Today's SWAPA Number is 1.5%. That's the 2023 profit sharing percentage that Southwest will be paying its employees this year. So today on the show, we're going to talk with NC member Damian Jennette about how that number was derived, how it compares to the industry, and how it fits into our pilot's retirement planning.
If you have any feedback for us at all, please drop us a line at comm@swapa.org
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Today's SWAPA Number is 1.5%. That's the 2023 profit sharing percentage that Southwest will be paying its employees this year. So today on the show, we're going to talk with NC member Damian Jennette about how that number was derived, how it compares to the industry, and how it fits into our pilot's retirement planning.
If you have any feedback for us at all, please drop us a line at comm@swapa.org
Follow us online:
Twitter - https://twitter.com/swapapilots
Facebook - https://www.facebook.com/swapa737
Kurt Heidemann:
Today's SWAPA Number is 1.5%. That's the 2023 profit sharing percentage that Southwest will be paying its employees this year. So today on the show, we're going to talk with NC member Damian Jennette about how that number was derived, how it compares to the industry, and how it fits into our pilot's retirement planning.
I'm Kurt Heidemann.
Amy Robinson:
And I'm Amy Robinson. And here's our interview with Damian.
Kurt Heidemann:
Damian, it's another year of profit sharing and we usually have you on just about every year to talk about it. So a lot of these things that we'll talk about, we've already covered in previous podcasts, but let's go back and review from the top. Let's start with what is the profit sharing number this year?
Damian Jennette:
All right, the exact number, 1.5850278%. It was for 2023 plan year.
Kurt Heidemann:
So 1.5?
Damian Jennette:
Yeah, that's close enough. Yep.
Kurt Heidemann:
And how does that stack up compared to our historic rates?
Damian Jennette:
Well, I mean, if you go back what the full 50-year history, 50 year history average was 8.9. Past five years was about 4%, and past three years was 2.6. So definitely underwhelming and it's probably going to continue that way for another year or two, I'd imagine with the pay increases for all the employee groups across the board, especially with the one that we just got. But historically it's pretty low and it's going to continue to stay low.
Amy Robinson:
Why is that?
Damian Jennette:
Well, we have a little bit of a revenue problem right now. I mean, we have record revenues because of ticket sales, but we also have a lot of cost creep on the expense side of the house. So in order to have profit sharing, you have to have profits. And so those profits have been shrinking, and so I would expect to have that dilution going forward for a little bit of time, especially since our contract just got ratified. There'll be some smoothing out of that. Flight attendants when they finally get a contract, that will need some smoothing out as well. I would suggest that we're going to have some low percentages going forward for some time.
Amy Robinson:
How does that compare with other carriers? I mean, you said you talked about the fact that we just signed our contract, but other carriers have already closed their contracts.
Damian Jennette:
Yeah, good question. So how do we compare? American was, I believe about 1.1%. United came in around 8%. And then Delta though, Delta was the super magnet there, they came in at 10.4%. They had a $1.4 billion profit sharing for all the employees. It was actually 1.383 to be exact. So that was pretty colossal. But they also do their profit sharing metric differently than we do, because American got their contract, United got their contract, they kind of me too-ed the Delta profit sharing plan. So they all mimic it now, but of course they have higher revenues and higher profit sharing or profits, we'll say, especially since our 2023 year as comparison.
Kurt Heidemann:
A question that always comes up is how is ours different than theirs? I know that theirs are paid as a bonus. Explain how ours is paid and why.
Damian Jennette:
Yeah, so they are considered, not to add confusion to this, but they're considered a cash bonus plan where ours is part of a retirement vehicle. It's actually a 401k plan essentially. And so what we're doing is we're grabbing the first 15% of profits, where at Delta, American, United, they have a structure where you have to exceed a certain threshold. So that threshold is $2.5 billion in pre-tax income. You have to exceed that in order to get the higher payout. So up to the $2.5 billion in pre-tax income is at 10% and then over that is 20%. And so in order for us to do that same metric, it would dilute our percentages quite a bit as comparison.
Amy Robinson:
Is there a reason we can't take ours as cash like the other airlines?
Damian Jennette:
Well, you can. That's obviously a part of negotiations. You can have a structure to do that. I will say during our SAP process, the reason that we didn't have a change in this last negotiation cycle was it wasn't very strong in the polling. The polling actually came back and said, "Maintain what we have but enhance it." Which I think kind of surprised all of us on the committee. At least it surprised me. But that's why we maintained basically the current book with some additional features on it.
But the biggest part I would also mention though, is the 15% of pretax earnings, that is codified. We're the only union at Southwest that has that specific metric codifying it. So what I mean by that though is every CVA at Southwest specifically says in there that you can't take away my plan. And in our 2016 contract, we added a provision in there that said that you can't change that formula. So we're actually the only union at Southwest that you can't change that pre-tax formula, that 15%. Whereas in the other contracts actually at Southwest, you could actually reduce that down and so they could change the metric on every other one, but we're the only one that actually has that piece of it codified.
Kurt Heidemann:
Damian, before we get too far away, earlier when you said our profit sharing plan is a retirement vehicle, and then you said it's specifically a 401k. When you said that, I bet we're going to get a lot of confusion from people who say, well, I have a 401k. Is this the same way? Explain the difference between those, between our 401k and the profit sharing plan specifically.
Damian Jennette:
Yeah, yeah. So I'm going to get very exact here in a second. It's going to add even more confusion, but I think we'll be able to back out of this puddle. Technically speaking, both our 401k plan and the profit sharing plan are profit sharing plans. So there you go. So I'm adding a little bit more confusion to it. So now let's back us up a little bit. The difference is our 401k, the SWAPA 401k, it is a profit sharing plan, but it has what's called CODA availability. Cash Or Defer Arrangement. That's a true 401k in essence that you can defer part of your cash into the plan or the company's going to put money into it.
The profit sharing plan as a retirement vehicle, the way the plan document says is that it will just receive money from the company and that's the only available source. So our plan says you can have both our source and the company source, this profit sharing plan just says that company money can go in there. And so it still has to meet all the IRS limitations, the 401(A)(17) and the 415 C and all that good stuff. It still has to comply with the retirement vehicle. Did I clear that up or is it still dirty as mud?
Kurt Heidemann:
I think you did. I guess we have two separate accounts though. And how does a pilot know which money is where or who's holding what or how can we tell?
Damian Jennette:
Yeah, so obviously the soon to be 17% NEC is going into the Schwab account, right? So that's the SWAPA 401k plan. The Empower account is where the profit sharing plan goes, and so you'll have to go to the Empower site and see how much your balance is and all that good stuff. Of course, we had an enhancement in this last contract to transfer that money. If you're under the age of 59 and a half, I'm sure we'll talk about that in a bit. But that's where you essentially go is Empower for your profit sharing plan account, and of course you would go to the Schwab account for your SWAPA 401k account. So that's the big difference to where you view your account balances.
Amy Robinson:
So obviously it's another year or so before it comes to fruition, but where will the market-based cash balance plan, where will those funds go?
Damian Jennette:
So the first thing I'd say is since we're talking about profit sharing plan, just completely wipe that out of your mind because profit sharing plan has nothing to do with the market-based cash balance plan. With that said, the market-based cash balance plan will be on the Empower website. If you have funds in the profit sharing plan, you'll be able to see it on the Empower site along with your market-based cash balance plan. If you participate in the Top Hat plan or any of the non-qual plans, they're all on the Empower website, which you can see there as well.
Kurt Heidemann:
So back to the profit sharing plan, Damian. We touched a little bit on why we can't take it as cash. You said it's a qualified account, but we do have an annual vote. Explain what that annual vote is and why it is, and the timing's a little weird, so explain that too.
Damian Jennette:
Yeah, so we have to have the election in there by the membership prior to the start of the plan year. So in this case, before 1/1 of '24 for this plan year, we had to have that election in to Southwest by basically no later than 12/31 of '23, which we actually do in the fall election normally. So we have to have that in place. And the reason that we do that is because it's a 401k plan, there's very stringent laws on what you can and can't do.
And so basically the law says you can modify it to take it as cash if you want, but you have to have a consensus from the total membership, and that membership has to have that vote in prior to the plan year. So that's why you can't make this individual election. Like I said, the only place that you actually have an election is in your SWAPA 401k on how much you want to defer in there because of that rule set that CODA, remember the Cash Or Deferred Arrangement rule set. Because of that, it allows you to put money into your 401k.
But because a profit sharing plan doesn't have those CODA rules, then that's why you can't make individual elections either on deferrals. It's just company money going in and then later you can make those decisions on what you want to do with that money.
Kurt Heidemann:
And this election is a result of the 2016 negotiation. Prior to that, we didn't even have that option.
Damian Jennette:
Right, right, exactly. That's a good comment. So yeah, we did, and of course this last contract, we made minor tweaks to it because of the NEC increasing. We did put in different levels for the membership to vote on. It's 3.5% now, 7% or all of it. Used to be a different metric there, but of course we've dropped it down to 3.57 and then all of it. Ever since 2016, the membership has always voted to put a hundred percent into the plan. And then obviously if you have spill cash, you'd get the spill cash back or drive some of that money into the non-qual plans. And so that's why pilots have voted for that deferral availability.
Amy Robinson:
And just to be clear, the breakdown that you're just referring to, the three, the seven and a half, they won't be voting on that until the fall general election of this year, correct?
Damian Jennette:
Yeah. Yeah. So we'll do it in the fall for the 2025 plan year. That's exactly right.
Kurt Heidemann:
And then just to make it more confusing, when does the 2025 plan year get paid?
Damian Jennette:
Yeah, good question there. So obviously they normally pay March 15th and you said for 2025, so it'll actually pay in 2026. So we're about to receive March 15th, the 2023 plan year monies will be deposited into the, I'm sorry, the profit sharing plan account on March 15th, and then if you had any excesses or things of that nature, it would actually be paid on March 20th paycheck.
Kurt Heidemann:
Is that allowed by the IRS for us to get our 2023 profit sharing funded into a qualified account if it fits, even though we're three months into 2024?
Damian Jennette:
Yeah, because it's all been designated. It's for that plan year, they need to do the accounting for it and things like that. They currently do because they have to have the end of the year accounting summed up and all that good stuff. So yeah, it's definitely allowed by law to wait off it.
Actually, they could do it at the end of the next year if they wanted to, but of course we have stipulations in the CBA now that they can't go any more than the last day of April. We kind of put that in as kind of a buffer in there just in case. But they have historically, especially in the past couple of years since we've had profit sharing actually pay out. They've been paying it March 15th typically.
Amy Robinson:
And what would qualify as profit sharing eligible wages?
Damian Jennette:
So that's basically your core money, right? So that's your TFPs time your pay rate. That is essentially what your core eligible wages are. Now, I'm going to get a little bit more trickier here. There's actually two parts to it, and this is because our profit sharing plan is a little different than everybody else. So the first segment of your, like I said, it is all your TFPs time your TFP rate, that's your eligible wages. But then you also have to put a line in there and it's called your 401(A)(17) line. So that's your IRS limit line. Anything below that 401(A)(17), which is a compensation limit, anything below that is eligible to go into the plan. Anything above that would actually be paid back as cash.
I know that's getting very technical side, but the reason that's important is when you have that 1.585% number that we're talking about, it's being applied to the full amount. However, the 1.585% is only being applied and put into the plan if it's available, can go into the plan if it's below that 401(A)(17) line. So I'm adding a lot of confusion to this, I know, but it's part of the IRS rules, so that's why anything above that though would be paid back as cash.
Amy Robinson:
Are there any minimum requirements to be eligible for profit sharing?
Damian Jennette:
Yeah, so you still have to meet the hours of service. We've had that for a long time now, but have to have a thousand hours of service. If you have produced at least one TFP in a month, then you get the equivalent value of 190 hours for that month. So that's where that a thousand hours, 190 hours per month, that's where all that comes in. There's some stipulations in there too if you are on a long-term disability or medical leave or something of that nature. They also grant you a block in there as well called 501 hours if you're out for a long-term, but you still have to meet that requirement is a thousand hours.
Kurt Heidemann:
Damian, what if I meet the hours of service requirement, I'm here for 10 months, but then I retire in October, say. Will those guys get profit sharing, the retirees, even if they get the year's worth of service?
Damian Jennette:
Just as long as they get the hours of service, that's correct. Yeah, they will get it in the following year. Yes.
Amy Robinson:
So you mentioned earlier that there's a 59 and a half provision in the CBA currently. Could you explain that to the membership a little bit more?
Damian Jennette:
Yeah, so we added the provision that, well, so let me say prior to this contract, the old book said if you were over the age of 59 and a half, you could transfer your profit sharing account every year into the SWAPA 401k plan. The addition that we added was if you're under the age of 59 and a half and you have at least five years of service, meaning that you're fully vested into the plan, you can then do a one-time transfer into the SWAPA 401k plan.
Now, you can only do it once if you're under the age of 59 and a half, but once you reach 59 and a half, you can do it annually, just like the old book allowed you to do going forward. That little enhancement in there allows you to transfer whatever monies you have in your profit sharing plan account into your SWAPA 401k plan without any kind of tax penalty or anything of that nature.
Amy Robinson:
Why would someone want to use that? Give an example.
Damian Jennette:
Part of it would be consolidation. Most people don't like to go to different accounts to look at everything. Some people like the investments, specifically in the Schwab 401k plan that we offer. And also it would be available to be transferred into your PCRA to do any kind of brokerage trades that you normally partake in maybe. But that's the mass majority reasons.
Kurt Heidemann:
Damian, I know it's hard for us to get you to give us advice, but when would a good time to take that transfer be?
Damian Jennette:
Obviously it's age-based too, that decision. But I guess the biggest part would be just as long as you believe that you're not going to have any more monies going into the account, then you may want to transfer it out if that's something that you're wanting to do. So if you are a 12-year Captain, more than likely, especially if you're a high time flyer and you're younger, let's say you're in your mid-forties, you want to transfer it over. Of course we're not giving advice here, but if you like the investment options in the Schwab account, then just transfer it over.
I will say that the account will remain active so that if you transfer that money over, let's say you're 45, you transfer it over because you don't think you'll have any more monies go into your profit sharing plan account, but you do have some go in there, it will go into the account. You just will have to wait until you're 59 and a half to transfer it out later.
Amy Robinson:
So you mentioned it earlier, Damian, but go ahead and tell the listeners one more time. When will profit sharing fund?
Damian Jennette:
So profit sharing will actually fund on March 15th into the Empower account, and then if you have exceeded your IRS limits, you have excesses, things of that nature, even the 401(A)(17) excesses, all of that will actually be paid on the March 20th paycheck.
Amy Robinson:
Thank you to Damian for coming on the podcast to talk to us about this year's profit sharing payout.
Kurt Heidemann:
If you have any feedback for us at all, please drop us a line at comm@swapa.org.
Amy Robinson:
And finally, today's bonus number is $118 million. That's the total amount that Southwest Airlines is contributing to profit sharing accounts this year. As Damian mentioned, that amount is lower than historical averages, so hopefully there will be better news next year.