Direct answer. Below are the most common questions about IRC §401(h) retiree medical accounts. A 401(h) is a separate medical reimbursement sub-account inside a qualified Defined Benefit pension plan; it cannot stand alone, cannot be attached to an IRA or to a standalone 401(k), and provides tax-deductible employer contributions, tax-deferred growth, and tax-free §213(d) reimbursements to retirees, spouses, and dependents.
The Basics
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 questions below collect the answers our actuaries and plan specialists give most often — organized so you can scan them quickly.
Tax Treatment
See the full discussion on the 401(h) tax trifecta. Briefly: employer contributions are deductible under IRC §404, earnings are exempt inside the trust under IRC §501(a), and qualifying §213(d) reimbursements are generally received tax-free.
Eligibility & Hosting
A 401(h) can only be hosted by a qualified pension plan — typically a Defined Benefit or Cash Balance Defined Benefit plan. See Can a 401(h) be added to an IRA? and Can a 401(h) be added to a 401(k)? for the full rationale.
Funding & Limits
Annual 401(h) contributions are actuarially determined and constrained by the §401(h) subordination rule: aggregate medical contributions cannot exceed 25% of aggregate pension contributions (excluding contributions for past-service credits). See funding & limits.
Reimbursement Mechanics
After retirement, the retiree (or spouse or dependent) submits qualifying §213(d) medical expenses to the plan trustee for reimbursement. See how 401(h) reimbursements work for documentation, substantiation, and timing rules.
Compliance & Administration
The 401(h) account is reported on Form 5500 alongside the host plan, tested for nondiscrimination, and subject to ERISA fiduciary standards. The separate-account requirement, reasonableness rule, reversion prohibition, and forfeiture rule of Treas. Reg. §1.401-14 must all be satisfied. See IRS rules for 401(h).
Frequently Asked Questions
What is a 401(h) plan?
A separate medical benefit account inside a qualified Defined Benefit pension plan, authorized by IRC §401(h), used to pay qualifying medical expenses of retired employees, their spouses, and their dependents.
What code section authorizes a 401(h)?
Internal Revenue Code §401(h), with operational rules in Treasury Regulation §1.401-14.
Can a 401(h) be added to an IRA?
No. IRAs of every type cannot host a 401(h) account.
Can a 401(h) be added to a SEP IRA or SIMPLE IRA?
No. SEP and SIMPLE IRAs are not qualified pension plans for §401(h) purposes.
Can a 401(h) be added to a standalone 401(k)?
No. A 401(k)/profit-sharing plan by itself is not a qualified pension plan for §401(h) purposes.
What plans can host a 401(h)?
Qualified Defined Benefit pension plans, including modern Cash Balance Defined Benefit plans, and qualified money-purchase pension plans (historically).
Who can receive 401(h) reimbursements?
Retired employees, their spouses, and their dependents — for qualifying §213(d) medical care.
Are reimbursements taxable?
Qualifying reimbursements paid from a properly administered 401(h) account are generally received tax-free.
Are employer contributions deductible?
Yes — employer contributions are deductible under IRC §404, subject to §401(h), §404(a), and §415 limits.
What is the subordination rule?
Aggregate 401(h) contributions cannot exceed 25% of aggregate pension contributions (excluding past-service funding). The medical benefit must remain subordinate to the retirement benefit.
Is a 401(h) the same as an HRA?
No. An HRA is governed by IRC §105; a 401(h) is a sub-account of a qualified pension trust under IRC §401(h).
Is a 401(h) the same as a VEBA?
No. A VEBA is a §501(c)(9) tax-exempt trust; a 401(h) is part of a §401(a) qualified pension trust.
Can a 401(h) reimburse Medicare premiums?
Medicare premiums are generally §213(d) medical care; subject to plan terms and substantiation, they may be reimbursable.
Can a 401(h) reimburse long-term care insurance premiums?
Qualified long-term care insurance premiums up to the §213(d)(10) age-based limits are generally §213(d) medical care; subject to plan terms, they may be reimbursable. See long-term care + DB plans.
What happens to unused 401(h) funds at death?
Plan terms govern, but funds typically remain in the medical benefit account to cover qualifying expenses of surviving spouse and dependents, with any forfeitures applied to reduce employer contributions.
Can a 401(h) revert to the employer?
Generally no — Treas. Reg. §1.401-14 prohibits reversion prior to satisfaction of all medical-benefit liabilities; thereafter limited reversion may be permitted, subject to plan terms and applicable excise taxes.
Does a 401(h) require a high-deductible health plan?
No. Unlike an HSA, a 401(h) has no HDHP requirement.
Is the 401(h) account separate from the pension trust?
It is a separate account within the same qualified trust — Treas. Reg. §1.401-14(b) requires separate accounting.
Who administers the 401(h)?
The plan trustee, supported by an actuary and TPA, under ERISA fiduciary standards.
How do we know if a 401(h) is a fit?
An actuarial feasibility study evaluates owner ages, compensation, census, cash flow, and existing pension structure. Request a consultation to start.
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.
