Southwest Airlines introduces new cash balance plan for pilot retirements

Unlike standard 401(k)s, the MBCBP is not restricted by typical contribution caps, allowing higher-earning pilots to save more for retirement. As of 2024, individuals under 50 can contribute up to $69,000 to their 401(k), including employer contributions, while those over 50 can contribute up to $76,500 with catch-up contributions.

By 2026, Southwest will increase its automatic contribution to the MBCBP from 1% to 2% of a pilot's salary. Any remaining employer contributions after reaching the 401(k) cap—up to 17% of salary—will be transferred to the MBCBP. For instance, if a pilot earns $445,000 annually, $17,000 would be moved into this plan.

The new arrangement also provides instant tax relief as MBCBP contributions are tax-deferred. Previously, contributions over the 401(k) cap were taxed as income. Now they grow tax-deferred within the MBCBP.

Financial advisors view this plan positively for Southwest pilots. Nick Coleman from Bonfire Financial noted that it could lead to substantial additional savings without increasing tax liabilities. He stated that it "could mean significantly more for (pilots') retirement," potentially amounting to hundreds of thousands of dollars depending on when they retire.

As reported by Pensions & Investments using data from Southwest Airlines, by September 30th, the plan had accumulated $26 million in assets. The IRS authorized this new retirement scheme through a private letter ruling (PLR), providing insight into future trends in employee benefits despite being specific to each organization.

Earlier this year, Southwest Airlines pilots approved a new five-year contract with a vote margin of over 92%. This agreement prevented a potential strike and includes an initial pay rate increase of nearly 30%, along with improvements in various employment terms such as leave policies and scheduling regulations.