The landscape of retirement savings is complex, particularly for United Airlines pilots who face unique choices with their 401k in planning their financial future. The recent introduction of the Market-Based Cash Balance Plan (MBCBP) offers an additional avenue for retirement savings complementing the existing 401k plans.

Today we’ll take an in-depth look at these choices, focusing on how United Airlines pilots can best navigate their 401k contributions in light of the new MBCBP. We will examine contribution limits, potential tax benefits, and the strategic implications of different savings approaches, all designed to assist pilots in making well-informed decisions for their long-term financial well-being.

Should United Airlines Pilots Maximize Their 401k Contributions with the new Market-Based Cash Balance Plan Available?

Many United Airline pilots fund their allowable 401k contribution along with receiving the 17% contribution to their 401k from United.

The most an employee can contribute to their 401k in 2024 is:

• $23,000 if under 50 years old

• $30,500 if 50 years old or older

United will also contribute to your 401k, whether you are contributing or not. An employee is only limited to contributing the above numbers, however, the 401k has a separate total limit that includes all contributions; both from you and from United. That 401a maximum is called the 401a Limit.

In 2024, the 401(a) Limit is set at:

• $69,000 if under 50 years old

• $76,500 if 50 years or older

Once that limit is hit, United’s 17% contribution does not stop. It must flow into a different bucket. Previously, the 17% went into the Health Reimbursement Account (HRA), which many pilots did not find beneficial. Many pilots we worked with wanted to reduce the spillover, so more company dollars went into their 401k, rather than spillover. However, the new Market-Based Cash Balance Plan, a retirement plan similar to the 401k, is a much more beneficial account that many pilots are wanting to take advantage of.

Now, pilots want to get as much spillover as possible, so this account gets funded more.

Why is the Market-Based Cash Balance Plan (MBCBP) a good option?

1. The contributions from United are not taxed in the year of the contribution. They are deferred until you take the money out. You can also roll the funds into an IRA when you retire and manage the account by yourself or have a retirement planner like us manage it for you. Much like the 401k.

2. It will allow you to save even more for your retirement. Many pilots that want to save more for retirement, or are nearing retirement and want to maximize savings, will find this account to be very useful.

3. Your money will be invested for you, and aims to have a reasonable return of 5-6% per year.

With that being said, you may decide that you want to maximize what United “spills” into your new retirement account (MBCBP). But how can you do this?

Best way to maximize your savings:

The best way to maximize your savings is by maximizing your employee 401k contribution. If you are 50 years old, you can contribute $30,500 into your 401k. United, at 17%, will contribute up to the total limit of $76,500, meaning they will fund the rest at $46,000. Once United has funded $46,000, you have hit the max. From there, United’s 17% will fund the MBCBP. If you are under 50, your contribution max is $23,000 and total max is $69,000. So United still has a contribution of $46,000 to reach your $69,000 limit/

According to our math, if you maximize your 401k contributions, your 401k will max out once your salary reaches approximately $270,000. 17% of all dollars above that will flow to the MBCBP. For example, if your salary is $370,000, you will receive $17,000 into your MBCBP ($100,000 x 17%). In total, you would have added $93,500.

This is a better option than not contributing to your employee contribution. If you decide not to contribute at all, United will have to contribute up to 17% of your salary up to $345,000 into your 401k before it spills over (See 401(a) Limit). For example, if your salary is $370,000 that means your total retirement additions will only be $62,900.

Why Should You Maximize Your 401k Contribution?

In the past, United Airlines Pilots were hesitant to overfund their 401k’s because they did not want excess funds funding the RHA or the HRA. Going forward, pilots can now have the spillover continually fund a retirement account. The other reason to maximize your 401k is that you will be saving an additional $30,500 per year for retirement (50+), plus you can write it off as a tax deduction if you are funding the traditional 401k.

When we do a quick math calculation, we can see the major impact that saving $30,500 can have just on a 10 year timeline. Let’s say you contribute $30,500 per year, for 10 years, and you earn a reasonable return of 8%. How much money will you have after 10 years? When you include compounding interest, your total would be $441,840. Close to half a million dollars in additional retirement savings in just 10 years!

Which should you choose, the HRA or the MBCBP?

From initial discussions, it looks like pilots will only be allowed to choose one option or the other. Should you choose the HRA or the MBCBP?

HRA:

• Benefits:

  • Tax-Free reimbursement for most medical, dental, and vision expenses, including copays and premiums

  • Good option for paying medical expenses in retirement

• Cons:

  • Non-portable. Meaning you cannot move this account at any time. It stays at a trust at United

  • If you and your spouse pass away without using the entire amount, the balance get reverted back into the trust

MBCBP:

• Benefits:

  • Can move the account to an IRA at 59 ½

  • Contributes and grows tax-free

  • Helps you save more for retirement above traditional limits

• Cons:

  • Investment is controlled by a third-party committee

  • Cannot be used until retirement age of 59 ½

  • Pay income tax when you use the money

 

Want to maximize your financial plan?

As a CERTIFIED FINANCIAL PLANNER™, I’ve had the privilege of working with over 50 pilots, just like you, to help them chart a course toward a secure retirement and a prosperous financial future. My specialization in United pilot benefits helps equip me to guide you in maximizing your career earnings and benefits. There are many accounts and benefits that we want to help you get the most out of, before you are forced into retirement by current FAA laws. By working with us, we can help you get on the right track to the retirement and financial future you deserve. Let’s get started today. 

2024 United Pilot Plan Updates: Understanding the Cash Balance Plan

If you’re a United pilot, the dawn of 2024 likely brings with it an exciting prospect—the new contract set to take effect this year. Among the changes, the introduction of the Market-Based Cash Balance Plan (MBCBP) has piqued the interest of many United pilots. As a CERTIFIED FINANCIAL PLANNER™, I’ve had the privilege of working with over 50 pilots, just like you, to help them chart a course toward a secure retirement and a prosperous financial future. My specialization in United pilot benefits helps equip me to guide you in maximizing your career earnings and benefits.

How the Market-Based Cash Balance Plan works with your current plan

The Market-Based Cash Balance Plan represents an opportunity to enhance your retirement savings, working in conjunction with the Profit Sharing Retirement Account Plan (PRAP). This supplementary retirement savings account is designed for spillover contributions from your 401(k) plan. The question on many pilots’ minds is how the MBCBP operates, how it can be utilized, and whether it offers advantages over the Health Reimbursement Account (HRA).

Understanding the MBCBP involves grasping two crucial limits—the 401(a) Limit and the 415(c) Limit.

The 415(c) Limit sets the total cap on contributions to your 401(k) from both your employee and employer contributions. For individuals under 50, this limit stands at $69,000, while those 50 or older can contribute up to $73,500. Meeting this limit can occur when maximizing your 401(k) contributions, which are:

• $23,000 for individuals under 50
• $30,500 for those aged 50 or older

The 401(a) Limit, dictated by ERISA regulations, determines the portion of your salary that United considers when contributing to your 401(k). In 2024, this limit is set at $345,000. If your salary exceeds this amount, United’s 17% contribution will spill over into either the HRA or MBCBP. For example, if your salary reaches $445,000—$100,000 over the limit—this excess 17% translates to $17,000 as spillover. Over a decade, this could accumulate to a substantial sum.

Understanding the Market-Based Cash Balance Plan

So, what exactly is a Cash Balance Plan? It serves as a retirement account, much like your 401(k), but with the capacity to hold a more significant sum for retirement than traditional retirement accounts. While a 401(k) is constrained by an annual limit—$69,000 in 2024, for instance—a Cash Balance Plan can theoretically accommodate contributions of up to $300,000 annually. This account operates differently from a 401(k) in that it follows a “Defined Benefit” model, allowing for higher contributions to support specific benefits, such as an annual pension.

The Market-Based Cash Balance Plan is a deferred plan, meaning you don’t pay taxes on contributions or growth within the account. Instead, taxes are levied when you withdraw funds during retirement, aligning with your income tax level at that time. This structure can be advantageous, as it doesn’t increase your taxes while working, potentially leading to lower tax brackets in retirement.

Regarding investment management, Cash Balance Plans prioritize a “reasonable return” within strict ERISA and IRS guidelines to safeguard the defined benefit. As such, pilot investments in the MBCBP aren’t subject to individual choices but rather managed collectively by a committee. Upon retirement, you have the flexibility to roll over the MBCBP into an IRA. This will grant you greater control over investment decisions.

One notable advantage of the Cash Balance Plan is its portability. After retirement, you can transfer the funds to an IRA, allowing for greater flexibility and potential wealth transfer. In contrast, the HRA and RHA remain non-portable and are confined to United’s trust, accessible only for qualified health-related expenses and with limited beneficiary options.

Is a Market-Based Cash Balance Plan Right for You?

So, should you consider using the 2024 United Pilot Cash Balance Plan? If you aspire to save more for retirement, especially as retirement draws nearer, it could be a valuable tool. However, it’s essential to retain some funds for potential health expenses in retirement, considering that healthcare costs can be substantial. Fidelity estimates that a couple retiring in 2021 might spend around $157,000 on medical expenses during retirement.

Additionally, you can maximize your 401(k) contributions further by taking full advantage of your personal contribution limit:

• $23,000 for individuals under 50
• $30,500 for those aged 50 or older

By doing so, you not only bolster your retirement savings but also may enjoy significant tax benefits. Contributions are tax-deductible, potentially leading to substantial tax savings.

Furthermore, you may consider diversifying your retirement savings by exploring Tax-Free retirement options like the Backdoor Roth IRA Conversion. This strategy can help you build tax-free retirement income while avoiding Required Minimum Distributions (RMDs).

Next Steps

To ensure you’re making the most of your 401(k) and United pilot benefits, consider discussing your retirement goals with a professional. I’ve worked closely with numerous pilots to navigate the complexities of their financial plans, and I’m here to help you secure a successful financial future and retirement.

Let’s start a conversation about your financial goals and explore the strategies that can help set you on the path to financial freedom and a prosperous retirement. Set up a free consultation call today to learn more about how we can help you!