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Contract 2020 Financial Consideration for Southwest Airlines Pilots

Financial Planning Aviation

After years of negotiations, Southwest Airlines pilots have much to celebrate with the ratification of their new contract in January 2024. Like with many other major airlines, COVID and the subsequent recovery created major setbacks in negotiations while the entire aviation industry tried to stay afloat. Now, years after the original amenable date, the newest SWAPA agreement (ironically dubbed “Contract 2020”) has been ratified, and the implementation of many aspects of the new contract has already begun.

As with all contractual reviews, our aviation team isn’t here to give any implicit approval or disapproval of the terms of the contract, and it’s beyond the scope of this article to cover any aspects of the contract that aren’t directly related to financial planning (such as scheduling and other quality-of-life issues). In this article, we’ll review what are, in my opinion, some of the most significant takeaways regarding financial planning for pilots subject to this contract. As Southwest pilots are most likely aware, there are several significant changes to the contract that have made the SWAPA contract not only significantly better but — in a few cases — industry leading.

Letter of Agreement 24-01 – Ratification Bonus

By the time this article is published, the ratification bonus for pilots will have been paid out. The entire bonus is retirement eligible, meaning a 15% non-elective contribution (NEC) will be applied to a pilot’s 401k, just like wages from any other paycheck. The bonus is also eligible for 2024 profit sharing calculations to be paid out in 2025.

How pilots elected this bonus will drive some important decisions for the rest of 2024. For those who elected to put their bonuses in their 401k plan along with the 15% NEC, there’s a strong possibility many will be close to maxing out their 401k earlier in the year than is typical, creating “spillover” that will be credited toward the new Market Based Cash Balance Plan (see below regarding contract Section 5.A).

Section 4.A – Medical Insurance

In general, pilots will have most of the medical plan options they’ve seen in the past with some minor changes. The most significant change from a financial planning perspective is that, should a pilot predecease their spouse, there are now contractual provisions written in for the surviving spouse for medical benefits. The spouse of a pilot who dies prior to the FAA mandatory retirement age will have three options available to them:

  • Option 1 – Up to five years of coverage in the Choice Plan C and Basic Dental Plans. Surviving spouses can pay for this benefit using unused sick leave their spouse had in their sick bank. Once the sick leave is exhausted, the spouse will need to pay normal active employee rates.
  • Option 2 – 36 months of COBRA coverage, with the first 12 months being completely paid for by the company. The subsequent 24 months would be paid for by the surviving spouse at current COBRA rates.
  • Option 3 – If the deceased pilot was eligible for early retiree medical and dental benefits (between ages 55 and 65), the surviving spouse will be eligible for benefits as if the pilot had survived and decided to retire early.

Finally, the new contract now allows for pilots to keep their current medical plan should they go on disability, which is a departure from the previous contract.

Section 4.D – Disability Insurance

Improvements to the disability plan are arguably one of the biggest wins for the SWAPA pilot group and go active on May 1, 2024. As a refresher, there are two providers for disability plans for the pilot group: the union and the company itself. Union-provided benefits include voluntary short-term disability (STD) benefits as well as two versions of voluntary supplemental long-term disability (LTD) benefits. These have been upgraded from the previous structure, include shorter elimination periods and higher payouts and are typically meant to bridge the gap for a pilot waiting to qualify for loss-of-license (LOL) benefits, a company-provided benefit.

Here’s a summary of changes to these benefits:

  • Company Provided Loss-of-License Plan – The changes to the LOL benefit are truly substantial. The current plan has an elimination period of six months, only lasts for five years and has a cap on income. All these have been vastly improved. The plan has been restructured to now only have a 60-day elimination policy (which aligns with the new STD plan), provide a 50% pre-disability income benefit with no caps and, most importantly, last until FAA mandatory retirement age. Pilots also have the ability to choose between a taxable or non-taxable benefit option. Pilots will automatically be defaulted to the taxable option. If no changes are made, pilots will see no line items on their pay stubs, and benefits will be taxed at a pilot’s marginal tax rate. If choosing the tax-free option, pilots will see a line for imputed income on their pay stubs, and benefits will be received tax-free (for more information on imputed income, read our article we wrote for Delta pilots’ GVUL Insurance Policy Benefit Change). Another huge addition to the plan is that the company will now make non-elective contributions (NECs) to a pilot’s 401k based on their pre-disability earnings — not on the actual benefit payment itself.

For those who might become permanently disabled, the LOL plan has a cost-of-living adjustment (COLA) built in, with pilots on extended LOL benefits receiving a 5% increase in benefits every five years. Pilots who require income in addition to their LOL benefits may elect to use their sick bank to plus-up their income to a maximum of 100% of their pre-disability earnings.

  • Finally, other important provisions include the removal of a 24-month benefit limitation for mental health disorders as well as the same limitation for substance abuse issues (assuming the pilot is actively participating in a HIMS program).
  • SWAPA Voluntary Short-Term Disability Plan – Gone are the A and B plans. The union now provides one single STD plan that pilots can opt in to. Pilots that opt in to this plan pay the premiums, which cap out at a maximum of $127.50 per month. The plan is now structured with a shorter elimination period of 14 days (versus the previous 30 days), and the plan no longer accounts for the exhausting of sick leave. The benefit is tax-free, 50% of pre-disability benefits, and capped at $2,500 per week from day 14 to day 60 after a disabling event. This payout period is important, as it provides a seamless transition to LOL benefits, as described above. All pilots will be auto-enrolled in this plan unless they proactively opt out.
  • SWAPA Voluntary Long-Term Disability Plan – While the STD benefit went down to one plan, conversely, the LTD plan increased to two plans, LTD A and LTD B (both new plans now have an elimination period of 60 days, versus the previous 180 days):
    • LTD A – This benefit provides 10% of pre-disability income and caps out at $2,500 monthly — and there are no offsets, meaning the benefits aren’t reduced due to income from other sources. The benefit is tax-free and pays out until the mandatory retirement age of 65. The max premium for this plan is $312.50 per month. Similar to the STD Plan, pilots will be auto-enrolled in this plan unless they opt out.
    • LTD B – This plan is identical in structure to LTD Plan A, except benefits start in month seven of disability. This plan increases the monthly benefit from 10% to 15% of pre-disability pay, with a cap of $6,300 monthly. The maximum premium for this plan is a hefty $667.80 per month.

While these changes to disability are tremendous for the pilot group, it’s also a lot to digest, and you might find yourself reading and re-reading the section above to fully absorb it. You might be asking yourself these questions:

  • Should I opt in or out of the STD and LTD plans?
  • If opting in, which LTD plan is right for me?
  • If I’m on an extended period of disability, will I be able to make ends meet?
  • Do I need to have an additional source of income or additional disability insurance?

However, the answers to these questions depend on each pilot’s unique situation.

Going on disability is a scary proposition for pilots (see our recent article, Pilots Should Treat Life Contingencies Like Flying Contingencies). For this reason, it’s a standard part of our review process to do a thorough disability analysis for all pilots that work with our Creative Planning Aviation Team so that they have the information they need to make important decisions when planning for disability.

Regarding timelines, open enrollment for the new disability plan runs from 4/1 to 4/12, and as mentioned above, pilots will be auto-enrolled in STD and LTD A unless they opt out. It’s worth noting that this will be the only time current SWA pilots will be able to opt in to these plans without going through a medical screening process with MetLife (meaning they will essentially be guaranteed coverage). If a pilot opts out but then subsequently decides to opt back in, they won’t necessarily be guaranteed coverage (coverage will be dependent on the results of your medical screening). Additionally, if a pilot opts in to LTD A but later decides to change to LTD B, completion of the medical screening process will be required for that change as well. For this reason, a pilot might consider opting in to these SWAPA plans (the most conservative option being Plan B) pending running a disability analysis.

Section 4.E – Life Insurance

Pilots now have a contractual benefit of $800,000 paid for by the company. The important aspects from a financial planning perspective are that pilots will maintain this coverage even when going on disability, which is a change from the previous contract. The other aspect to this policy is that pilots will see a line for imputed income for insurance on their paystubs above the amount of $50,000 in coverage. This is an IRS requirement when a company pays for a life insurance policy for an employee. Please read this article to get a better understanding of imputed income and how it will increase as a pilot becomes older. For pilots that eventually have lower life insurance requirements, they might consider voluntarily lowering their insurance coverage to reduce the amount of imputed income on their paychecks.

Section 5.A – Market Based Cash Balance Plan (MBCBP)

A big win for Southwest pilots, the MBCBP is rapidly becoming the fashionable alternative to traditional defined benefit plans of the past, which have tragically left countless “dead zoners” from other airlines with pensions worth only pennies on the dollar of what they were promised. We’ve covered the basics of MBCBPs for both Delta and United in previous articles, and you can find a summary of the nuts and bolts of how these plans work here. In short, MBCBPs are funded by company contributions only. Because the plan isn’t currently in place and is pending a private letter ruling from the IRS to make it official, the company has stated they’ll go ahead and start accruing credits for pilots in the meantime to add at a future date once the plan is officially established.

With that, we’ll break down the finer point details of the Southwest version of this plan:

First, Southwest’s plan will make 1% monthly contributions of all eligible compensation below the 401(a)(17) limit (also known as the maximum compensation limit) to a pilot’s MBCBP (starting in 2026, this will rise to 2%). This limit for 2024 is $345,000 in total compensation, and once a pilot hits that amount of compensation for the year, these contributions stop. It’s worth noting that the 401(a)(17) limit is indexed for inflation and goes up annually, so the 2025 limit will be higher. What this essentially means for Southwest pilots is that, unlike the other airline plans, even the most junior new hire pilot at SWA will begin receiving contributions to their MBCBP on day one and won’t have to wait until their 401k has been maxed out to begin receiving these contributions. This practice would theoretically result in a contribution of $3,450 by the company to this plan in a year and would be doubled starting in 2026 — again, indexed for inflation.

Second, the other way funds will make it into the MBCBP — and, most likely, the most significant source of contributions — is “spillover” from the 401k. Once a pilot reaches the 415c maximum for contributions into their 401k ($69,000 for 2024), the company NEC spills over into the MBCBP. Spillover continues until, as mentioned above, a pilot hits $345,000 in compensation for the year, after which spillover stops into the MBCBP. How much spillover a pilot can achieve in given year will depend on their total compensation for the year, the amount of elective contributions they make into their 401k and how quickly they make these contributions before hitting $345,000 of total compensation for the year.

It’s important to know a vital difference between this plan and that of other airlines, and it’s that MBCBP contributions come to a halt once a pilot hits that $345,000 limit for the year, after which future NECs will flow into the various non-qualified deferred comp plans as it did in the past for pilots.

To run through a theoretical scenario using 2024 limits, here’s what a potential savings scenario could look like for a pilot who maxes out their 401k:

  • Maximum elective deferral of $23,000 by the pilot. Those over 50 years old can save an additional $7,500 in catch-up contributions, but these don’t count toward the IRS maximums.
  • This leaves another $46,000 of room in the 401k, which company NECs would cover upon hitting $270,588 of compensation for the year.
  • This now leaves the pilot another $74,412 of compensation on the year to apply the 17% NECs to their MBCBP. In this case, it would equate to $12,650 of contributions into their MBCBP. Remember that these contributions stop once a pilot hits $345,000 of compensation for the year.
  • Finally, the 1% contribution of $3,450 would go into the MBCBP.
  • This brings the total amount of contributions into qualified accounts for a pilot up to $85,100 (or $92,600 for those over age 50) in this scenario.
  • Any spillover past these amounts flows into the deferred comp plans or is paid as cash to the pilot. The above situation doesn’t account for profit sharing, which would follow all the same spillover rules just discussed.

These numbers only go up in 2026 once NECs increase to 18%, and the normal MBCBP rate increases to 2%.

Section 5.B – Profit Sharing

Pilots with more than five years of service will be able to make a one-time transfer of their current balance from Empower to Schwab. This will be similar in nature to a rollover of a 401k and will have no real-time tax consequences. For those who prefer consolidation of their retirement accounts with one custodian, this is a great option. For pilots younger than age 59 1/2 with at least five years of service, there will be an option for a one-time transfer of their profit-sharing balance to their 401k. Once hitting age 59 1/2, pilots will be able to make this transfer once per calendar year.


All in all, the newest SWAPA agreement puts their pilot group right on par with the other “big four” airlines from a financial perspective, and we congratulate them on this. With all the financial enhancements available to the pilot group, our Creative Planning Aviation Team stands ready to assist pilots in using these enhancements to help plan for all their financial goals and contingencies.

A common question we get from Southwest pilots is, “why should I pay someone to handle this for me?” Because of the nature of much of the financial industry, pilots often have the expectation for us to be like countless other firms, many of which simply plug them into prefabricated portfolios for a fee, and that’s the extent of the relationship. This expectation is understandable, as this is the model for much of the financial industry. However, this preconception couldn’t be further from the reality at Creative Planning. Our process is truly comprehensive in nature, and we evaluate all financial areas of our clients’ lives.

For those who have questions about what a comprehensive evaluation looks like, we encourage you to reach out to our team and go through our process, which includes a financial plan and a customized set of recommendations tailored to your situation, to see what kind of value we can bring to your financial life. Meeting with us has no obligation whatsoever — the only thing it costs is a bit of your time. We’re confident you’ll find value in what the Creative Planning Aviation Team has to offer.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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