Direct answer. A 401(h) is an employer-funded medical reimbursement account inside a qualified Defined Benefit pension plan — best for high-income closely held business owners who can sponsor a DB plan, with potential accumulation in six- or low-seven-figure territory. An HSA is an individual-owned, portable account requiring a high-deductible health plan, with relatively small annual contribution caps. Both deliver favorable tax treatment, but they target very different planning problems.
Snapshot Comparison
| 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 |
Structure & Ownership
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.
The most important difference is structural:
- HSA — an individually owned account at a bank or custodian, governed by IRC §223. The individual must be enrolled in a high-deductible health plan (HDHP) and meet other §223(c) eligibility requirements.
- 401(h) — a sub-account of a qualified Defined Benefit pension trust, governed by IRC §401(h) and Treas. Reg. §1.401-14. The employer sponsors and funds it; the trustee administers it; there is no HDHP requirement.
Contribution Limits
HSA contribution limits are set annually by the IRS and are modest — typically a few thousand dollars per year per individual or family, with a small catch-up at age 55+.
401(h) contributions are actuarially determined inside the pension plan, capped by the §401(h) subordination rule (≤ 25% of aggregate pension contributions, excluding past-service funding) and the broader §404 deduction limits. In practice, annual 401(h) contributions for a high-income owner are frequently many multiples of an HSA cap.
Tax Treatment
Both vehicles can offer "triple tax" benefits — deductible going in, tax-deferred growth, and tax-free distributions for qualifying medical care. The difference is who takes the deduction and how large it can be:
- HSA — deductible to the individual (or pre-tax through payroll), capped at the annual statutory limit.
- 401(h) — deductible to the employer, sized by actuarial calculation, typically far larger.
Accumulation Potential
A well-funded HSA over a long career may accumulate a six-figure balance. A properly structured 401(h) for a high-income business owner may accumulate up to approximately $750,000 per eligible participant for qualifying future medical reimbursement, subject to actuarial limits and IRS rules.
Who Each Vehicle Is Best For
| HSA Best For | 401(h) Best For |
|---|---|
| W-2 employees with access to an HDHP | Closely held business owners who can sponsor a DB plan |
| Self-employed individuals with an HDHP | Professional practices (medical, dental, legal, accounting, engineering) |
| Anyone wanting portable, individually controlled medical savings | Owners aged ~45+ seeking concentrated deductible contributions |
| Modest annual savings horizon | Six-figure annual savings horizon |
Can You Use Both?
Yes — they are not mutually exclusive. An owner with an HDHP can fund an HSA personally while the business funds a 401(h) inside its qualified pension plan. The two coordinate well because each addresses a different layer of healthcare funding.
Frequently Asked Questions
What is the main difference between a 401(h) and an HSA?
An HSA is an individually owned account requiring an HDHP; a 401(h) is an employer-funded medical reimbursement account inside a qualified Defined Benefit pension plan with no HDHP requirement.
Which has higher contribution limits?
A 401(h), typically by a wide margin. HSA limits are set by annual statutory caps; 401(h) contributions are actuarially determined inside the pension plan.
Do both offer triple-tax benefits?
Yes. Both can offer deductible contributions, tax-deferred growth, and tax-free qualifying medical distributions, but at very different scales.
Does a 401(h) require a high-deductible health plan?
No. The HDHP requirement applies to HSAs (under IRC §223), not to 401(h) accounts.
Can a self-employed sole proprietor have a 401(h)?
Only if they sponsor a qualified Defined Benefit (or Cash Balance DB) plan and adopt a §401(h) feature. A solo 401(k) by itself cannot host a 401(h).
Can you have both a 401(h) and an HSA?
Yes — they are governed by different code sections and serve different layers of healthcare funding.
Who controls the funds?
HSA — the individual account holder. 401(h) — the qualified pension plan trustee.
Which is portable?
HSAs are individually portable. 401(h) assets stay with the plan; participants access them as reimbursements after retirement.
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.
