A change to Southwest Airlines
Retirement benefits that took effect in August have allowed pilots to increase their retirement savings, USA Today reported Thursday. The new Market-Based Cash Balance Plan (MBCBP), which is a result of the airline’s contract negotiations with the Pilots union
allows pilots to save more for retirement than is possible with a traditional 401(k) plan.

Under the new agreement, Southwest pilots will be able to take full advantage of the airline’s 17% retirement contributions, even if they exceed the contribution limits of their 401(k) plans. All contributions in excess of the 401(k) cap are funneled into the MBCBP, providing Pilots with additional savings opportunities and tax benefits.

Part of the new contract

The new market-based cash balance plan began Aug. 1 as part of a contract Southwest Airlines negotiated with the pilots’ union earlier this year, Monica Centers, Southwest’s manager of retirement and total rewards, said in an email to financial media outlet Pensions & Investments.

Phillip Hulme of Stars and Stripes Financial Advisors in Douglasville, Georgia, told USA Today that this is a step in the right direction.

“This is an example of a return to the original intent of the three-legged stool, where workers, employers and government each took some responsibility for workers’ retirement outcomes.“

This is how the market-based cash balance plan works

Unlike typical 401(k)s, the MBCBP is a type of retirement plan that is not limited by the usual contribution limits. This will allow Southwest pilots, particularly those with higher wages who could reach 401(k) contribution limits earlier in the year, to save more for retirement.

For those under age 50, the 401(k) contribution limits for 2024 are $69,000 for total contributions, including employer and employee contributions, and $23,000 for salary deferrals. For those over 50 who are eligible for an additional $7,500 in catch-up contributions, the cap increases to $76,500.

In 2026, Southwest will increase its automatic contribution to MBCBP from 1% of pilot pay to 2%. Any employer contributions remaining after a pilot reaches his 401(k) contribution limit – up to 17% of his salary – are transferred to the MBCBP.

Pilots who earn more than the $345,000 qualifying income limit for 17% contributions will have their excess money transferred to the MBCBP. For example, if a pilot earns $445,000, $17,000 will be transferred to the MBCBP.

Pilots also receive immediate tax relief as MBCBP contributions are tax-deferred. Prior to this change, pilots received cash contributions for all contributions above the 401(k) limit, which increased their taxable income. Under the new regulation, these contributions grow tax-deferred within the MBCBP.

Impact on pilots’ retirement provision

Financial advisors believe the new MBCBP offers significant benefits to Southwest pilots. According to Bonfire Financial advisor Nick Coleman, who spoke to USA Today, the idea could lead to huge additional savings. Coleman said pilots could save significantly more for retirement without having to pay more taxes.

Become a pilotget more money from Southwest for retirement; it (MBCBP) does not increase your tax burden and it grows tax-deferred,” according to Coleman’s comment. Coleman explained that the new plan “could mean significantly more for (pilot) retirement. Depending on when they retire, it could be hundreds of thousands of dollars more.“

Citing data provided by Southwest, Pensions & Investments reported that the plan had accumulated $26 million in assets as of Sept. 30.

Through a private letter ruling (PLR), the IRS approved Southwest’s new pension plan and allowed the company to provide the MBCBP under certain tax rules. PLRs can provide insights into future trends in employee benefits, even if they only apply to each company.

A win from January

Southwest Airlines pilots voted for a new five-year contract earlier this year, averting a possible strike that had been on the calendar for several months. Southwest Airlines Pilots Association (SWAPA) members voted 92.73% to 7.27% in favor of the tentative contract reached through federal mediation between Southwest and SWAPA officials in December.

The new contract, which runs until December 2028, calls for an initial 29.15% pay increase for pilots, followed by gradual increases over the next few years. Improvements to retirement programs, maternity and paternity leave, company-sponsored disability insurance, pilot planning policies and comprehensive coverage are also included.