Direct answer. A 401(h) account is a separate medical benefit account inside a qualified Defined Benefit pension plan, authorized by IRC §401(h). It may receive employer contributions that are tax-deductible, grow tax-deferred, and be distributed tax-free for the §213(d) qualifying medical expenses of retired employees, their spouses, and their dependents — a structure available to closely held businesses willing to sponsor a DB or Cash Balance DB plan.
What a 401(h) Account Is
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.
A 401(h) account is a sub-account of a qualified Defined Benefit pension trust dedicated to "the payment of benefits for sickness, accident, hospitalization, and medical expenses of retired employees, their spouses, and their dependents" (IRC §401(h)). It is operated under the rules of Treasury Regulation §1.401-14 and is one of the most under-used advanced retirement planning tools available to closely held businesses and professional practices.
Core Positioning
Purpose
To accumulate dedicated, tax-favored assets for the qualifying retiree healthcare and long-term-care expenses of the owner, family, and other eligible participants.
Structural Requirement
The 401(h) account only exists inside a qualified pension structure — most commonly a modern Cash Balance Defined Benefit plan.
The 401(h) Tax Trifecta
In many designs the 401(h) contribution represents an additional tranche of deductible employer dollars layered above the pension funding requirement, subject to the §401(h) subordination rule. See the 401(h) tax trifecta for the full walkthrough.
How It Compares to Other Accounts
| Feature | 401(h) Account | HSA | Standalone 401(k) | IRA |
|---|---|---|---|---|
| Funded by | Employer (sponsor of qualified DB plan) | Employee & employer | Employee & employer | Individual |
| Requires a qualified pension plan | Yes — DB or Cash Balance DB | No | No | No |
| Contribution deductible to employer | Yes, subject to actuarial limits | Limited annual statutory cap | Yes, within 415(c) limits | Limited / nondeductible at higher incomes |
| Growth | Tax-deferred | Tax-deferred | Tax-deferred | Tax-deferred |
| Distributions for qualifying medical care | Potentially tax-free | Tax-free | Taxable as ordinary income | Taxable as ordinary income |
| Requires high-deductible health plan | No | Yes | No | No |
| Available to retirees & dependents | Yes (retiree, spouse, dependents) | Yes (account holder, spouse, dependents) | Account holder | Account holder |
Potential Accumulation Opportunity
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.
Whether that ceiling is realistic for any given business depends on owner age, compensation, employee census, plan funding history, and the §401(h) subordination math. The figure is illustrative — every plan is actuarially sized.
Who Is a Strong Candidate
- High-income closely held business owners (typically $400K+ in eligible compensation).
- Professional practices with stable cash flow — medical, dental, legal, accounting, engineering, architecture.
- Owners already evaluating Cash Balance Defined Benefit design.
- Owners concerned about retirement healthcare and long-term care exposure (see healthcare costs in retirement).
- Owners with a relatively short time horizon to retirement who want concentrated, deductible funding.
Implementation Snapshot
- Feasibility study — actuary models contributions, deductions, and projected accumulation.
- Plan design & document drafting — DB or Cash Balance plan with a §401(h) medical benefit account.
- Adoption & trust funding — employer adopts the plan, funds the pension and 401(h) sub-accounts.
- Ongoing actuarial & TPA administration — annual valuation, Form 5500, nondiscrimination testing.
- Reimbursement administration after retirement — see how 401(h) reimbursements work.
Why Most Advisors Miss It
Most retail advisors operate primarily with IRAs, brokerage accounts, and 401(k) plans. 401(h) planning sits at the intersection of pension actuarial science, ERISA, IRC §213(d) medical rules, and TPA administration. It requires an actuary and a plan-document specialist — see why advisors rarely discuss 401(h).
Frequently Asked Questions
What is a 401(h) plan?
A 401(h) plan is a separate medical benefit account maintained inside a qualified Defined Benefit or Cash Balance Defined Benefit pension plan, authorized by IRC §401(h).
Can a 401(h) be added to an IRA?
No. A 401(h) cannot be added to an IRA, SEP IRA, SIMPLE IRA, or Roth IRA.
Can a 401(h) be added to a standalone 401(k)?
No. The host must be a qualified pension plan — typically a Defined Benefit or Cash Balance Defined Benefit plan.
What is the tax trifecta of a 401(h)?
Tax-deductible employer contributions, tax-deferred accumulation, and potential tax-free reimbursement of qualifying §213(d) medical expenses for the retiree, spouse, and dependents.
How much may accumulate in a 401(h)?
A properly structured 401(h) arrangement may potentially accumulate up to approximately $750,000 per eligible participant for qualifying future medical reimbursement expenses, subject to actuarial calculations, IRS limitations, and inflation adjustments.
Why is 401(h) planning not widely known?
It requires Defined Benefit plan expertise, actuarial coordination, and specialized TPA administration, so it is rarely surfaced in retail advisory conversations.
Are 401(h) reimbursements taxable?
Qualifying reimbursements paid from a properly administered 401(h) account are generally received tax-free under IRC §213(d) for retirees, spouses, and dependents.
What is the subordination rule?
Aggregate 401(h) contributions may not exceed 25% of aggregate pension contributions (excluding contributions to fund past service credits) — the medical benefit must remain subordinate to the retirement benefit.
Who is a typical 401(h) candidate?
High-income closely held business owners and professional practices that already sponsor — or are good candidates for — a Defined Benefit or Cash Balance Defined Benefit plan.
How is a 401(h) administered?
It is administered by the pension plan's trustee under the plan document, with annual actuarial valuation, Form 5500 reporting, nondiscrimination testing, and reimbursement substantiation under §213(d).
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.
