Southwest Airlines distributes their annual Profit Sharing on March 15th.  Do you understand how those monies are paid out?

There is a widespread misperception that all of the profit sharing money is paid directly to you.  In fact, profit sharing is distributed based on a number of factors: current year 401k contributions, income in excess of $270,000 (for 2017) as well as elections you selected in October 2017.

Here is a quick breakdown of things you need to know:

For tax year 2017, you and Southwest Airlines are only allowed to put a total of $54,000 (under age 50, $60,000 age 50 and older) into your “Qualified Accounts” – 401k and SWA Profit Sharing.  If any contributions (Non-Elective Contribution “NEC” or Profit Sharing) exceed these limits, they will be distributed to your bank account (after withholding state and federal taxes) or to one of your Non-Qualified Accounts, in this case, the Excess Benefits Retirement Plan. The money will be distributed based on your elections at Empower Retirement (

Tax Note:  You do not pay federal income taxes on the amounts credited to any Non-Qualified Plan or any earnings associated with that contribution until you actually withdraw them from the Plan.* 

Also, by IRS rule, Southwest can only deposit profit sharing and 401k NEC contributions into your Qualified accounts on income up to $270,000 ($275k for 2018).  However, Southwest will continue to contribute profit sharing and 401k NEC on income above $270,000, but these contributions will be distributed to your bank account (after state and federal taxes*) or to your 401(a)17 Retirement Account, ( depending on your elections.

*Social Security and Medicare (FICA) taxes are withheld at the time Southwest contributions are credited to the Non-Qualified Plan.  For purposes of those pilots that exceed the $54,000 contribution limit, the amount of the tax withheld on contributions to the non-qualified plan will be approximately 2.35%.  (1.45% Medicare tax plus 0.9% additional Medicare surtax)   

Example 1:

By the end of tax year 2017, a pilot under age 50, in combination with Southwest has contributed the maximum $54,000 to his or her 401k.  This means ANY profit sharing due will be paid in Excess Contributions (aka “overage”).  Overage will be deposited into their personal bank account (after tax) or into the pilot’s Excess Benefits Retirement Plan. (see tax note above)

Example 2:

A Southwest pilot’s 2017 earnings exceeded $270,000.  Southwest will continue to contribute 401k NEC and profit sharing above $270,000, however, these monies must be distributed to the pilot’s personal bank account (after tax) or their 401(a)17 Retirement Plan. (see tax note above)


Q:  Where and when do I make the elections for Excess Contributions (aka “overage”) i.e., Non-Qualified Account elections.

A:  Every October, for approximately two weeks, we are allowed to change our elections and determine where any excess monies are to be deposited, e.g., your personal bank account, Excess Benefits Plan, or 401(a)17 Retirement Account.  SWAPA will send a notification of the exact two week period and guidance on how to make this election on the Empower website,

You can change this election every year, however, your last election will remain in effect until you make a new change.

Q:  How do I calculate how much I will receive?

A:  Take the amount you and Southwest have contributed to your 401k and subtract $54,000 ($60,000 for age 50 and over).  This is the amount that can go into your profit sharing account, the rest will be overage.  In addition, take the amount of your income above $270k and multiply by the NEC and profit sharing contribution.

Q:  What is the most financially smart thing to do with an overage?  

A:  This depends on many things, for example, your age, time left at Southwest, your current and future income.  It is very important to consider all of your options for overage money; paying off high-interest debt, college savings, Roth IRA, (or Back Door Roth IRA) contributions, etc. could be great alternatives.  Call Leading Edge for help determining what is best for your situation.

Q:  Is any of the profit sharing taxed?

A:  When money is deposited into your Southwest Profit Sharing account it is “tax-deferred” meaning it will not be taxed until it is withdrawn at retirement.

Q:  What is the Top Hat Plan? 

A:  The Top Hat Plan is the only Non-Qualified Plan that is totally elective.  Once you exceed $160,000 of income you can elect to defer a portion of your salary (depending on your age) into the Top Hat Plan.  The main purpose for using the Top Hat Plan would be to defer taxes on income that you’ll receive at a later date – retirement.

Q:  What does “at risk” money mean? 

A:  The Top Hat, 401(a)17 Retirement Account and the Excess Benefits Retirement Plan are all considered Non-Qualified retirement plans by the IRS.  A Non-Qualified account has many advantages but it important to note that the monies in Non-Qualified accounts could be available to creditors if Southwest Airlines declares bankruptcy.  In other words, if Southwest declares bankruptcy there is a chance you could lose the money in your Non-Qualified account.

We recognize the Profit Sharing distribution process can be confusing.  Please reach out to us with any questions, 865-240-2292.

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