401k Contributions for Pilots

Posted on January 29, 2024January 29, 2024 by Nick Coleman

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?

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.
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.
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: Cash Balance Plan

Posted on January 4, 2024January 23, 2024 by Nick Coleman

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!

Navigating Retirement Contributions: Demystifying 401(a) and 415(c) Limits

Posted on September 19, 2023February 1, 2024 by Nick Coleman

Retirement planning isn’t just about saving; it’s about mastering the rules of the game. If you’re a high-flyer working for a major airline, you’ve probably heard about the 401(a) and 415(c) limits – but do you truly understand how they can help supercharge your retirement savings? Let’s break down these limits, unravel the intricacies, and set you on the path to maximizing your retirement nest egg.

What is the 401(a) limit?

The 401(a) limit caps the amount of money your employer can contribute to your 401(k), as described by a salary limit. That salary limit for 2024 is $345,000. This means when your employer is contributing to your 401(k), they are going to contribute XX% of your salary up to $345,000 of your salary.

For example, if United contributed 16% of your salary into your 401(k), the most they will add is $55,200 ($345,000 X 16%). If your salary is higher than $345,000, they can no longer contribute to your 401(k), and this is where the money may spill over.

Some more senior pilots may have a salary higher than salary limit. In this case, they will get the maximum amount allowed from their employer. If your salary is under that, you don’t have to worry about that limit. However, both pilots will have to pay attention to the next limit, called the 415(c) limit, which will limit what you and your employer contribute as a total limit.

401(a) Limit: Your Key to More Employer Contributions

The 401(a)(17) compensation limit, nestled within the U.S. Internal Revenue Code, is your golden ticket to getting your employer to pump more money into your 401(k). This limit caps the portion of your earnings that counts when determining contributions to specific retirement plans, including beloved options like 401(k)s and defined benefit pension plans.

Now, the real magic happens when you align your contributions with the 401(a) limit. This strategic move can lead to a larger employer contribution to your 401(k), leaving you with more take-home dollars. The aim is to maximize your 401(k) without hitting the cap too soon or spilling over.

415(c) Limit: The Sibling of 401(a)

But wait, there’s more! The 415(c) limit, or Section 415(c) limit, is another player in this retirement savings game. This provision in the tax code sets the annual ceiling on contributions or benefits allocated to an individual’s retirement account within qualified plans, spanning 401(k)s, 403(b)s, and pensions.

These limits aren’t etched in stone; they evolve yearly to keep up with inflation and economic shifts. For the most current numbers, consult the IRS or your trusted tax advisor when making retirement contributions.

Making Sense of 415(c): Real-Life Scenarios

Let’s dive into real-life scenarios. Imagine you’ve maxed your contribution at $22,500. Your employer can contribute up to $43,500. If your salary is $280,000 and your company matches 16%, that’s a generous $44,800 from your employer. However, there’s a $1,300 spillover due to the 415(c) limit. In this case, you could reduce your contribution to $21,200 and still receive the full $44,800 employer contribution, reaching a total of $66,000.

Now, what if you’re 50 or older and want to hit the max of $73,500, including a $7,500 catch-up contribution?

401(a) at Play: Maximize Your Employer’s Share

Here’s a twist – you can contribute only the catch-up amount to your 401(k) if your employer’s contributions have already filled your account to the max. Say you earn $345,000, and your employer contributes 16%, giving you $55,200. If you’re under 50, you can add $13,200 to reach the $66,000 cap. If you’re 50 or older, it’s an extra $20,700 to hit the $73,500 limit. Fascinatingly, neither scenario requires you to max out your employee limit of $22,500 plus a $7,500 catch-up.

Crunching the Numbers for Your Benefit

To make the most of these limits, a little number-crunching and projection are in order. Consider your salary history and estimate future earnings to create a strategy that maximizes both your contributions and those from your employer.

Why does all this matter? Because it’s your gateway to getting more money into your 401(k), rather than spillover accounts. And the more you get in now, the better your financial future will look in retirement.

Beyond 401(k) – The Backdoor Roth Conversion

But our journey doesn’t end here. For our high-earning clients in the airline industry, we’re here to uncover your financial dreams and set you on the right track. One exciting strategy to explore is the Backdoor Roth Conversion. This allows you and your spouse to stash away $6,500 each per year, or $7,500 each if you’re 50 or older, in addition to your 401(k) contributions. It’s a powerful way to build a pool of tax-free retirement dollars.

In a nutshell

In real-life scenarios, these 401(a) and 415(c) limits offer opportunities for fine-tuning your contributions. By making thoughtful adjustments to your contributions, you can leverage your employer’s contributions and, if you’re 50 or older, take advantage of catch-up contributions. Ultimately, these limits are the building blocks of a more secure financial future in retirement. The more you invest wisely within these boundaries, the more comfortable and stable your retirement years will become. So, remember, it’s not just about accumulating savings; it’s about understanding and utilizing these financial limits to secure your financial well-being in retirement.

What We Can Do for You

As a Certified Financial Planner and Fiduciary Financial Planner, we partner with over 50 pilots just like you, helping them discover their financial goals and chart a course to success. We can help you navigate 401(a) and 415(c) limits. Those who work with advisors or have done so in the past often have at least double the retirement savings of their peers, sometimes even more. Your financial future deserves expert guidance – let us help you soar towards your retirement dreams.

Set up a free consultation call today to learn more about how we can help you!

United Airline Layoffs. What to do if you are laid off.

Posted on July 15, 2020June 4, 2021 by Nick Coleman

United Airline Layoffs

Economic downturns often hit the airline industry harder than most. Once again, the airline industry has been grounded by the pandemic and the corresponding economic conditions. As such, layoffs are looming. United Airlines announced it will be laying off thousands of employees, estimated to be 36,000 by October 1, 2020. Additionally, United Airlines said the jobs of more than 14,000 employees are at risk when federal aid expires in the spring of 2021. These layoffs could affect everyone from customer service employees, flight attendants, to pilots. Many other airliners may follow suit.

The fallout from 9/11 and the impact of the 2008 Financial Crisis took the airline industry roughly 2-3 years to recover. It is hard to say how long the coronavirus impact will last or how it will all turn out.

If you are worried you might be one of the airline employees to be laid off or already have been, there are many concerns you may have. From how to pay bills, to how long will this last, to how to keep medical insurance and benefits… the list goes on.

What should I do if I am laid off?

We have put together some tips, ideas, and strategies to help you get through this tough situation.

Covering your living expenses

Being able to cover your living is by far the most important question and concern. There are a number of strategies to help navigate this and there are also some new provisions from the CARES ACT that can help if you are a United Airline employee who has had to face the layoffs.

Your emergency fund

An emergency fund is a savings account or separate account that is set aside for when the unexpected happens, like being laid off. We recommend that our clients have 3-6 months of their monthly expenses saved in this kind of account. The goal is to use this money to pay for your mortgage, food, etc. It is designed to help you bridge the gap of unemployment to your next job or getting rehired when things recover.

One often-overlooked task is once you are employed again to refill your emergency fund. This account can help you in a tough situation but be sure to replenish it to ensure it is there for the next time something unexpected comes up.

If you do not have an emergency fund in place, read on for some other ideas that can help.

Claiming unemployment

If you received a WARN, it is important to start planning ahead now. You can now qualify for weekly unemployment payments from the state in which you worked. Many people fly out of a hub that is different from the state that they live in. When applying for unemployment, use the state that you work out of. Selecting reason for unemployment: “Coronavirus” can streamline the paperwork process. A quick Google search of your state and unemployment will land you on the right page. Look for “.gov” in the address. The CARES Act is adding $600 per week into unemployment checks but is set to end on July 31st. This may be extended as the impact of the virus continues.

Mortgage Forbearance

Mortgage Forbearance means you can postpone your mortgage payment temporarily. For 180 days you can request a forbearance from your mortgage lender. If granted it means you will not have to pay your mortgage for about 6 months. However, this is not mortgage forgiveness. You still owe the full amount and interest still accrues on the months you do not pay. You will need to work out the details and repayment plan with your lender as each situation is different. Per the CARES Act, no additional fees or penalties will be applied if you require forbearance.

Retirement Account Withdrawals

Taking a distribution or withdrawal from your 401(k) should be a last resort. The money in your 401(k) is meant for your retirement. However, with the intensity and impact of the United Airline layoffs caused by COVID-19, the CARES Act has set up many relief options.

Traditionally, you could not access your retirement account before the age of 59 1/2 without having to pay a 10% penalty and income tax. The CARES Act has waived this 10% penalty. Since all retirement accounts (Roths excluded) are funded with pre-tax dollars and the income tax is normally due in the year of a distribution.

The CARES act has allowed distribution in 2020 up to $100,000 be taken out and the taxes are due over the next 3 years. For example, if you take out $90,000 from your retirement account, you will have to pay tax on $30,000 in 2020, $30,000 in 2021, and $30,000 in 2022. That is much better than having to pay all $90,000 in 2020. The money will come out of your account’s investments pro-rata, so if you have half your money in large-cap stocks and half in small-cap stocks, the money will be sold in them equally to fund the distribution.

Reach out to your 401(k) provider Charles Schwab or Fidelity for details.

401(k) Loan

Taking a loan from your 401(k) is not a good idea because you will be taxed on the distribution, and you will have to repay the loan. There could potentially be many more downsides to taking a loan rather than just distributing the money. If you are furloughed or leave the plan, you will be subjected to a faster repayment schedule.

If you take out a loan, you will be taxed on the loan amount, plus you will have to use after-tax dollars to pay back the loan. In the grand scheme of things, once you repay the 401(k) loan, you will still be subjected to income tax when you take the money out when you retire. So you will be taxed TWICE on the money, instead of just at the distribution.

Miscellaneous Items

Many car manufacturers are offering payment deferrals during this time. If you are unable to make payments comfortably on your car, be sure to reach out to your car’s manufacturer finance department to discuss payment options. Many newer cars (2018 or newer) will have more generous payment options than older vehicles.

Also, a voluntary separation could be a good idea if you are close to retirement. The benefits of the United Airlines Retirement Health Account (RHA) can help you pay for medical insurance.

What about my Benefits if I am laid off??

United Airline layoffs are hard enough, luckily you can retain certain benefits. For instance, health insurance, RHA, and you’re retirement accounts can still provide you benefits.

Health Insurance

COBRA is a government bill that lets you keep your medical insurance with your company for up to 3 years. You will have the same coverage and plan, except you will have to pay 100% of the premium (plus a 2% premium for administration costs for a total of 102%) Look at your most recent pay stub to see how much you and your employer were paying for medical insurance.

Retirement Health Account

Your Retirement Health Account (RHA) is a unique account granted directly to United from a private letter ruling with the IRS. The RHA is used to pay for out-of-pocket medical expenses and health insurance premiums when retired, furloughed, or separated from service. The RHA can also be used to pay for your COBRA premiums. Click here for more details on how to use your RHA.

401(k) and Retirement Investments

There are some options you can choose to do with your 401(k) when you have faced a layoff.

You can keep it with the company. Nothing will change as you will have the same investment options and access.
You can withdraw the money, as we mentioned above. However, this is not the best action to take if it can be avoided.
You can roll your money into an IRA. There are no taxes on this move, and it can give you more investment options and control of your money.

Our preference is to roll your 401(k) over into an IRA so that you have better access to your account while avoiding the administration and investment fees from United, Fidelity, or Charles Schwab. We can build you a custom portfolio based on your needs and our custom investment research for a fee typically lower than your Fidelity and Charles Schwab 401(k) options.

Our expertise is working with pilots and aircrew in providing them the best investments through our relationship with Charles Schwab. Leveraging our partnership with Charles Schwab we can build you a custom portfolio in your PCRA.

What’s Next?

We can help you navigate one of the most difficult times the airline industry has ever faced, and that is really saying a lot! We work with many pilots, crew members, and their families and help them prepare for a successful retirement and reach their financial and life goals.

Bonfire Financial is a fiduciary, fee-only, financial advisor. We have a staff of Certified Financial Planners™ that specialize in helping United Airline Employees and Pilots.

As a United Airline or major airline employee, we would like to offer you a free consultation to help answer any questions you may have and help you get a game plan in place. Scheduled your call now.

United Employee Benefits: How to Leverage Your RHA for Tax-Free Growth

Posted on January 17, 2020June 4, 2021 by Nick Coleman

United Airlines Employee Benefits: Retirement Health Account

Working as a United Airline Employee has more benefits than just a 401(k) plan or free flights. United provides a Retirement Health Account that gives you another resource to fund medical expenses in retirement. When doing financial plans for our clients many of which are pilots, one important issue that often comes up is how to fund health care. The United RHA is a great tool for that.

What is an RHA?

The United Retirement Health Account is a health expense reimbursement account like a Health Saving Account (HSA) but one you use in retirement. United Airlines ALPA Retirement Health Account (RHA) allows retired United and legacy Continental pilots to reimburse themselves tax-free for qualified health expenses for them, their spouse, and dependents in retirement. For that reason, it truly is one of the great United Employee benefits.

Eligible expenses include:

Doctor visits
Co-pays
Dental premiums
Insurance premiums
Medicare
Long Term Care insurance premiums

The RHA is a fringe benefit provided by United and is a unique savings account that most companies do not have. United basically got the blessing of the IRS through a private letter ruling to have this plan. Because it is more of a one-off plan the rules are more opaque and restrictive.

How does the RHA work?

Unlike other United Airlines employee benefits, the RHA is funded by United only. No employee money is ever contributed to the account. Every working hour, United contributes $1.00 to your account. More importantly, when your 401(k) limit is reached, all employer contributions will continue, but spill into the RHA. United contributes 16% of your salary into your 401(k), and once the 401(k) limit is reached at $57,000 in 2020 (not including the employee age 50 catch-up of $6,500 in 2020), further contributions will spill into the RHA. Forfeited vacation can be contributed to either the PRAP or RHA at the employees’ discretion.

What can I use the RHA for?

The RHA is meant for medical expense reimbursement in retirement or separation of service only. The account itself is held in a pooled account with other employees and pilots at United, and cannot be moved into an individual account. As such, the benefit of the RHA is to allow you and your spouse and dependents to reimburse any health expenses and premiums tax-free.

According to a study done by Fidelity, the average 65-year old couple retiring in 2019 can expect to spend $285,000 in healthcare and medical expenses. Medical expenses increase at nearly twice the rate of inflation, and will likely continue to grow in the future. The RHA allows retired employees and pilots to maximize their retirement benefits by providing a tax-free vehicle to pay for medical expenses, without having to access taxable or tax-deferred accounts like your 401(k).

An example

Take for example, Sarah. Sarah is a retired pilot and can use her 401(k) to pay for regular retirement expenses. The issue that she runs into is that distributing from her 401(k) will recognize that income. If she is currently in the 22% tax bracket and takes out $50,000 per year to pay for expenses, she will need to pay $11,000 in tax for that year. Sarah needs surgery and will need to pay $10,000 out of pocket. She will pay that money from her checking account, and reimburse herself from the RHA for $10,000. Because she used the RHA for a qualified health expense, she will not have to pay any taxes. If Sarah made the mistake of using her 401(k) for the expense, she would need to pay an extra $2,200 to the government!

The RHA can be used to pay for Medicare premiums, co-pays, insurance premiums, dental insurance premiums and expenses, and even long-term care insurance premiums. The RHA can grow rather quickly and it can be very useful for your family. For example, if you have a balance of $0 in your RHA, and United contributes $5,000 each year for 20 years, and you expect an annual return of 6%, your ending RHA value will be $183,928 of tax-free dollars at 65! If you have contributed $10,000 per year, you would have $367,856!

Eligible Expenses

All of the following in red are covered by the RHA. The blue are non-eligible medical expenses that must be paid out-of-pocket.

(Image: Further/SelectAccount Family of Products)

When can I excess the money in my RHA?

There are a few times in which you will be able to access your RHA. The most straightforward one is in retirement. Also, if you are laid off or fired you will be able to access it. Additionally, if you are furloughed, you can use the RHA to pay for COBRA premiums until you get back to work. Just another one of the United Employee Benefits.

How do I maximize my RHA?

If you are nearing retirement, you may be seeing that you have a very large 401(k), which can also mean a very large tax problem when you go to withdraw from it in retirement, especially with Required Minimum Distributions (RMD) beginning at 72 years old with the new SECURE retirement act. To maximize RHA funding, you can contribute more to your 401(k), up to $19,500 in 2020. Moreover, if you maximize your contribution, you will have only $37,500 ($57,000-$19,500) left for the employer to contribute. Say if you make $280,000 in 2020, United will contribute $44,800. Because there is only $37,500 left for United to fund the 401(k), the rest, $7,300, will spill into the RHA. Therefore, if you wish to save more in your RHA, you can maximize your contribution early in the year to fund the 401(k) using your employee contribution.

Further, you can also elect to move all forfeited vacation days into the RHA. You can maximize or minimize what is in your RHA by either over- or under-funding your PRAP using your employee contribution or forfeited vacation. The United Retirement & Insurance committee has an RHA spill calculator available to you, to estimate your projected RHA funding.

Here is an example of two pilots, they both make $280,000. Both pilots are 47 years old. Tom (Pilot A) maxes his 401(k) contribution up to $19,500. Bill (Pilot B) contributes $10,000 to his 401(k). Remember, the total amount allowed in the 401(k) per year is $57,000. Any amount over will spill into the RHA:

	Salary	United’s 16% Contribution	Pilot’s Personal Contribution	Total Contribution (limit of $57,000)	Spill into RHA (above $57,000)
Tom (A)	$280,000	$44,800	$19,500	$64,300	$7,300
Bill (B)	$280,000	$44,800	$10,000	$54,800	$0

How do I limit contributions to my RHA?

Because United funds your RHA based on your salary, there is no way to avoid contributing to the RHA if United has maximized your 401(k) contribution. Based on the 401(k) rules, the 401(k) spill will begin once a pilot has reached a total of $57,000 contributed in his 401(K) in 2020 (not including $6,500 in catch-up at 50). All employer contributions will go to the RHA after that. By underweighting what you contribute into the 401(k), you can limit the amount of spill into the RHA. If you have a salary of $250,000 and United contributes 16%, you will have $40,000 in your 401(k). You still have $17,000 without having any spill into the RHA ($57,000 – $40,000 = $14,000 left to fund). Regardless, you are not losing money when United contributes to the plan. It is essentially a free benefit to you.

What happens to my RHA if I die?

The RHA can be used by you, your spouse, and qualified dependents. If you are 65, and your children now support themselves, they are not considered to be your dependent. When you die, your spouse will be able to use and access the RHA. Once your spouse dies, and you have no dependents, any remaining amount in the RHA will be reverted back into the pooled investment account at the record keeper. The RHA is not able to be inherited like other accounts. Therefore, it is important to take advantage of your RHA when you are able to use it so you don’t leave any money on the table.

The RHA and Tricare for Life

Many pilots are retired military and will use Tricare to supplement part of their medical coverage. For example, a family on Tricare for Life in retirement will still be using Medicare Part A & B, and Tricare is used in conjunction to pay for coverage outside of hospital stays (A) and doctor’s visits (B). Similarly, Tricare is used for other coverage such as prescription drugs, and the remaining premiums from Medicare Part B. Tricare and Medicare Part A & B cover most health-related expenses, but the RHA can be used tax-free to cover other parts such as dental insurance premiums, long term care insurance premiums, vision plans, therapy, and other eligible medical expenses outside of Medicare and Tricare coverage.

RHA to fund long term care insurance premiums

According to Genworth Insurance, $51,480 in 2019 was the national annual median cost of In-Home Care. Long-term care can quickly drain older Americans’ retirement and savings. According to AARP, 52% of people turning 65 in 2017 will need long-term care at some point. The estimated cost for end-of-life care in 2016 ranged from $215,820 and $341,651 according to Alzheimer’s Association. Ultimately, the last thing you want is to drain your worth in your final years and not be able to leave anything to your estate, children, heirs, and charities.

Long-term care insurance is one way to pay for long-term care and nursing care. LTC insurance can cost up to $3,000 per year for one person and can be even more if you have a family history of dementia. Luckily, you can pay for LTC insurance premiums tax-free with the RHA. Therefore, you can have LTC insurance and leverage your RHA’s tax-free characteristics.

The Retirement Health Account might just be one of the best United employee benefits out there. It’s employer-funded, more money without more taxes, extra money for health care expenses during retirement benefit.

Questions?

We are here to help. Bonfire Financial acts as a fiduciary financial advisor for our clients. We have a staff of Certified Financial Planners™ that specialize in helping United Airline Employees and Pilots with their retirement and benefits. Schedule a free consultation with us today. We’d love to talk to you.