Direct answer. A Cash Balance Defined Benefit plan with a §401(h) sub-account combines a high-deduction modern pension design with a tax-favored retiree medical reimbursement account. The Cash Balance plan delivers large, age-weighted deductible employer contributions; the §401(h) layers an additional medical-benefit contribution on top, subject to the subordination rule, capable of accumulating significant retiree healthcare assets tax-free.
What This Combined Design 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 Cash Balance plan is a modern type of Defined Benefit plan that expresses each participant's benefit as a hypothetical account balance — but remains, for tax and actuarial purposes, a full DB pension plan. That makes it a valid host under IRC §401(h) for a medical benefit account.
Layered together, the design has two coordinated pieces:
- Cash Balance DB plan — the retirement income engine, with actuarially determined contributions.
- §401(h) sub-account — a separate medical benefit account inside the same trust, funded with additional deductible contributions for retiree healthcare.
Why It's the Preferred Modern Host
- Allows large deductible employer contributions in the DB plan itself, expanding the subordination-rule "denominator" that determines 401(h) headroom.
- Age-weighted — older owners benefit disproportionately.
- Coordinates cleanly with an existing 401(k)/profit-sharing plan for a 401(k) + Cash Balance + §401(h) stack.
- Provides clear participant communication via hypothetical account balances.
Typical Stack
| Layer | Purpose | Code Section |
|---|---|---|
| 401(k) deferral + match / profit-sharing | Employee deferrals + base employer contributions | §401(k), §401(a) |
| Cash Balance Defined Benefit | Large, age-weighted deductible employer contributions for retirement income | §401(a) (DB) |
| §401(h) sub-account | Additional deductible employer contributions for retiree medical reimbursement | §401(h) |
Best-Fit Candidates
- Owners aged ~45+ with $400K+ in eligible compensation.
- Closely held businesses and professional practices with consistent cash flow.
- Owners already at the §415(c) limit in their 401(k) and looking for the next layer.
- Owners who view retiree healthcare and LTC exposure as a real planning risk.
Subordination in a Combined Design
The §401(h) headroom equals 25% of aggregate pension contributions (excluding past-service funding). Because a Cash Balance plan tends to produce large pension contributions, it expands the §401(h) headroom proportionally. This is the structural reason the Cash Balance + §401(h) combination is so efficient.
Implementation Sequence
- Feasibility study modeling the Cash Balance contribution and §401(h) headroom against actual census data.
- Plan-document design — Cash Balance benefit formula, §401(h) medical benefit account.
- Adoption and trust funding.
- Annual actuarial valuation, Form 5500, nondiscrimination testing.
- Post-retirement reimbursement administration (see how reimbursements work).
Frequently Asked Questions
Is a Cash Balance plan a Defined Benefit plan?
Yes. A Cash Balance plan is a Defined Benefit plan that expresses benefits as hypothetical account balances.
Can a Cash Balance plan host a 401(h)?
Yes. As a qualified pension plan, a Cash Balance DB plan is a valid host for a §401(h) medical benefit account.
How does the combined design coordinate with a 401(k)?
The 401(k) continues to operate for elective deferrals and discretionary profit-sharing. The Cash Balance plan provides the pension structure for §401(h) and adds substantial deductible employer contributions.
Who is a typical candidate?
High-income closely held business owners and professional practices, generally aged 45+, with $400K+ compensation and stable cash flow.
How does subordination work here?
Because Cash Balance plans tend to produce large pension contributions, the 25% subordination ceiling for the §401(h) layer is correspondingly larger in absolute dollars.
What about employees?
The plan must satisfy nondiscrimination rules. Employees participate in the §401(h) benefit per the plan document; effective designs balance owner objectives with employee benefits and cost.
How long does implementation take?
A typical feasibility-to-adoption cycle is several weeks to a few months, depending on data availability and plan complexity.
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.
