For Southwest Airlines employees and pilots
Planning for Southwest Airlines employees, where the 401(k) is the pension.
Southwest has no traditional pension. For most employees, the Retirement Savings Plan, with its company match and ProfitSharing deposits, is the retirement plan. For pilots, the contract-funded company contribution is large enough to run into the federal cap on 401(k) additions, and where the overflow lands is a decision in itself. We coordinate those accounts with the ESPP, lump-sum contract payments, and the exit date.
The situation
One employer, three retirement accounts, no pension
Southwest reported 72,790 active full-time-equivalent employees at the end of 2025, including 32,214 in air operations, with headquarters near Dallas Love Field. About 84% are union-represented, and most retirement terms are written into those contracts; the SWAPA pilot agreement is amendable in January 2029. Southwest’s 10-K describes no traditional pension, only defined contribution plans and a small market-based cash balance plan created for pilots in 2024.
The main plan changed shape on May 31, 2024, when the ProfitSharing Plan merged into the 401(k) Plan to form the Southwest Airlines Co. Retirement Savings Plan. For 2025 the company matched 100% of deferrals up to 9.3% of pay for most participants, and the Board-set profit-sharing contribution was about $70 million. Pilots have a separate 401(k) plan funded by non-elective company contributions, plus the cash balance plan.
Cash arrives in lumps. Pilots received roughly $1.35 billion in ratification bonuses in early 2024, and the 2024 contracts with pilots, flight attendants, and ramp and operations agents paid about $1.9 billion in bonuses in total. In February 2025 the company eliminated about 1,750 corporate roles, roughly 15% of corporate positions. A large payment and an early exit each change the tax year they land in, and both are easier to handle when the plan already has a rule for them.
Why it’s complex
Five decisions specific to a Southwest career
The pilot 401(k) meets a federal ceiling
Company contributions and your own deferrals share the $72,000 cap in 2026. Above a certain pay level the two cannot both fit, and your deferral election decides which dollars get in. See the illustration below.
Catch-up contributions in 2026The cash balance plan is a small pension
Since 2024, eligible pilots earn pension credits of 1% of eligible wages, 2% from January 1, 2026. The account tracks a designated portfolio month by month, up or down, but the benefit can never be less than the credits themselves. The default payout is an annuity.
How survivor benefits fit togetherProfitSharing lands inside the plan
Since the 2024 merger, profit-sharing awards are deposited into the Retirement Savings Plan, not paid in cash. The amount is set by the Board each year, and company contributions vest 20% a year over five years. Leaving in year three forfeits part of it.
How we build a planThe ESPP buys monthly at a 10% discount
Shares are bought at 90% of the market price at the end of each monthly purchase period, after six months of service. In 2025 employees bought about 2.1 million shares at an average of $28.54. The discount is income when you sell; how long you hold decides the rest.
Equity compensation and concentrated stockA separation resets the clocks
The February 2025 reduction and the 2024 voluntary separation program each ended careers on the company’s timetable. Unvested company money, the Rule of 55, sick time that can fund retiree medical premiums to 65, and severance all turn on your age and service at the separation date.
The Rule of 55Hypothetical illustration
How a pilot reaches the $72,000 cap
Employee deferrals and company contributions share one IRS limit on annual additions, $72,000 in 2026 under Section 415(c); catch-ups sit outside it. Assume a company contribution of 17% of eligible pay, the rate pilot-benefit summaries report under the 2024 agreement (the SWAPA agreement and plan document set the actual rate), counting pay only up to the $360,000 compensation limit. Round numbers, no real pilot, no investment return.
| Eligible pay | Company money at 17% | Own deferral | Total additions | Against the $72,000 cap |
|---|---|---|---|---|
| $200,000 | $34,000 | $24,500 | $58,500 | $13,500 of room left |
| $300,000 | $51,000 | $24,500 | $75,500 | $3,500 over |
| $360,000 or more | $61,200 | $24,500 | $85,700 | $13,700 over |
Two things follow. Every dollar a high-earning pilot defers is a dollar of cap the company contribution cannot use, so the deferral election decides how much company money fits. And what happens to company money that does not fit is a plan rule, not an IRS rule: the 10-K says amounts over the Code’s limits go to a separate unfunded arrangement or are paid in cash. Read the current SPD before setting the election. The age-50 catch-up of $8,000, or $11,250 at ages 60 to 63, sits outside the $72,000.
Sources: IRS cost-of-living limits for 2026; Southwest Airlines Co. Retirement Savings Plan, Form 11-K for 2025; Southwest Airlines 2025 Form 10-K, Notes 12 and 13. Terms vary by work group and contract; your plan documents govern.
Our approach
A plan that treats the 401(k) like the pension it replaces
Without a pension, the savings rate, the deferral election, and the exit date do the work a pension formula would have done. We read the public plan terms, then your statements and contract, and build the structure in the order the decisions arrive.
Capture the match
In the Retirement Savings Plan, defer at least 9.3% of pay so no match is left behind; choose pre-tax or Roth deferrals while income is lower; and decide what the ESPP shares are for before the first monthly purchase.
Manage the cap
For pilots, set the deferral election against the company contribution each January, confirm where any overflow goes, and use catch-ups from 50. For everyone, give profit sharing and bonus years a written use.
Choose the date
Pilots stop flying at 65 by regulation. We model leaving at 55, 60, and 65 against vesting, sick time that funds retiree medical premiums, Social Security timing, and the low-income years before required distributions.
Turn it into income
Sequence withdrawals across the Retirement Savings Plan, the cash balance benefit, ESPP shares, and taxable savings, with Roth conversions sized to the brackets that open after the last paycheck.
The work
What you’ll work through with us
- Deferral strategy against the $72,000 cap, pre-tax versus Roth, with catch-ups from 50
- Where company contributions above the cap go under your plan
- The cash balance plan election: annuity form, survivor protection, or lump sum if offered
- ProfitSharing and vesting: what a departure date costs in unvested company money
- ESPP participation, holding periods, and how much LUV the household should own
- Tax planning for bonus and retro-pay years: withholding, estimates, brackets
- Retirement-date modeling: the age-65 rule for pilots, the Rule of 55 for everyone
- Health coverage from separation to Medicare, and coordination with your CPA and estate attorney
Planning at the firm is led by Theo Halbardier, CFP®, CIMA®, CAIA®, the firm’s founder. We are fee-only: no commissions, no product sales. About Theo
Questions
Common questions from Southwest Airlines employees
Are you affiliated with or endorsed by Southwest Airlines?
No. The Financial Sciences Company is an independent, fee-only registered investment adviser. We are not affiliated with, endorsed by, or sponsored by Southwest Airlines, its benefit plans, the Southwest Airlines Pilots Association, or any other union representing Southwest employees. We work from public SEC filings and, with your permission, your own plan statements.
Does Southwest have a pension?
Not a traditional one. Southwest’s 10-K describes defined contribution plans covering substantially all employees and, since 2024, a market-based cash balance plan for eligible pilots that credits 2% of eligible wages from 2026, tracks a designated portfolio, and pays as an annuity by default. For everyone else, the Retirement Savings Plan is the retirement plan.
What happens to company 401(k) money above the IRS limit?
It depends on your plan. The 10-K says amounts exceeding the Code’s limits are provided through a separate unfunded arrangement or paid in cash; pilot publications have described a planned redirection into the cash balance plan. A nonqualified arrangement, a cash payment, and a qualified pension credit are taxed and protected differently, so we confirm the current rule in your SPD before setting a deferral election.
Should a high-earning pilot stop deferring to let more company money in?
Sometimes, and it is a real trade. Your deferral and the company contribution share the $72,000 cap, so a full $24,500 deferral can push company dollars out of the qualified plan. Whether that matters depends on where the overflow goes and how it is taxed. Catch-ups, $8,000 from 50 and $11,250 at 60 to 63, sit outside the cap and are the first place to look.
Is profit sharing paid in cash?
No. Since the May 31, 2024 merger, the award is deposited into your Retirement Savings Plan account, subject to Board approval each year. The plan’s default formula is 15% of the company’s operating profit as defined, less certain pilot deferred-compensation contributions, but the Board may set a different amount; the 2025 contribution was about $70 million. Company contributions vest 20% a year over five years, and fully at 59½, disability, or death.
My role was eliminated in the February 2025 reduction. What should I check first?
Your age and years of service at the separation date. They determine how much company match and profit sharing you keep, whether the Rule of 55 lets you draw from the plan without the 10% penalty, whether accrued sick time can pay retiree medical and dental premiums until 65, and what severance does to the year’s bracket. Then decide, without hurry, whether the balance stays in the plan or rolls over.
Reviewed by Theo Halbardier, CFP® · Updated September 2026 · Figures current for 2026
Start with your statements.
The first conversation is 30 minutes. A recent Retirement Savings Plan statement and, for pilots, your cash balance statement help, but no preparation is needed.
Meet with usSouthwest Airlines and its logo are trademarks of Southwest Airlines Co. The Financial Sciences Company is an independent, fee-only registered investment adviser and is not affiliated with, endorsed by, or sponsored by Southwest Airlines or the Southwest Airlines Pilots Association. Plan details summarized here come from public sources and may change; your plan documents govern.