How Spillover Contributions Affect Your PRAP: Cash Balance Plan vs. Retiree Health Account

If you're a United pilot contributing the maximum to your PRAP, you've probably noticed that not all of your money ends up in the same place. Once your contributions hit the IRS 415(c) annual additions limit — $70,000 for 2025, including both employee and employer contributions — the excess has to go somewhere else. That somewhere is either the Market-Based Cash Balance Plan (CBP) or the Retiree Health Account (RHA), and the difference between them is more significant than most pilots realize.

This isn't a niche issue. Senior captains at United regularly hit the 415(c) ceiling, especially once company contributions are factored in. Where the spillover lands affects your tax treatment in retirement, your flexibility with the money, and whether it's available for anything other than healthcare expenses. It's worth understanding before you default into whatever your enrollment form had pre-selected.

What Triggers the Spillover

The PRAP is a defined contribution plan — your 401(k). Between your own contributions, the company match, and any additional company contributions, the total can approach or exceed the IRS annual additions limit. When it does, the plan can't accept more into the 401(k) portion. The excess — the spillover — gets redirected.

For most United pilots earning captain pay, this happens automatically during the year. You don't get a notification that says "you've hit the limit." The payroll system redirects the contributions based on your election. If you haven't made a deliberate choice about where the spillover goes, you may be defaulting into an option that doesn't match your financial plan.

The Market-Based Cash Balance Plan (CBP)

The CBP is United's relatively new defined benefit component. It functions differently from the PRAP — contributions to the CBP grow based on a market-based crediting rate rather than your own investment selections. You don't choose the funds. The plan credits your account based on a formula tied to market performance, with some downside protection built in.

The key advantage of the CBP is portability. When you leave United or retire, the CBP balance can be rolled over into an IRA. That means it becomes part of your broader retirement portfolio, subject to the same rules as any other pre-tax retirement money — you control the investments, you manage the withdrawals, and you can integrate it into your overall distribution strategy.

The CBP is taxed as ordinary income when you withdraw it, just like traditional 401(k) distributions. It's subject to Required Minimum Distributions starting at age 73. And if you die before exhausting it, the balance passes to your beneficiaries. In other words, it behaves like additional retirement savings — flexible, portable, and yours to manage.

The Retiree Health Account (RHA)

The RHA is a very different animal. It's designed exclusively to cover qualified medical expenses in retirement — think Medicare premiums, supplemental insurance, dental, vision, long-term care insurance, and out-of-pocket healthcare costs. The money in the RHA can only be used for these purposes. You can't roll it into an IRA, you can't take cash distributions, and you can't redirect it to non-medical expenses.

The upside is significant though: RHA distributions for qualified medical expenses are tax-free. No income tax on withdrawals. No capital gains. For a pilot facing potentially hundreds of thousands of dollars in lifetime healthcare costs — Fidelity estimates that the average retired couple needs roughly $315,000 for healthcare in retirement — a well-funded RHA can cover a meaningful portion of those costs without creating taxable income.

The RHA also has no Required Minimum Distributions. The money sits and grows until you need it for medical expenses, and anything remaining can pass to a surviving spouse for their healthcare costs. It's essentially a dedicated healthcare savings vehicle with permanent tax advantages.

How to Think About the Decision

The CBP vs. RHA choice comes down to flexibility versus tax efficiency.

If you already have substantial retirement savings — a large PRAP balance, outside investment accounts, and a pension — the RHA becomes more attractive. You don't need the spillover for general retirement income. What you do need is a way to cover healthcare costs without generating additional taxable income in retirement. The RHA does exactly that.

If your retirement savings are thinner — maybe you started late, went through a furlough, or had years of lower contributions — the CBP's portability is more valuable. You need every dollar working as part of your general retirement income, and locking money into a healthcare-only account reduces your flexibility when you might need it most.

Your health outlook matters too. Pilots with chronic conditions or a family history of expensive medical needs may get outsized value from the RHA. Pilots in excellent health who expect minimal healthcare costs beyond standard Medicare might prefer the CBP's flexibility.

The Tax Math

Here's where it gets concrete. Say you have $15,000 in annual spillover contributions. Over 10 years, that's $150,000 plus growth.

In the CBP, that $150,000-plus grows and eventually gets withdrawn as taxable income. At a 24% federal rate, you're giving back roughly $36,000 or more in taxes on those withdrawals.

In the RHA, the same $150,000-plus comes out tax-free when used for qualified medical expenses. If you're spending that much on healthcare anyway — and in a 20- to 30-year retirement, you almost certainly are — the RHA effectively saves you that $36,000 in taxes. The longer you live and the more healthcare costs you incur, the wider the gap gets.

Common Mistakes

The most common mistake is not making a choice at all. If you haven't actively elected where your spillover goes, you're defaulting into whatever the plan's standard option is. That default may not match your situation.

The second mistake is treating this as an either-or decision without looking at the full picture. The right spillover allocation depends on your total retirement income, your expected healthcare costs, your tax bracket in retirement, and your other savings. It's not a standalone question — it's a piece of a larger puzzle.

The third mistake is assuming you can change your mind later. The CBP and RHA have different rules about access and portability. Money that goes into the RHA stays in the RHA. If you decide five years from now that you'd rather have had that money in a rollable account, you can't retroactively redirect it.

Getting It Right

The spillover decision is one of those financial planning details that's easy to overlook but expensive to get wrong. It sits at the intersection of tax planning, retirement income strategy, and healthcare cost management — three areas that interact in complicated ways for high-income pilots.

If you're hitting the 415(c) limit and haven't reviewed your spillover election recently, it's worth a conversation with an advisor who understands the PRAP structure and can model both scenarios with your actual numbers. Contact TIMGT to make sure your spillover is working for you, not just defaulting somewhere.