McPhee is in the final year of his deal and the two sides have not yet discussed an extension.
According to the Washington Post, the Capitals must let McPhee go and bring in a new GM to run the ship.
Capitals head coach Adam Oates may also be let go this off-season.
If McPhee isn't brought back and a new GM is hired, it will be up to that man to decide what to do with the bench boss.
However, Oates has clashed with multiple players this season, including the likes of former-Capitals Michael Neuvirth and Martin Erat, current goalie Jaroslav Halak and captain Alex Ovechkin, among others.