United Pilots’ MBCBP – Important Differences

Unlike some other airlines that I won’t mention here for fear of getting more Hurt Feelings Reports filed against me, the pilots at United Airlines are currently voting on a Tentative Agreement (TA) for a new contract that carries on the pattern bargaining process established by ALPA’s founder, Dave Behnke. This deal, a contract increase valued at more than $10B, helps bring the entire industry higher. I declare that if this deal passes, United pilots drink for free for the next four years, and pilots from a couple other airlines had better do the buying. You can read the details of this TA, directly from the UAL ALPA MEC, on their UPA23 website.

That TA includes language requiring the establishment of a Market Based Cash Balance Plan (MBCBP) similar to the one that Delta pilots just got in their new contract. I tried to get some useful information out about the Delta plan, and those pilots are now either locked into the new MBCBP, or permanently excluded from it. New hires will be automatically enrolled in the plan, per IRS rules.

Although similar, the United pilots’ MBCBP has some unique circumstances and provisions that require an entirely different calculus. The three key points are:

1. United pilots’ 401k “spill cash” currently goes into a Retirement Health Account (RHA).
2. The United TA specifically states that the company/union will ask the IRS to grant pilots the ability to elect to participate in the MBCBP, or not, on an annual basis.
3. Unlike an RHA, the funds in a pilot’s MBCBP endure as the property of his or her estate.

Let’s start by discussing the RHA.

Mixed Blessing

Bonfire Financial has a fantastic overview of United’s Retirement Health Account (RHA).

From the 35,000’ view, United’s RHA functions a lot like a Health Savings Account (HSA). If you haven’t already, you should read why a blogger who writes as The Mad Fientist regards the HSA as the Ultimate Retirement Account.

Most Americans end up with large medical bills at some point. Even if you’re healthy now, costs for end of life care stack up very quickly. Even military retirees with access to Tricare can face significant out-of-pocket costs.

As such, most pilots benefit greatly from contributing to an HSA if they’re eligible. (Tragically, military pilots with Tricare aren’t eligible. If the hawks in Congress really cared about you, they could give you access to a Tricare HSA plan with the lowest deductible allowed by law. Start writing your letters now.)

At United, any 401k excess dollars (“spill cash”) gets contributed to their RHA, and those dollars mostly act like dollars in an HSA. As we’ve established, this is valuable for most pilots.

This is in stark contrast to Delta where pilots either receive that spill cash as regular (taxable) income in their paychecks, or, now, as tax-deferred contributions to their MBCBP.

In an ideal world, the United RHA dollars would act exactly like HSA dollars. In this day and age, a pilot can easily doctor shop until they find someone willing to prescribe a variety of therapeutic good deals…like a spa and/or swimming pool, or certain botanical treatments, depending on your state of residence. Many pilots could use up a significant amount of taxed-advantage money on such things.

Unfortunately, based on Bonfire Financial’s description, it appears that United RHA dollars cannot be used for some of these treatments.

Another fantastic characteristic of an HSA is that starting at age 65, a retiree can use money (subject to regular tax treatment) from an HSA account for any expenses, not just medically-related items. Essentially, this worst case for an HSA is that at age 65 it starts acting exactly like a Traditional IRA.

This is important because many people worry about over-funding an HSA (or RHA). While Bonfire suggested that many Americans need anywhere from $215K-$341K for end-of-life medical expenses, it’s definitely possible for the balance in these accounts to exceed these figures.

If the pilots at United approve their TA, they’ll push pay rates to the highest in the industry. Their 18% DC excess dollars, invested in a pilot’s RHA over the course of a 20- (or 30-, or 40-) year career, could easily surpass that $341K mark.

There’s a good chance a United pilot will pass away with a lot of money left in their RHA.

The plan makes some allowances for that pilot’s family to inherit these benefits. A deceased pilot’s spouse and dependent children can continue spending their pilot’s RHA dollars. However, once that pilot’s spouse passes away and any children lose their status as dependents, the rest of that pilot’s family loses access to that money forever. The excess funds are simply absorbed back into the pool of RHA funds and get used by other pilots.

In my opinion, that’s terrible. Sure, it’s okay to help your fellow pilots, but their RHAs are just as over-funded as the deceased pilot’s was. This is especially egregious for former military aviators, as they probably won’t be able to use nearly as much of their own money in their lifetime.

Thankfully, their proposed MBCBP fixes this problem.

Status Quo

The Delta pilots didn’t get the choice on whether to participate in their MBCBP because the IRS felt kindly toward them. The Railway Labor Act mandates that parties to pilot contracts must “maintain status quo” during negotiations (to varying degrees.) Prior to their recent TA, status quo for Delta pilots was that all 401k spill cash got paid out monthly as regular, taxable income. Essentially, Department of Labor laws trumped IRS laws and required that active Delta pilots get the choice to maintain status quo by not participating in their new MBCBP.

If the United pilots approve their TA, they will get a similar opportunity to choose. However, that choice is very different. If they choose not to participate in their MBCBP, then any 401k spill cash they earn will continue flowing into their likely overfunded RHA.

Knowing that, it seems that most United pilots would benefit from participating in a MBCBP. This is even more the case for United’s military pilots on Tricare.

One meaningful exception here would be families where one or more members has severe, long-term medical issues. In that case, they probably can’t get enough money into an RHA.

MBCBP vs RHA

The biggest benefit of a MBCBP over an RHA is that a pilot’s family inherits it just like any other property. Even when the pilot and pilot’s spouse pass away, and all their children grow up, those kids and their descendants still get to keep the money from that pilot’s MBCBP. A couple unique rules force this.

Although each pilot gets an individual “account” in the MBCBP, that structure is only theoretical until money gets withdrawn. Until then, all MBCBP funds for every pilot at the company are pooled in one gigantic investment fund. The company and union have to agree upon a third party professional money manager to act as steward of those funds, and nobody but that manager gets to choose how to invest those funds.

When a pilot retires, they are required to pull their entire balance out of the MBCBP. This isn’t optional…that money must go somewhere else. The options offered at Delta include annuities, a lump-sum payment, and a non-taxable roll-over into an IRA.

That last option is the next major advantage of the MBCBP. Once a pilot starts moving money out of the MBCBP, he or she regains full control over it. The pilot will be able to invest it in the stock market, or even alternatives like real estate through a self-directed IRA. This essentially gives MBCBP dollars the same advantages as HSA dollars after age 65, as mentioned above.

The Delta pilots’ MBCBP takes this one step further though. It allows pilots to start executing these roll-overs at age 59 ½. This means they regain control over their investments nearly six years earlier than they might have. I suspect the United pilots’ MBCBP will offer a similar provision.

We’re glossing over a lot of other details here, but even at this most basic level, we see how advantageous the MBCBP will be for most United pilots. For them, the question won’t be taking taxable cash versus locking funds in a MBCBP, it’ll be continuing to over-fund an RHA versus participating in a MBCBP. That would be an easy choice for me.

Annual Elections

As good as a MBCBP may be for most United pilots, their TA specifies one more provision that could make it even better. Their TA specifically states that they’ll ask the IRS for permission to let pilots choose between contributing to the RHA and the MBCBP on an annual basis.

Before going any further, let’s note that this is far from guaranteed. Active Delta pilots got a one-time, irrevocable decision to participate in the MBCBP, or not. The IRS decided that Delta pilots hired after June 1st didn’t have a status quo to maintain, so it mandated that all new hires after that date must participate in the MBCBP, whether they want to or not.

It’s possible that the IRS will reject the United pilots’ request for annual elections between the two accounts. And yet, they’re asking a different question than their peers. For Delta pilots, the alternative to the MBCBP was getting a pile of cash to spend on whatever they wanted.

This whole situation exists because most US pilots lost their pension plans, and a pile of taxable cash won’t replace that for most. At United though, the choice here is between two regulated, retirement-oriented accounts. As far as the IRS is concerned, if a pilot chooses the MBCBP over the RHA they’ll end up paying more taxes when they eventually spend the money. I can’t see the IRS complaining about that. In the near term, Uncle Sam isn’t going to get his hands on this money in either case. Both the RHA and the MBCBP defer taxes now and reduce taxable income overall.

Allowing the United pilots to switch annually between these two plans would meet the IRS’s mandate of forcing people to save for retirement, and it wouldn’t change that money’s tax treatment in the near term. There won’t be a more convincing argument for allowing annual elections, and I think the United pilots stand a good chance here.

This would be stellar. It would allow United pilots to contribute as much to their RHA as makes sense for their family’s specific situation. Then, they could switch over to the MBCBP, thereby minimizing RHA over-funding, and retaining control over more of their money.

Industry Leading

I sincerely hope the United pilots get that good deal with their MBCBP. I have friends there, and want the best for them.

I also want this for selfish reasons though.

Remember our earlier discussion about pattern bargaining? Part of the reasons we airline pilots enjoy such amazing pay and Quality of Life is that pattern bargaining has reliably increased the value of our contracts.

Unfortunately, negotiations at some of our peer companies have completely failed in living up to this ideal. In one case, their TA was markedly worse than other industry proposals. Thankfully, those pilots rejected the TA. On the other hand, the American pilots’ TA was significantly worse than their peers until the United pilots’ TA raised the bar above what Delta pilots had gotten. American’s management realized that their offer didn’t begin to measure up, so they quickly offered an extra $2B in value and the pilots took it. I worry for my friends there that this new agreement sacrifices Scope and QOL for a little bit of cash, but I digress.

What our industry needs is leadership among each pilot group to repeatedly raise the bar during contract negotiations. This is especially important for ALPA pilots supposedly united at a national level under the spirit of Dave Behnke’s vision.

Not only did United’s TA win a value increase nearly 50% greater than Delta’s, if they win approval for annual MBCBP elections, it opens up the door to similar provisions for MBCBPs in other new contracts. That would benefit every single airline pilot in our industry.

Selfishly, I hope that this would come back around to help improve my MBCBP and get a similar provision added. (Until then, I’ve chosen to participate in my MBCBP and will just use the $330K loophole to meter the flow of money into my account.)

What Next?

Whether I benefit from this provision or not, United’s negotiations appear to have raised the bar on airline pilot contracts for our entire industry. That kind of leadership deserves our thanks and our praise.

If you’re a United pilot considering how to vote on your TA, you’ll unfortunately have to cast your vote long before the IRS makes its decision about annual elections. However, since your choice is between an RHA and a MBCBP, your calculus is very different than it was for the Delta pilots. I feel that in most cases, your MBCBP is a major value-add to your contract.

However, you shouldn’t make that decision based on my opinion. You should absolutely consult a Certified Financial Planner to examine your family’s specific situation and decide what’s best for you. I hope this discussion has helped set the stage for that discussion.

If you don’t already have a good advisor, I can recommend a few. Before you go CFP shopping, I also recommend you get a second opinion. You should listen to Episode 34 of the Passive Income Pilots podcast. (If you haven’t been listening to every episode of this show, you’re missing out!) This episode specifically discusses MBCBPs with guest CFP Timothy Pope. He might be a good person to ask for advice.

This podcast episode covers a lot of basics, and one of the hosts, Ryan Gibson, has a very negative opinion of MBCBPs in general. Take his opinions with a grain of salt. He’s 100% correct, but that’s largely the case because he’s also highly experienced in alternative investments. He runs a multi-million dollar investing business. He knows exactly how and why to put his money to work most effectively.

Many pilots have been asking me whether I recommend they participate in our MBCBP. Although I always exhort them to speak with a CFP, there’s also a pretty easy way to start forming your opinion. If you’re already involved in alternative investments (real estate syndications, you have your own business, you own real estate yourself, etc.) you already know that you can get tax advantages and investment returns equal to or exceeding those offered by a MBCBP.

Most pilots, though, aren’t that active with their investments. They’re content to put a bunch of money in the stock market and allow America’s unique combination of boundless ingenuity and insatiable greed to pay dividends and increase the value of their shares over time. Author JL Collins wrote a book calling this The Simple Path to Wealth. I believe that if a pilot chooses this path (and doesn’t spend like a moron) they’ll do just fine overall. They’ll end up with more than enough money to cover their needs, and enjoy plenty of luxuries for the rest of their lives.

If you’re in this camp, you don’t have access to the kinds of alternative investments that Ryan Gibson has in mind when he critiques the general idea of a MBCBP. You can absolutely gain access to those alternative investments, but it will take you a while to do so safely and effectively. In the meantime, you’re probably better off putting your money to work for you in a MBCBP. Worst case, you’d still retain significant control over how much of your money goes into your MBCBP each year.

The MBCBP in the United pilots’ TA is a victory for them. It also has the potential to raise the bar on pilot contracts for our entire industry. Congrats, and good luck with your voting.

This post’s feature image was taken by Tim Gouw and posted on Unsplash.