Preview of what we’ll cover today:

✈️ Why Pilots Are Hitting 401(k) Contribution Limits

📉 Cash Balance Plans Explained

🏥 HRAs and Medical-Only Dollars

⚠️ The Risk of Forced Decisions Without Full Details

🧠 A Practical Approach in an Uncertain Situation

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More About This Episode:

United pilots are being asked to make a major retirement election by the end of the year and the plan hasn’t even received IRS approval. The election window for 2027 Pilot Contributions is open until December 31 for the proposed United Airlines Pilot Cash Balance Plan (the ‘CBP’). To help you better understand your options and what it could mean for your retirement, we’ve invited pilot tax specialist Zach Smith to unpack what’s happening, why it’s happening, and what pilots should understand before making a decision that could impact their long-term financial flexibility.

As airline compensation has increased and employer contributions have grown, more pilots are running into IRS limits on 401(k) contributions. To address the “spillover,” airlines like Delta and American introduced cash balance plans and alternative retirement vehicles. United is now following suit, but without full clarity, final plan details, or an opt-out option.

Ryan and Zach walk through the two primary options United pilots are facing: the CBP or HRA, along with the trade-offs of each.

Go Deeper Into The Episode:

0:00 – Intro

1:03 – Why has this become a solution?

4:00 – Your options

7:00 – The Tradeoffs

7:26 – The 3 Election Options

8:22 – Is there a best option right now?

13:03 – Final thoughts

Resources:

Retire Pilots – https://retirepilots.com

Get your FREE Retirement Toolkit – https://bit.ly/3ZmZsaX

Pilot Tax – https://pilot-tax.com/

The Pilot’s Advisor Podcast is also on video. Watch & Subscribe on YouTube: https://bit.ly/3EIEBW2

Connect with Pilot-Tax: https://pilot-tax.com/

Episode Transcription:

(Note, this is an automated transcription. Please forgive any errors.)

Ryan Fleming: Welcome back, uh, Zach Smith from the uh, Pilot from Pilot Tax outside Indianapolis. Zach, thank uh, you for being on the podcast again.

Zach Smith: Absolutely. Happy to be back.

Ryan Fleming: Yeah, and I think it’s great. We’ve gotten a lot of positive feedback of us working uh, together on this and talking about certain issues, having the financial advisor side and, and the uh, tax side with, with someone that, that works with airline pilots and all the different legacy carriers. And what we’re recording today is um, is talking about the we’re United pilots are being forced to make a decision right now on something that we don’t even know if it’s going to be approved by the irs. So it’s a really an interesting dynamic. Um, and we’ve, we’ve dealt with this with ah, Delta, we’ve dealt with this with American where they’ve seen, started to come up with these cash balance plans and other options for the money that spills over from the IRS limits. But why is all this happening? Zach, can you talk to myself and the pilots about what the problem is and why this is becoming the solution for a lot of these airlines and what they’re trying to put together?

Zach Smith: Yeah, absolutely. So what’s happened over the years, especially with these new contracts that have come out over the next few, you know, the last few years with uh, all the legacy carriers, is that the unions and the airlines recognized, um, that we have a problem, right? We have a problem with compensation, we have a problem with what’s going into the 401k plans. So as they work through these contracts, they started to recognize that, hey look, with your 18% non elective contribution coming from the airline and the significantly increase in wages for the pilots over the years, uh, they realize that, hey look, as we’re making contributions throughout the year, very frequently, what is going to happen is that these pilots are going to be hitting that max that can go into the 401k between the employer and employee. So many of these airlines took a step back and said, well, what do we do with the money? Right? What do we do with this excess money that per contract we’re still required to pay our 18% to the pilots, right? So what do we do? Um, and this has been a pretty common approach. As Ryan said. We’ve seen this at Delta already. They were the first ones out of the gate with this. Um, and American Airlines just rolled theirs out this year. They got approval from the IRS to operate. And uh, to Ryan’s point, United uh, does not have that yet. They’re asking you to make the election now with the anticipation that they’re going to get it. Um, I think Ryan and I can both agree here that given the precedence that’s been set by some of these other airlines, that I, uh, would venture to say that United is likely going to get approved, um, because we have precedence here with the other airlines. So what’s going to happen here is that there’s an establishment of a cash balance plan, and this was the workaround to give pilots the option to take that NEC money and roll it into, uh, effectively another retirement vehicle, or in United’s case, uh, these HRA accounts, these health retirement accounts. So, big picture, these were kind of a solution intended, uh, to combat, uh, the excess 401k contributions that we’re going to be running into between the airlines and the pilots.

Ryan Fleming: Well, and one thing I’ll point out, and I know we have opinions on what we think about this, but it’s almost like they’re giving pilots an option to keep those money in some sort of deferral, um, you know, and it’s not necessarily in the qualified plan, but still, deferring taxes on those monies versus what it was before, whereas cash over cap, it spills over. Now it’s coming back in your paycheck, which, of course, we’ve talked about before, I actually like, because now you have flexibility, you have options, you have control. All these, these things that they’re coming up with, you lose a lot of control.

Zach Smith: Absolutely.

Ryan Fleming: Uh, I do like the fact that Delta and American’s plans, even though there’s not a lot of flexibility to switch back and forth, they at least gave you the option to keep cash over cap or to opt out of these plans. And everything that I’m seeing on the horizon right now with United, that doesn’t seem to be an option. It seems like your only real decision here is whether you want 100% into one of them or you want to split the two. Is that what you’re seeing?

Zach Smith: That’s what our understanding, and Ryan is absolutely correct. There’s not a lot of information on this yet, and we can’t completely point a finger at you, United, uh, because they don’t have approval yet. So I don’t think they, from a corporate level know exactly what this is going to look like yet. But I’m in agreement with Ryan. 100% agreement. Uh, my firm operates on the acceleration of the recognition of tax today to save money over the long term. Right. Ryan, you know, has a lot of tools that we use, uh, to have very tax advantageous long term growth, um, by locking this money up, uh, into these cash balance plan or these HRAs, uh, pretty restricted investments. What we’ve seen with American and Delta and what we’re probably going to see with United is that because they got approval for the IRS to operate at a normal tax

00:05:00

Zach Smith: code, they’re restricting what they can do. Right. They’re very, very restrictive. It’s uh, more pre tax money. And I know Ryan’s big problem with these is they are highly conservatively invested.

Ryan Fleming: Well, two things I would say. And let’s just look at the two retirement benefits that United is talking about. We want this to be a little bit more focus, to give United pilots some options or some knowledge because I think they’ve been put in a position where we unfairly have to just decide on something right now without all the details. And it’s not even approved. It’s not even approved. We don’t have all the details. But you need to make a decision today just in case. So I’m, I don’t like the way this is being pushed out at all. And I’m going to tell you that, um, and uh, and I wish you had an option to opt out, but that doesn’t seem to be the case right now. So our job here is to just try to give you as much information from we can gather. You got an option of two different things actually. You have three options. Choose all the cash balance plan, choose the HRA or a split between them and we’ll talk about, you know that a little bit later. But just in, in essence what they are cash balance plans, deferring taxes on it into something that, that is um, basic basically just trying to keep, you know, the only guarantees keeping the principal, um, very, very conservatively invested and the company holds on to all this. It’s not inside your 401k plan, which is kind of interesting to me as well. Um, and it’s just going to be an inflation adjusted income potential versus the alternative which is these HRAs RHA, which is, is a health savings account. It’s no different than like a 529 where it has to be used for educational expenses, this has to be used for medical, medical costs later on in life. Now we all like, you know, tax qualified stuff, but uh, in both cases these are very, very limited. Anything you want to add before I go to the next slide, Zach?

Zach Smith: No, I think you, I think you hit the nail on the head there. And um, I will, I will add. The only thing is, uh, I think we’re Choosing between the lesser of two evils here right now.

Ryan Fleming: Yeah, we’ve talked about this before, but you can see here, um, if you’re. If you’re not worried about medical expenses, you probably want to go more towards the cash balance plan. If medical expenses are something that you’re really, really worried about, and you want that money to grow and, and have that benefit, but only to be used for. For medical expenses, well, then maybe the HRA is a little bit, uh, more beneficial to you. That’s kind of the. The core trade off here. You’re losing a lot of control in either case. Um, so these are the three options that I can see that you’re having to choose from. Zach, you want to say anything about these? And then we’ll kind of give our two cents.

Zach Smith: Yeah.

Ryan Fleming: So this is.

Zach Smith: This is what Ryan was kind of hitting on. So you have two options, or you can split between the three. Right. Cash balance, plan, hra, or we can. We can divide these up. And I think Ryan’s gonna have a pretty good recommendation here, uh, on how we think this would probably be beneficial for most pilots.

Ryan Fleming: Yeah, and we’ll talk about that. I mean, I look at this and I go, we don’t have any details on any of this stuff, but you need to make a decision right now, and it hasn’t been approved, so that’s a pretty tough position to be in.

Zach Smith: Okay, well, and I think right now we’re pretty well stuck with the hra, so this is just adding a potential alternative, um, pending approval later in the year. Later next year.

Ryan Fleming: Yeah. And so these are all your options. You know, right now, you got the HRA and then it caps out. Um, or you guys, you can go 100 to the cash balance planner or take a mix. Um, I think the most defensible position right now with no. You know, there’s a lot of uncertainty right now. Uh, the IRS approval is pending. Um, the design details of the cash balance plan. We don’t really know what it is. It’s probably going to evolve and change. Um, and, you know, I think, uh, in an individual case, you know a little bit more about your personal health or your career length or what. What your family history might look like. So without having specifics for the individual pilot, without having details of what this is really going to look like, I would Recommend, uh, the 50. 50 split it. You know, now you’re kind of getting a little bit of both. I don’t like it. If given the choice to opt out of both of these, that’s what I would do I choose cash over cap. Get my money, get the money that I’ve earned and have control over it today and let it grow. Um, but I don’t know if that’s going to be an option for United pilots, and I hope it is. Um, but this, this balance plan that we’re looking at here, uh, it hedges against the uncertainty of both. Um, it gives you the most flexibility, um, until we understand what the final structure is going to look like and, uh, if your personal circumstances might dictate otherwise. But I think the safe approach right now would be this 50, 50. And that’s my opinion. Zach, if you have anything to add on this, we wanted to get something out to your United, uh, clients and pilots.

Zach Smith: Yeah, I, I do have a couple things. So in talking to many of my United, uh, pilots, at least those that have been there for some period of time, uh, the big complaint that I’m hearing is that, listen, Zach, I’ve already got a lot of money

00:10:00

Zach Smith: in the hra, right? I’ve got quite a bit of money that’s been my spillover from the last couple years just based on the default that United was operating under. So I’m seeing pretty frequently that folks are pretty confident or comfortable with the amount that they already have in the HRA. Um, and for those folks, maybe 100% cash balance plan might make sense. Um, but I do have a conflicting side of this where I agree with ryan that the, uh, 50, 50, I think is a safer, potentially safer for some people, uh, at the current position that we’re sitting at, some of the cash balance plan benefits, uh, while I don’t like this either, but one of the cash balance plan benefits is once we do hit a certain age, some of these other airlines are allowing us to roll these to an Iraq. Um, so it’s not going to be something that happens anytime soon, but we may be able to get a little more flexibility with the cash balance plan money. But it’s not tomorrow, it’s not in the next, potentially five years or 20 years for some of our pilots or longer.

Ryan Fleming: Right.

Zach Smith: So we still have this money locked up in one of these two accounts, but I think later on down the road we may have the ability to control the cash balance plan money a little better. Now. It still contributes to the giant retirement problem that we have with pilots because this is continuing to add to our tax deferred money, causing us problems. Ryan’s classic term is a retirement taking tax time bomb. This is just adding more powder to that bomb. Right. So we don’t have a choice though. Right. We’re stuck with choosing between the two of these. So, um, for the time being, yeah.

Ryan Fleming: And just think of it, it’s like, uh, taking your money and putting it in a CD or putting under your mattress for. Until you’re 59 and a half and then we can roll it over and have control of it. And oh, by the way, now it increases the tax problem that we already have with absolutely more tax deferred money. So, um, and I think the fear.

Zach Smith: With the, I think the fear with the HRAs is guys are hitting the point where they said, I, you know, I don’t know that I’m going to be able to spend all this HRA money. Right. Depending on Medicare, Tricare, whatever their situation’s it, their HSA balances on top of these HRAs. Um, they’re hitting that point where they say, I think I’ve got enough money in the hra. Uh, but this is all going to be, this is all going to be individual. It’s all going to be individual kind of situations depending on where guys are at their age, their income and all that.

Ryan Fleming: Well, and, and no different than a 529 as well. I spent so much time trying to get assets out of those because it’s not being used. It’s very much a, uh, in case. And then suddenly life changes. Kids get a scholarship. Well, when we look at these health savings accounts, uh, you know, it’s, it’s the same thing like we’re, you know, putting money aside just in case you might have health issues. And it’s not quick and quick and easy, per se.

Zach Smith: Yeah. And Ryan. What? I don’t know. And maybe, you know, you and I could dig a little deeper at some point. I don’t know what happens to these HRAs if you die. Right. The cash balance plan should be able to establish beneficiaries, but, uh, what I don’t want to see is one of our pilots die and their spouse misses out on spouse or kids miss out on, uh, HRA money that’s been deferred. That would have been compensation if we could have elected out.

Ryan Fleming: And I will leave us. We’ll close this one down with this, uh, for all our United pilots out there that are either clients or prospects, you guys are going to get a lot more information up front than we will. So please keep feeding us that information so we can read through it and get, you know, make the best decisions or give out the best advice for the details that we do know at this time. But making this election right now is a very interesting thing. When none of it’s been approved, we don’t have all these details, so, uh, just. You just got to make the best calculated decision that you can make with the facts that we do have right now. And. And, Zach, I appreciate you getting on and. And talking through this a little bit. Hopefully, that makes the decision a little bit easier for some of the United pilots out there. Just get seeing what the big picture, what you’re deciding right now. Thank you guys for listening. We’re always here to help out. Um, fly safe.

Zach Smith: Thanks, Ryan.

Ryan Fleming: Information is for illustrative purposes only and does not constitute tax, investment, or legal advice. Always consult with a qualified investment, legal or tax professional before taking any action.