If you’re a United pilot, you know it’s been a long road for the pilot group, having been engaged in heated negotiations for 1,627 days past the amendable date of your previous contract. After several years of stalled talks (complicated by COVID, early retirements, picketing and pilots carrying a lion’s share of responsibility to get capacity back up to pre-pandemic levels by flying arduous schedules), the pilot group and the company have finally come to an agreement.
The Creative Planning Aviation Team has been tracking progress on your contract, and we now have some real clarity regarding many of the details. While it’s beyond the scope of this article for us to comment on certain aspects of the contract — such as work rules — or to opine about the perceived value of the contract itself, there have undeniably been changes that will affect every single pilot financially. In this article, we’re going to detail some of the financial planning implications of the contract and how they might affect you.
Section 3 – Compensation
With an increase in pay scales anywhere between 13.8% and 18.7% (depending on the aircraft and seat one sits in), a greatly improved profit-sharing formula, retirement contributions on profit sharing, and the LOA 23-02 Ratification Bonus payments, there’s going to be a significant increase in annual income for the average United pilot. And while more money is a good thing, as the song goes, “the mo’ money we come across, the mo’ problems we see” — and in this case, the problem is the tax man. With substantial increases in overall W-2 compensation, some pilots (again, aircraft and seat dependent) may find themselves thrust into a higher tax bracket. And with the SECURE Act 2.0 making it more difficult in the not-so-distant future for high-income earners to shelter more pre-tax dollars in qualified accounts by forcing catch-up contributions in 2026 to be made to Roth accounts only, finding ways to reduce your tax burden annually is going to be paramount.
Section 7 – Furlough
Minimum furlough notice was tripled from 30-days’ notice to 90-days’ notice, giving pilots more breathing room in their contingency planning, should the industry or United experience hardship. Especially for those who have lived through furlough, the threat is always real, so having a robust emergency fund or plan B for income is always a consideration for all pilots (see our previous article by Dhanise Pagulayan addressing emergency funds here: 3 Reasons a Pilot’s Emergency Fund Should Be Extra Robust). The extra padding on required notice isn’t much, but it will give pilots a little more breathing room should WARN letters ever be issued.
Section 11 – Vacation
There are multiple changes to vacation in the contract, but the most significant change, from a financial planning perspective, is that the company will now make non-elective contributions to pilot 401ks whether vacation is used or forfeited. This change should alleviate some of the pressure pilots were under in the past to use all their vacation in a given year (for fear they would miss out on the company’s free money going into their retirement plan on forfeited vacation days).
Section 12 – Leaves of Absence
The new addition of eight weeks of paid maternity leave and 14 days of paid parental leave allow for more financial flexibility when it comes to family planning.
Section 22 – Retirement
The retirement improvements are probably the most significant change to the contract from a financial planning perspective:
- Non-Elective Contributions (NECs) – These are set to increase to 17% in 2024, and 18% in 2026. This will allow company contributions to accumulate more quickly in 401(k)s and will either reduce a pilot’s need to make more of their own elective deferrals or will more quickly trigger a “spillover” event once IRS contribution limits on the 401(k) are exceeded.
- Profit Sharing contributions – Similarly, to the bullet point above regarding NECs, this can serve to accelerate accumulation in their 401(k), leading to “spillover” sooner in the calendar year. At Creative Planning, we understand that the data show that lump sum investing typically leads to superior returns in the long run, and making a substantial contribution earlier in the year utilizing profit sharing is a great tool for those willing to use it.
- In-Service Distributions – Personal and United in-service distributions are now available starting at age 59 ½.
- Market Based Cash Balance Plan (MBCBP) – Delta broke the seal on this enhancement to retirement with their contract earlier this year, and it seems to have become en vogue with the rest of the airlines, as both American and FedEx have made similar proposals in their negotiations. In our opinion, the MBCBP is a good thing — it ensures pilots have another bucket to fund for retirement in the form of a pension, it ensures pilots get to keep that money regardless of what misfortune may befall the airline, and it ultimately allows the airline to provide a pension option to pilots without carrying the risk of underfunded pension liabilities (those who’ve been around a long time understand how that worked out). Earlier in the year, we wrote an article detailing the mechanics and planning considerations of the MBCBP for Delta pilots, and rather than rewrite our entire explanation of the plan, United pilots can visit the article to get the full explanation. The United proposal is similar to Delta’s, with a few differences:
- United is seeking to allow pilots an annual election to opt-in or opt-out, whereas Delta’s pilot group was forced to make a one-time irrevocable decision.
- There will still be an option of funding an HRA/RHA with spillover funds separately, or in combination with the MBCBP.
Implementation details and timeline are yet to be determined as of this article’s publication. However, pending final approval by both the IRS and United Airlines, we anticipate the plan beginning in 2025.
Section 24 – Insurance
Coming in a close second place behind retirement, the changes to insurance in the new contract are also incredibly significant to financial planning.
- HRA/RHA spillover – Whereas previously all spillover cash went into a pilot’s HRA/RHA, now the limit is capped at $10,000 until the MBCBP is implemented for those exceeding the 401a17 limit (this is the $330,000 max compensation limit for 2023). Any funds in excess of $10,000 will be paid out as cash to pilots and subject to taxes and union dues. Exceeding the 415c limit ($66,000 for 2023) will still result in spill going to the HRA/RHA until the MBCBP is established.
- For pilots who receive cash from exceeding the 401a17 limit, be prepared to give over a third of it back in the form of taxes and ALPA dues.
- It’s important that pilots understand how their HRA/RHA accounts work. Different than other forms of health savings accounts, the HRA/RHA is a form of a trust known as a VEBA (voluntary employees’ beneficiary association). Without going into all the nuanced differences, the most important difference is that, unlike an HSA, if a pilot passes away without a spouse or child under the age of 26, the United VEBA plan reabsorbs any funds still left in the account. In other words, all those years of United contributions that may have accumulated in these accounts would simply evaporate from their estate. If funding healthcare costs in retirement is a higher priority, spillover into the HRA/RHA is not unreasonable. If, however, maximining overall general retirement funding and maintaining control of the funds United contributes to you throughout your career within your estate is more important, then consideration for using the MBCBP should be strongly considered.
- Long-Term Disability (LTD) – Moving forward as of the date of signing (DOS), the maximum LTD benefit will increase to $13,521.40 (up from $11,000) and be tied to pay scale increases rather than being capped at an immovable maximum for years at a time. This means the caps will continue to increase year by year from DOS until 2027.
The 90-day elimination period (i.e., the time after a disabling event a pilot would have to wait until being able to collect LTD compensation) has been reduced to 60 days, which thereby also reduces the amount of vacation, sick pay, or other emergency funds that would be needed to live on during that period. Additionally, a new extended sick bank will begin to help bridge the gap for those pilots with not enough sick time to cover the new waiting period of 60 days.
Finally, with the inception of the MBCBP, pilots on LTD will now have company NECs contributed to this plan to the tune of 34% of the maximum benefit amount.
It’s worth noting that LTD compensation at United Airlines is tax-exempt income. This is a huge financial planning consideration! As they say in ground school class (or at least they did when they used to conduct ground school classes in person), this is a “foot stomper” moment. There are a multitude of planning options that arise from a pilot taking LTD, and if you find yourself one of these pilots, it behooves you to consult with a financial professional to see how this can affect your financial position.
- Company-Paid Life Insurance – This has long been a major shortfall for United pilot benefits. United clients we’ve worked with who didn’t already have other insurance policies in place have usually had significant shortfalls when it came to life insurance. With the newer formula modifier doubling — and in conjunction with the higher pay scales — the new benefit goes a long way toward improving a pilot’s life insurance situation. As an illustration, a 12-year 756 Captain’s life insurance coverage will go from $321,241 to $744,322 as of the DOS.
All in all, we extend our congratulations to the United pilot group on finally having a new contract in place. We at the Creative Planning Aviation Team are standing by to help guide you through the above considerations and more. If you’d like to schedule an appointment to discuss your situation with one of our aviation team wealth managers, you can call Creative Planning at 833-416-4702 or schedule a meeting online.
