capncrunch

September 21, 2016
16-14
VEBA Update

This death benefit, while available, is limited to the pilot’s spouse or eligible dependent(s). It was previously communicated that upon your death and the death of your spouse, amounts remaining in your VEBA account up to $50,000 could be paid to a designated beneficiary. Further research has uncovered an IRS ruling that prohibits a death benefit in conjunction with a Health Reimbursement Account or VEBA to a beneficiary other than your spouse or eligible dependents.

PilotJ3

Already have that with my whole life insurance. I’m out…

First Break

How about you go use the google machine to learn that a MBCBP is vastly different from a VEBA and isn’t even in the same section of the IRC.

The plan that the Notepad from 2016 was talking about was killed by the MEC after the contract ratified due to its numerous shortcomings and almost universal disdain from the pilot group.

The MBCBP was negotiated over the course of several years leading up to C2019 and finally agreed to by the company in LOA 20-04 after the furlough/UNA relief in the agreement was leveraged to several permanent gains. These gains included the lower TLV, reduced GS trigger, and a commitment to implement the MBCBP.

Gunfighter

The below examples are pure speculation, just like 95% of the content on this board. The option for in service withdrawals could make it useful for the 55+ crowd looking to defer income for a few years. Here are a few scenarios where this plays out well. Notice none of the examples feature pilots under 55.

1. A pilot stuffs $$ into the plan from 55-60, then begins in service withdrawals while coasting in the left seat for the last 5 years.
2. A 58 year old pilot with an outside business opts in to the plan for the income deferral, then makes a big in service withdrawal in a "loss year" for the business.
3. A 57 year old pilot married to a high earner opts in, only to begin in service withdrawals three years later when the spouse retires.
4. Every 58 1/2 year old pilot figures out they can put the money in, then take it out next year without paying ALPA dues.

We owe an apology to new hires for not working harder on an exemption. The good news is DC excess isn't likely to hit a majority of new hires until they have been on property for 5 years or more. Another side effect of the plan is that it makes front loading less appealing due to the trapped overage for those who opt in.

My decision will depend on the details of in service withdrawals at 59 1/2. I'm considering opting in for a mix of the above scenarios. A little adjustment to the overall portfolio could make room for the 60/40 fund. Did I read correctly that those who opt in don't get DC excess confiscated until October? At least there is a break for those who front loaded 401a dollars. Another bright spot is the recent addition of in plan Roth conversion as a way to reduce self inflicted DC excess.

Trip7

Stop referencing financial advisors. This is basic math. There is ZERO difference between the compounding of the two. One is tax deferred, and other isn't. The only real difference is your tax bracket when paying the taxes. Most that go tax deferred are betting they will have a lower tax bracket on withdrawal in retirement. Easier decision to make with 5 years or less to go.

Your comment on compounding interest and tax arbitrage for younger pilots is misplaced. I don't think you fully understand how low of a return 5% is and huge opportunity cost wasted by not paying taxes now, controlling your own money and investing it as you see fit. Any pilot can get a much better return on real estate or value stocks. Moreover, I believe you're flat out confused on the tax advantages. The MBCBP is not a HSA and therefore not triple taxed advantaged.

By all means, do what's best for you, but coming on here and telling pilots who are opting out that we don't know finances is quite the contrary. For me to opt into the MBCBP I'd need at least a 10% hurdle rate, preferably 15%

Gunfighter

The power of compounding interest comes from time, and the youngest pilots will suffer the most because they are trapped in a vehicle with subpar gains for two or three decades when they should be investing for growth.

TED74

It’s spill money. As folks have said previously, newbies aren’t likely to hit spill dollars for years after being hired. And the first year they get spill dollars, and likely the fifth year they’re getting spill dollars…it just isn’t a ton of money when looking at a total portfolio.

“Subpar gains” on a very small portion of one’s portfolio, while benefiting from tax deferral and instant exemption from union dues on that money isn’t what I personally would describe as suffering. Just my humble opinion, though, and I wouldn’t presuppose as Trip does that I know what is best for every pilot, or that the factors involved are “basic math”.

First Break

When you receive DC excess, you are paying the highest marginal tax rate on those dollars, because they are effectively the last dollars you earn. Depending on your state, you may be losing upwards of 40+% of your spill cash to taxes, not to mention the 1.85% to Ambrosi. The arbitrage has nothing to do with the “tax bracket” you will be in during retirement. It has everything to do with the effective tax rate of the dollars that are withdrawn from your tax deferred retirement plans while in retirement. If you are paying a 40%+ effective tax rate on ALL dollars you withdraw from your tax deferred accounts, you won the game of life and likely have substantial income in retirement outside of your retirement accounts. Most realistic scenarios for an average pilot have an effective tax rate or IRA withdrawals of no more than 20%, and even that would require a pretty large yearly withdrawal rivaling a pilots pre retirement active income.

Some quick googling of the difference between marginal tax rates and effective tax rates may help illustrate where we might not be lined up on how we view this decision.

On the investment return side, you have to consistently earn something like double the return of the MBCBP to overcome the tax arbitrage above to come out ahead for a middle of the road pilot with normal circumstances.

If you are gifted enough to make a 10-12% return every year, without losing anything, EVER, consistently for your entire career, i admit you may come out ahead. Pilots with the ability (or luck) to achieve this remarkable rate of return for multiple decades in a row with no losses are in a pretty rare demographic amongst our seniority list. If you know any of them, I’d gladly give them my password and pay a handsome commission to manage my accounts.

One place you and I are in violent agreement is that Real Estate can reliably eclipse these gains if one has the fortitude and desire to invest the time, energy, and risk tolerance required to be successful.

But I also applaud the union for thinking outside the box and trying to improve the retirement outcome for the average Joe who wants nothing to do with having a second job owning/managing real estate or actively trading their spill cash.

And there must be some value beyond “basic math” in this plan, as nearly every other major pilot group has disclosed they are actively seeking a MBCBP. I’ve seen it mentioned by UAL, APA, SWAPA, FedEx, JetBlue, and Alaska. To my knowledge, Delta is much further ahead than any of these other groups.

higney85

I agree with most of this, and all of the real estate aspect. A REIT (or a few depending on sectors) can work just as well without the hassle. Everyone is different. Nothing good happens when I leave for a trip, and a mgmt company takes a big chunk to take that situation off your hands. The concern I see (as one who has been very excited for the MBCBP) is this is 40/60 bond/equity.

nope. That’s burning money to make light when the sun is shining.

First Break

Do you have any of your portfolio invested in lower risk assets? Even the most aggressive suggested portfolio mixes have some portion protected from risk.