Once again, the airline industry is being hit hard from an economic downturn and layoffs are looming. United Airlines announced it will be laying off thousands of employees, estimated to be 36,000 by October 1, 2020. 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 corona virus 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 keep medical insurance and benefits… the list goes on.
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 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.
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 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.
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.
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.
United Airline layoffs are hard enough, luckily you can retain certain benefits.
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 withdrawal 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.
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 financial advisor. We have a staff of Certified Financial Planners™ that specialize in helping United Airline Employees and Pilots.