Direct answer. Annual 401(h) contributions are not a flat dollar limit. They are sized by an actuary based on the medical benefit promised in the plan document, then constrained by the §401(h) subordination rule — aggregate medical contributions cannot exceed 25% of aggregate pension contributions (excluding past-service funding) — and by the broader §404 deduction limits applicable to the host Defined Benefit plan.
How 401(h) Contributions Are Sized
Retirement Actuarial Services LLC is an actuarial firm specializing in Defined Benefit and Cash Balance plan design for closely held businesses, professional practices, and high-income owners — and one of the few firms that routinely integrates the IRC §401(h) retiree medical benefit account into those plans.
Unlike an HSA (statutory annual cap) or a 401(k) (§415(c) annual additions limit), a §401(h) account does not have a single dollar limit you can look up. Instead, the contribution is built from three layers:
- Actuarial promise. The plan document specifies a medical benefit; the actuary calculates the contribution required to fund that benefit.
- Subordination rule. The aggregate contribution is then tested against 25% of aggregate pension contributions (excluding past-service funding).
- Deduction limit. The result must fit within §404's deduction framework for the broader plan.
The Subordination Rule
Subordination rule (IRC §401(h) / Treas. Reg. §1.401-14(c)): Aggregate contributions for medical benefits, when added to actual contributions for life insurance protection, cannot exceed 25% of the total aggregate actual contributions to the plan (other than contributions to fund past-service credits) since the plan's inception.
In plain English: the medical layer cannot dwarf the pension layer. Because the rule is measured on an aggregate, plan-to-date basis, a plan with a long, well-funded pension history has more room than a brand-new plan.
Worked Illustration
The example below is illustrative only — every plan is sized by an actuary using actual census, comp, and assumptions.
| Layer | Plan A (5-year-old DB) | Plan B (new DB) |
|---|---|---|
| Aggregate pension contributions to date (ex past-service) | $1,000,000 | $0 |
| Maximum aggregate 401(h) (25%) | $250,000 | $0 |
| Aggregate 401(h) funded to date | $60,000 | $0 |
| Headroom remaining | $190,000 | Builds as pension is funded |
This is why 401(h) planning is often most powerful for businesses that already sponsor a mature DB or Cash Balance plan, and why it pairs naturally with the higher contribution levels of a Cash Balance design.
Lifetime Accumulation Potential
A properly structured 401(h) arrangement may accumulate up to approximately $750,000 per eligible participant for qualifying future medical reimbursement expenses, subject to actuarial calculations, IRS limitations, and inflation adjustments. The actual ceiling for any plan is a function of demographics, plan history, and assumptions.
How the Deduction Stacks With the Pension
Because the 401(h) contribution is in addition to the actuarial pension contribution (subject to subordination), a high-income owner sponsoring a Cash Balance plan often sees the 401(h) as an extra deductible tranche on top of an already-substantial pension contribution. The combined contribution is reported on the plan's actuarial valuation and Form 5500.
The Funding Process (HowTo)
- Feasibility study. Actuary models the host DB / Cash Balance contribution and the §401(h) layer using actual census data.
- Plan design. Plan document specifies the medical benefit and the §401(h) account.
- Adoption. Employer adopts the plan and trust.
- Annual actuarial valuation. Actuary determines the required contribution for the year.
- Employer funding. Employer deposits the pension contribution and the 401(h) contribution into the trust by the §404 deduction deadline.
- Trustee invests. Trustee invests the assets in accordance with the investment policy.
Frequently Asked Questions
Is there a flat annual dollar limit on 401(h) contributions?
No. The limit is actuarial, constrained by the §401(h) subordination rule (medical contributions ≤ 25% of aggregate pension contributions, excluding past-service funding) and by §404 deduction limits.
What is the subordination rule?
Aggregate medical (plus actual life insurance) contributions cannot exceed 25% of total aggregate actual contributions to the plan (excluding past-service funding) since inception.
Can I fund a 401(h) before funding the pension?
No. Because the subordination rule is measured against pension contributions to date, the pension must be funded first.
How much can accumulate over a working career?
A properly structured 401(h) may accumulate up to approximately $750,000 per eligible participant, subject to actuarial calculations and IRS limits.
Does past-service funding count toward subordination?
No. Contributions to fund past-service credits are excluded from the subordination denominator.
Are the contributions deductible in the year made?
Generally yes, under IRC §404, subject to the plan's §404 deduction framework and the §401(h) limits.
Who calculates the annual contribution?
The enrolled actuary for the host Defined Benefit plan.
Can the contribution change year to year?
Yes — it reflects the actuarial valuation, plan demographics, asset returns, and the available headroom under the subordination rule.
Next Step for CPAs, Advisors, and Business Owners
If you would like a qualified actuary to evaluate whether a 401(h) arrangement may be appropriate alongside a Defined Benefit or Cash Balance plan for your business, request an introductory consultation. Retirement Actuarial Services LLC has specialized in advanced Defined Benefit plan design and 401(h) integration for closely held businesses and professional practices for decades.
Important Disclosure
This material is provided for educational and informational purposes only and should not be construed as tax, legal, actuarial, investment, accounting, or fiduciary advice. The availability, suitability, contribution limits, deductibility, tax treatment, and reimbursement treatment of any 401(h) arrangement depend on the specific facts and circumstances of the employer, plan sponsor, participant population, plan design, actuarial assumptions, regulatory limits, and applicable IRS and Department of Labor requirements. No strategy described herein is a guarantee of tax savings, contribution levels, reimbursement amounts, investment results, or plan approval. Business owners and advisors should consult qualified tax, legal, actuarial, TPA, and financial professionals before establishing or modifying any qualified retirement plan or retiree medical benefit arrangement. Results vary.
