Federal performance awards are simultaneously small (typically 1 to 5 percent of salary for most ratings-based awards) and consequential (the Quality Step Increase is the single largest career pay event most federal employees experience outside promotion). The framework authorizes agencies to recognize employees through multiple mechanisms — cash, permanent step increases, time off, honorary recognition — each with different rules, different tax treatments, and different long-term value. Employees who understand the options can sometimes influence which form an award takes. Employees who don't understand the options accept whatever the agency defaults to without evaluating whether it was the right choice for their situation.
The August 2025 OPM awards guidance added a layer of complexity. The guidance emphasized performance differentiation, applied rating distribution constraints, paused and restored specific award categories, and required agencies to report detailed FY 2025 outcomes by February 27, 2026. For FY 2026 — the performance cycle now in progress for most agencies — the new guidance is the operating framework. This article covers the underlying authorities and the 2025 changes, and offers the strategic frame employees should use when making award-related decisions.
A Quality Step Increase is worth more than an equivalent-dollar cash award over a federal career, because the step increase compounds. A $5,000 cash award at GS-13 is a one-time $5,000 event. A QSI at GS-13 raises base pay by roughly $2,500 per year — which recurs every year until retirement, raises the FERS high-3 calculation, increases TSP contributions at the same percentage, and compounds through step progression. Over 10 years, a single QSI produces over $25,000 in additional base pay plus the TSP and FERS effects. The employee who asks "QSI or cash?" when offered an award usually benefits from choosing QSI. Agencies vary in how often they grant QSIs versus cash awards, but the choice — when available — matters.
Section I The legal framework — 5 U.S.C. Chapter 45
Federal award authority flows from several statutory sources that Congress has layered over decades.
5 U.S.C. Chapter 45
Chapter 45 of Title 5, U.S. Code — sections 4501 through 4509 — is the Government Employees Incentive Awards Act. It authorizes agencies to pay cash awards to employees whose suggestions, inventions, superior accomplishments, or other personal efforts contribute to the efficiency, economy, or other improvement of government operations. Related sections cover the authority for specific award types and the approval thresholds for higher-dollar awards.
5 U.S.C. 4505a
The specific authority for performance-based cash awards sits in 5 U.S.C. 4505a. An employee whose most recent performance rating was at the fully successful level or higher may be paid a cash award under this section. The award may not exceed 10 percent of the employee's annual rate of basic pay, with an exception allowing up to 20 percent for exceptional performance as determined by the agency head.
5 U.S.C. 5336 — Quality Step Increases
The QSI authority sits in 5 U.S.C. 5336 and is implemented in 5 CFR Part 531, Subpart E. QSIs are step increases, not cash awards — so they are not counted as "awards" under 5 U.S.C. Chapter 45, but they serve the same performance-recognition purpose and are typically treated alongside cash awards in agency award programs. See our guide on step increases for the full QSI mechanics.
5 CFR Part 451
OPM's implementing regulations sit in 5 CFR Part 451. The regulation requires agencies to design award programs that recognize meaningful differences in performance, establish appropriate approvals, maintain records, and conform to OPM policy. Subpart A covers agency awards generally; Subpart B covers Presidential and Presidential Rank Awards.
Approval thresholds
Under 5 CFR 451.106 and related provisions: agencies may grant cash awards up to $10,000 without external approval. Awards between $10,001 and $25,000 require OPM approval before payment. Awards exceeding $25,000 require OPM review and Presidential approval. The Department of Defense, Department of Veterans Affairs, and Internal Revenue Service do not require OPM approval for awards up to $25,000 under specific statutory authorities, but awards over $25,000 still require Presidential approval.
Section II Rating-based cash awards
The most common federal performance award is the annual rating-based cash award tied to the employee's rating of record.
Eligibility
Under 5 U.S.C. 4505a, an employee is eligible for a performance-based cash award if the most recent performance rating of record is at the Fully Successful level (Level 3) or higher. Ratings below Fully Successful do not qualify. Under OPM guidance and 5 CFR 451.104(h), agencies must make meaningful distinctions in award amounts based on levels of performance — an employee rated Outstanding (Level 5) must receive a larger cash award, as a percentage of pay, than an employee at the same grade rated Fully Successful (Level 3).
Award amounts
The statutory cap under 5 U.S.C. 4505a(a)(2) is 10 percent of the employee's annual rate of basic pay. The rate of basic pay for this calculation includes locality pay and any applicable special rate supplements. The agency head may authorize up to 20 percent for exceptional performance. In practice, most agencies award rating-based amounts in the 1 percent to 5 percent range, depending on budget, rating level, and agency-specific award policy.
Typical agency patterns
Many agencies use a tiered structure: a rating of Outstanding (Level 5) may qualify for a cash award of up to 5 percent of base pay or a QSI; a rating of Exceeds Fully Successful (Level 4) may qualify for 3 percent; and Fully Successful (Level 3) may qualify for 1 to 2 percent or a nominal amount. Actual policies vary by agency — the Department of the Interior's bulletin on performance awards is illustrative of the tiered model that many agencies follow.
Budget realities
The statutory authority allows awards; the agency budget determines whether they are paid. Award pools are funded from agency operating budgets and are subject to annual appropriations realities. In budget-constrained years or during continuing resolutions, agencies often reduce award pool amounts even though the statutory authority remains available. Employees should not assume award amounts from prior years will continue — they depend on annual budget decisions.
Tax treatment
Cash performance awards are supplemental wages subject to federal income tax withholding at the supplemental wage rate (typically 22 percent), plus Social Security and Medicare (FICA) taxes. State income tax may apply. The employee receives the net award after withholding; the withholding rate is often higher than the employee's actual marginal tax rate, resulting in a tax refund or reduced balance due at filing time.
Processing
Performance-based cash awards are typically processed via Nature of Action Code 840 on the SF-50 ("Individual Cash Award RB"). The SF-50 documents the award amount, the legal authority, and the performance period. Employees should retain the SF-50 for records.
Section III Quality Step Increases as awards
The QSI is technically a pay action rather than an award, but most agencies treat it as part of their performance recognition framework. See our full guide on step increases for the mechanical details.
Eligibility
Under 5 CFR 531.504, three requirements: the employee's most recent rating of record must be at Level 5 (Outstanding or equivalent); the employee must have demonstrated sustained performance of high quality; and the employee must not have received a QSI in the preceding 52 calendar weeks. An employee at Step 10 of their grade cannot receive a QSI because there is no higher step.
Long-term value
A QSI advances the employee one step in the grade. At GS-12, the 2026 base step value is approximately $2,549; at GS-13, approximately $3,030; at GS-15, approximately $4,213. The value compounds annually as the employee remains in federal service, contributes to FERS high-3 calculation, and raises the base on which future percentage-based pay adjustments are calculated.
Cash award vs. QSI decision
When an agency offers an employee the choice between a cash award and a QSI (some agencies offer this choice; others do not), the QSI is usually the more valuable option for a career employee. The cash award provides immediate liquidity with supplemental wage withholding; the QSI provides cumulative lifetime earnings that typically exceed the cash award many times over. Exceptions: an employee near retirement who needs cash now rather than future pay increases; an employee approaching step 10 where the QSI's compounding opportunity is smaller.
Cap interaction
A QSI cannot push an employee's pay above the maximum rate of the grade (step 10). An employee near the top of the grade may not be able to receive a QSI because there is no step to advance to. Agencies typically substitute a cash award in these cases.
QSI waiting-period reset
A QSI does not reset the regular WGI waiting-period clock unless it places the employee at step 4 or step 7 (where the waiting period lengthens). This is an important nuance — employees can receive a QSI without losing their accumulated time toward the next regular WGI.
Section IV Time-off awards
Time-off awards are grants of paid leave in recognition of performance or specific accomplishments.
Authority and structure
Time-off awards are authorized under 5 CFR 451.104(e) as an alternative to cash awards. Agencies have discretion to establish time-off award programs, including rules on maximum hours per award, eligibility criteria, and scheduling requirements. Common agency limits are 40 or 80 hours per award, but specific caps vary by agency policy.
Calculation basis
For time-off award calculations, the hourly rate is determined by the employee's basic annual salary on the date the award is approved, including locality pay and applicable special rate supplements. The number of hours the agency can award depends on agency policy, not on the dollar value of an equivalent cash award.
Tax treatment
Time-off awards are generally not taxable at the time of grant because no cash is exchanged. The hours become paid leave that the employee uses in lieu of regular work. Time-off awards are taxed only to the extent they are converted to cash (which is generally not permitted under most agency policies) or carried to separation in limited circumstances.
Processing
Performance-based time-off awards are processed via Nature of Action Code 846 on the SF-50. The SF-50 documents the hours granted and the legal authority.
Strategic considerations
Time-off awards are most valuable to employees who are leave-constrained — those who frequently exhaust annual leave before the use-or-lose deadline, or whose jobs create difficulty taking regular leave. Employees whose annual leave balances are already accumulating toward the year-end ceiling benefit less from additional time off. In those cases, requesting cash or a QSI (where the agency allows employee input) is typically more valuable.
Expiration
Time-off awards are usually subject to expiration — most agencies require use within 12 months or within a specified number of pay periods. Unused hours may be forfeited. Employees should confirm their agency's specific use-by rules and schedule the time off rather than letting it expire.
Section V Special Act Awards
Special Act Awards are granted throughout the year in response to specific accomplishments rather than tied to the annual rating cycle.
Authority and purpose
Under 5 U.S.C. 4503, agencies may grant Special Act Awards (also called Special Achievement Awards or on-the-spot awards) in recognition of accomplishments that contribute to the efficiency, economy, or other improvement of government operations. The awards can be cash, time off, or honorary recognition. They are not tied to the annual performance rating and can be granted to any career employee at any time during the year.
Typical triggers
Completion of a specific high-impact project. A technical breakthrough, invention, or process improvement. Recognized response to an emergency or crisis. Collaborative achievement on a cross-organization initiative. Sustained effort on a particular task that exceeded expectations. Agencies often use Special Act Awards to recognize accomplishments that do not neatly fit the annual performance rating framework.
Amounts and approval
Special Act Awards follow the same approval thresholds as other cash awards: up to $10,000 at agency discretion, up to $25,000 with OPM approval, above $25,000 with Presidential approval. Typical amounts are smaller than rating-based awards — common ranges are a few hundred dollars to a few thousand dollars for individual contributions, with group Special Act Awards shared among team members.
Group Special Act Awards
Groups of employees can receive Special Act Awards for collaborative accomplishments. The group award is typically distributed among members based on their relative contributions, either equally or through a weighted formula agreed by the approving official. Group awards recognize that many significant accomplishments in federal work result from team effort rather than individual action.
Section VI SES performance awards and Presidential Rank Awards
Senior executives operate under different award authorities than the general workforce.
SES performance awards
Members of the Senior Executive Service are eligible for performance awards ranging from 5 percent to 20 percent of base pay under 5 U.S.C. 5384. To be eligible, the SES member must have received a Fully Successful or higher annual summary rating for the most recent appraisal period. The award amount is determined through a structured process: agency Performance Review Board evaluation, agency head approval, and accommodation within the agency's bonus pool for the fiscal year.
Presidential Rank Awards
The Presidential Rank Award program recognizes career SES and Senior Professional (SP) employees at two levels: Meritorious Executive (20 percent of base pay) and Distinguished Executive (35 percent of base pay). Under 5 CFR Part 451, Subpart B, the number of awards is capped governmentwide — Distinguished Executive awards limited to 1 percent of career SES, Meritorious Executive awards limited to 5 percent. Each agency may nominate up to 9 percent of its senior career employees for consideration.
The FY 2025 pause and FY 2026 restoration
OPM's August 2025 awards guidance paused Presidential Rank Awards for FY 2025, with return planned for FY 2026. The pause reflected the transition period around the new administration's approach to senior-employee recognition. Agencies were directed to ensure that in FY 2026, Presidential Rank Award nominations involve appropriate agency leadership coordination and are used to motivate truly outstanding performance by career SES and SP employees.
Political appointee award restrictions
Specific restrictions apply to political appointees. Agencies may not grant certain awards under 5 CFR Part 451, Subpart A, to noncareer or limited SES appointees or Schedule C appointees between June 1 of a Presidential election year and the following January 20 (5 U.S.C. 4508). Cash awards cannot be granted to Presidential appointees with Senate confirmation (PAS) in Executive Schedule positions (5 U.S.C. 4509). The August 2025 OPM guidance referenced an additional discretionary award freeze for political appointees.
Inspector General exclusion
Under the Inspector General Act of 1978 (5 U.S.C. App.), an Inspector General may not receive any cash award or cash bonus, including any cash award under Chapter 45 of Title 5. This exclusion protects IG independence from financial incentives tied to agency performance.
Section VII The August 2025 OPM guidance
OPM's August 2025 awards guidance was the most significant change to the federal award framework in years. The guidance reshaped FY 2025 practices and set expectations for FY 2026.
The 30 percent ceiling on Level 4/5 ratings
The guidance established a 30 percent ceiling on ratings at Level 4 or Level 5 for SES and Senior Professional employees. In FY 2025, the ceiling was implemented as "encouragement" — a suggested target without formal rule-backed enforcement. For FY 2026, the intent is a hard limit, pending rulemaking. The rule has not been finalized as of this writing, and existing regulations at 5 CFR Part 430 forbid quotas or forced distributions for performance ratings; enforcement of a hard cap before the rule takes effect could be legally challenged.
Meaningful distinction
The guidance emphasized that performance-based awards must make meaningful distinctions based on levels of performance. An employee rated Outstanding must receive a larger award, as a percentage of pay, than an employee at the same grade rated Fully Successful. Award programs that grant uniform percentages across rating levels — a common historical practice in some agencies — are inconsistent with the guidance.
Compliance plans and reporting
The guidance required agencies to submit compliance plans by September 8, 2025, and to report FY 2025 performance results (including rating distributions and award amounts) no later than February 27, 2026. OPM will separately provide reporting templates and additional guidance. The reporting requirements are creating visibility into agency practices that was not previously available at the governmentwide level.
Interaction with bargaining units
The guidance notes that implementation must be consistent with collective bargaining obligations. For bargaining unit employees, changes to performance distributions, bonus pools, or appraisal procedures must be consistent with negotiated agreements. Agencies cannot unilaterally impose changes that contradict existing collective bargaining agreements; any modification requires negotiation.
Employee implications
For federal employees, the 2025 guidance means: fewer top performance ratings in FY 2026 at SES and SP levels, with larger awards concentrated in a smaller group of high performers; stronger performance documentation required to justify Level 4 or Level 5 ratings; and closer scrutiny of agency-specific award policies. Employees should document their performance with measurable results, understand their agency's appraisal process and any negotiated procedures, and watch for updates in the Federal Register on final rule publication.
What to do this quarter
- Confirm your most recent rating of record. Only Fully Successful (Level 3) or higher qualifies you for performance awards under 5 U.S.C. 4505a.
- If you routinely receive Outstanding (Level 5) ratings, ask your supervisor about QSI eligibility. Many supervisors have never processed a QSI and don't know the employee qualifies.
- When offered a choice between a cash award and a QSI, calculate the long-term value. The QSI almost always exceeds an equivalent-dollar cash award across a career.
- Track time-off awards against the agency-specific use-by deadline. Unused hours may expire without notice.
- Document your performance with measurable results in your Individual Development Plan and end-of-cycle self-assessment. The 2025 guidance raised the bar for justifying top ratings.
Section VIII Frequently asked questions
Federal employees can receive four main categories of awards under 5 U.S.C. Chapter 45 and 5 CFR Part 451. Rating-based cash awards under 5 U.S.C. 4505a are tied to the annual rating of record and typically calculated as a percentage of salary. Special Act Awards under 5 U.S.C. 4503 recognize specific accomplishments throughout the year rather than annual performance. Quality Step Increases (QSIs) under 5 U.S.C. 5336 grant an additional within-grade step for outstanding performance. Time-off awards under 5 CFR 451.104(e) grant hours of paid leave as an alternative or supplement to cash. Honorary and nonmonetary awards (plaques, certificates, recognition events) are also available under the same general framework.
Under 5 U.S.C. 4505a, rating-based cash awards may not exceed 10 percent of the employee's annual rate of basic pay, with an exception allowing up to 20 percent for exceptional performance as determined by the agency head. Approval thresholds apply: agencies may grant up to $10,000 without external approval, up to $25,000 with OPM approval, and over $25,000 with Presidential approval. The Department of Defense, VA, and IRS do not require OPM approval for awards up to $25,000 under specific authorities. SES performance awards are limited to between 5 percent and 20 percent of the member's base pay, paid from agency bonus pools subject to aggregate limitations.
OPM issued performance management and awards guidance in August 2025 reshaping several elements of federal awards. Presidential Rank Awards were paused for FY 2025 with return planned for FY 2026. A 30 percent ceiling on Level 4/5 ratings for SES and Senior Professional employees was applied as encouragement in FY 2025 and intended as a hard limit in FY 2026, pending rulemaking. Agencies were required to submit compliance plans by September 8, 2025, and FY 2025 ratings/awards reports by February 27, 2026. The guidance emphasized that performance-based awards must make meaningful distinctions based on performance levels — employees with higher ratings must receive larger awards as a percentage of pay than employees at the same grade with lower ratings.
Cash performance awards are considered supplemental wages under IRS rules and are subject to federal income tax withholding at the supplemental wage rate, plus Social Security and Medicare (FICA) taxes. The supplemental wage withholding rate for most employees is 22 percent of the award amount, rising to 37 percent for awards exceeding $1 million in a calendar year. State income tax withholding applies based on state rules. Time-off awards are not taxable at the time of grant because they do not provide immediate cash compensation — they are taxed only to the extent they are later cashed out (which is generally not permitted) or converted to pay at separation in limited circumstances. QSIs are not awards in the tax sense; they are permanent step increases that raise future pay and are taxed as ordinary wages each pay period.
A Quality Step Increase under 5 U.S.C. 5336 permanently advances the employee one additional step in the grade, which raises base pay for all future periods until retirement. A cash award under 5 U.S.C. 4505a is a one-time payment that does not change the employee's rate of basic pay. Over a federal career, a QSI is typically worth significantly more than an equivalent-dollar cash award because the higher step compounds across all subsequent pay events, raises the FERS high-3 calculation base, and increases TSP contribution base. Agencies may grant only one QSI per 52-week period, whereas cash awards can be granted multiple times per year. QSI eligibility requires the highest rating of record (Level 5 Outstanding or equivalent) and agency-specific additional criteria.