MLB Pre-Arbitration Performance Bonus Program

How does the new Pre-Arb Bonus Pool work?

On March 10th, 2022, the MLB and the Players Association agreed to material terms of the ‘Pre-Arbitration Performance Bonus Program’ covering 2022 through 2026.

This article aims to educate players on:

1. What is the Agreement?
2. Who will Receive the Funds?
3. What Amount of Funds will Players Receive?
4. What are the Impacts on the Player Financially?

What is the Agreement?

The agreement, or the Pre-Arb Bonus Pool, was put in place during the latest collective bargaining agreement between the MLBA and the MLB. The Pre-Arb Bonus Pool’s goal is to provide additional compensation to Players who, generally, have less than 3 years of Major League service time. Some exceptions to this statement are explained below in the section “Who Will Receive Funds?”

The total dollar amount of the pool will be $50 million for 2023. Players can earn their allocation of the $50 million in two phases, with phase 1 being an Awards Allocation and phase 2 being a Statistical Allocation.

Who will Receive the Funds?

The top 100 players in terms of the statistical measure “Joint WAR” are deemed to be Eligible players for the pool and will receive an allocation of funds. Eligible Players include the following:

1. Players who have three years or less of Major League Service time and have NOT qualified for salary arbitration as a Super Two.
2. Players who have three years or less of major league service time and have signed multi-year agreements ARE eligible for the pool.
3. Players who were signed as Foreign Professionals or Extended Free Agents are NOT eligible.

What Amount of Funds will Players Receive?

There are two phases in determining the allocation of funds. Below are the details of both phases, and an example of how a player can earn an allocation from each.

Phase 1:

Eligible Players who receive consideration for the following awards can earn an allocation of the fund through Phase 1:

1. MVP
2. Cy Young
3. All-MLB Team
4. Rookie of the Year

Earnings for each award consideration are below:

Should a player receive consideration for multiple awards listed above (e.g. a player finishes 1st in Cy Young Voting AND wins Rookie of the Year) he will ONLY earn the higher of the two awards.

Phase 2:

After the funds are disbursed from Phase 1 to the award winners, the remaining funds in the pool will be disbursed to the top – 100 Eligible Players based upon that player’s Joint Wins Above Replacement (“jWAR”) as created and calculated by the MLB and MLBPA.

Each player will earn his share of the pool based on his percentage jWAR of the pool, multiplied by the dollars in the pool after phase 1 disbursements. See below for an example calculation:

• Player’s Individual jWAR: 4.5
• Total jWAR of top 100 Eligible Players: 250
• Player’s jWAR percentage: 1.8% (4.5 / 250)
• Total Phase 2 Funds: $40 million
• Player A’s Phase 2 Earnings: $720,000 (1.8% * $40 million)

Players CAN earn both phase 1 and phase 2 earnings. For example, if the above Phase 2 player who had a 4.5 jWAR also finished 2nd in the Cy Young voting, he would earn a total of $2,470,000 from the Pre-Arb Bonus Pool.

What are the Impacts on the Player Financially?

Congratulations - you receive an allocation from the Pre-Arb Bonus Pool, a well-deserved honor and an indication of your talent and hard work. Your financial team should be asking the following question: What can we do to maximize these funds?

With the appropriate expertise, you can be confident that you are planning for everything applicable to you, and no dollars are going to waste. Below are 2 areas you must plan for before receiving the funds.

1. State Taxes
2. Quarterly Estimated Tax

If no planning occurs, you will likely pay more in taxes than you should.

State Taxes

The Problem:

The IRS and State Revenue Departments require a return to be filed in every state where an athlete plays, as well as their resident state. Given this, for the pre-arbitration bonus pool earnings, a player will owe state taxes based on the individual player’s team’s schedule.

Teams will not allocate a player’s state taxes appropriately primarily for three reasons:

1)      Time spent during spring training

2)      Time spent on the IL

3)      Teams use the home state of the team as a ‘catch-all’ for unallocated wages, as in games played in TX, WA, or FL where there is 0% state income tax.

The Solution:

Recalculate a player’s earnings using the Duty Days approach.

The "Duty Days" approach allocates a player's income based on the number of days that a player performs services in a specific state. The tax preparer essentially ‘recalculates’ the correct state taxes owed based on the physical location where the player was throughout the year, and reports income based on that calculation as opposed to what the team would report. This recalculation can save players tens of thousands of dollars, depending upon their level of income.

Quarterly Estimated Tax Payments

The Problem:

We mentioned above that players pay state taxes in both the state they play in and their resident state. Most teams do NOT withhold resident state payments throughout the year, thus creating a potential penalty that you must pay if you do not pay your quarterly estimated taxes. These penalties are primarily due to a lack of planning from a player’s CPA or tax preparer, not safe harbor planning.

The penalties vary by state, but can and should be avoided through estimated state payments. The IRS and state departments of revenue require you to make estimated payments quarterly based on the income earned in that quarter. Failure to do so creates unnecessary penalties.

The Solution:

Have your CPA prepare a tax projection for you, and have them make your quarterly estimated tax payments for your pre-arb bonus pool earnings by January 15th, 2024.

Pro tip: if your investment advisor does not handle your tax planning as well, this likely will be missed.

Questions? Get in Touch

If you have any other questions we can help you answer as you navigate the financial implications of the pre-arb bonus pool or other financial matters, please don’t hesitate to reach out to us, personally.

*The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

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