A change to 
Southwest Airlines
‘ retirement benefits that went into effect in August has allowed pilots to increase their retirement savings, USA Today reported on Thursday. The new Market-Based Cash Balance Plan (MBCBP), which is a result of the airline’s contract discussions with the pilots union
, enables pilots to save more for retirement than is possible with a traditional 401(k) plan.
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Under the new arrangement, Southwest pilots will be able to fully benefit from the airline’s 17% retirement contribution, even if they exceed the contribution limits for their 401(k) plans. Any contributions that go beyond the 401(k) cap will be directed into the MBCBP, providing pilots with additional savings opportunities and tax benefits.
A part of the new contract
The new market-based cash balance plan began on August 1 as part of a contract Southwest Airlines negotiated with the pilot’s union earlier this year, Monica Centers, Southwest’s manager of retirement and total rewards, stated in an email to financial media outlet Pensions & Investments.
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Phillip Hulme at Stars and Stripes Financial Advisors in Douglasville, Georgia, told USA Today that it’s a step in the right direction. “This is an example of getting back to the original intent of the three-legged stool, where the employee, employer, and government all took some responsibility for employee retirement outcomes.“
How the market-based cash balance plan works
Unlike typical 401(k)s, the MBCBP is a retirement plan type that is not constrained by the customary contribution limitations. This enables Southwest pilots, especially those with higher wages who could reach the 401(k) contribution limits sooner in the year, to save more for retirement.
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The retirement age has increased by 20 years since the inception of the law.
For persons under 50, the 2024 401(k) contribution limits are $69,000 for total contributions, including employer and employee contributions, and $23,000 for salary deferrals. The cap is raised to $76,500 for those over 50 who are eligible to make an extra $7,500 in catch-up contributions.
In 2026, Southwest will boost its automatic contribution to the MBCBP from 1% of a pilot’s pay to 2%. Any employer contributions that remain after a pilot has reached their 401(k) contribution cap—up to 17% of their salary—will be transferred to the MBCBP.
Pilots who earn more above the $345,000 ceiling on qualified earnings for 17% contributions will have their surplus money transferred to the MBCBP. For example, if a pilot makes $445,000, $17,000 will be transferred to the MBCBP.
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Pilots also receive instant tax relief since MBCBP contributions are tax-deferred. Before this modification, pilots received cash contributions for any contributions over the 401(k) cap, which raised their taxable income. These contributions grow tax-deferred within the MBCBP under the new arrangement.
Impact on pilots’ retirement savings
Financial advisors believe the new MBCBP provides significant benefits to Southwest pilots. The idea might lead to huge additional savings, according to Bonfire Financial consultant Nick Coleman, who spoke to USA Today. Coleman said that pilots would be able to save significantly more for retirement without having to pay more in taxes.
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Pilots will “get more money from Southwest for retirement; it (MBCBP) doesn’t increase their tax burden, and it grows tax-deferred,” according to Coleman’s comment. Coleman stated that the new plan “could mean significantly more for (pilots’) retirement. It could be hundreds of thousands of dollars more, depending on when they retire.“
Pensions & Investments cited data provided by Southwest, reporting that as of September 30, the plan had accumulated $26 million in assets.
Through a private letter ruling (PLR), the IRS authorized Southwest’s new retirement plan, enabling the company to provide the MBCBP under particular tax regulations. PLRs can offer insights about future trends in employee benefits, despite the fact that they are exclusive to each organization.
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A win from January
Pilots at Southwest Airlines voted in favor of a new five-year contract at the beginning of this year, avoiding a possible strike that had been on the calendar for several months. Southwest Airlines Pilots Association (SWAPA) members voted 92.73% to 7.27% in support of the tentative contract that was reached between Southwest officials and SWAPA in December through federal mediation.
The new contract, which runs until December 2028, includes an initial pay rate rise of 29.15% for pilots, followed by progressive increments over the next several years. Improvements to retirement programs, maternity and paternity leave, company-sponsored disability insurance, pilot scheduling regulations, and scope safeguards are also included.