, CBO cannot precisely estimate the share of employees who would accept agencies’ offers, which would depend on a range of factors affecting individuals’ retirement decisions.

The estimate is also uncertain because of federal hiring policies. As required by law, when constructing its baseline budget projections, CBO adjusts current law funding for salaries and expenses for inflation, which implicitly assumes the number of federal employees remains the same over the projection period. However, several recent actions by the Administration have limited hiring. To the extent that those actions result in reduced hiring, increased attrition, and a smaller federal workforce overall, the budgetary effects of H.R. 7256 could differ. Agencies could realize savings in their spending subject to appropriation because of lower spending on salaries and benefits, including for health insurance premiums and retirement contributions. Such changes also could affect federal revenues because a smaller federal workforce may result in lower employee retirement contributions, which are classified as revenues. Such effects depend on future administrative actions and thus CBO does not estimate them.

Pay-As-You-Go Considerations

The Statutory Pay-As-You-Go Act of 2010 establishes budget-reporting and enforcement procedures for legislation affecting direct spending or revenues. The net changes in outlays that are subject to those pay-as-you-go procedures are shown in Table 2.

Increase in Long-Term Net Direct Spending and Deficits

CBO estimates that enacting H.R. 7256 would not increase net direct spending by more than $2.5 billion in any of the four consecutive 10-year periods beginning in 2037.

CBO estimates that enacting H.R. 7256 would not increase on‑budget deficits by more than $5 billion in any of the four consecutive 10-year periods beginning in 2037.

Mandates

The bill contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act.

Estimate Prepared By

Federal Costs:

Breanna Browne-Pike (federal pay, civil service retirement) 
Dawn Sauter Regan (military and civilian personnel)

Mandates: Andrew Laughlin

Estimate Reviewed By

Barry Blom
Chief, Projections Unit

David Newman
Chief, Defense, International Affairs, and Veterans’ Affairs Cost Estimates Unit

Kathleen FitzGerald 
Chief, Public and Private Mandates Unit

Christina Hawley Anthony
Deputy Director of Budget Analysis

Estimate Approved By