Direct answer. Below are the most important terms used in 401(h) planning. The 401(h) account is a separate medical benefit account inside a qualified Defined Benefit pension plan (IRC §401(h), Treas. Reg. §1.401-14). The glossary covers actuarial, ERISA, plan-design, and tax terms a CPA, advisor, or business owner is likely to encounter.
How to Use This Glossary
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 terms below appear repeatedly in 401(h) feasibility studies, plan documents, and Form 5500 filings. Definitions are deliberately concise; for citations, see IRS rules for 401(h).
Core 401(h) Terms
- 401(h) account
- A separate medical benefit account maintained inside a qualified pension trust under IRC §401(h) to pay sickness, accident, hospitalization, and medical expenses of retired employees, spouses, and dependents.
- Subordination rule
- Aggregate 401(h) contributions cannot exceed 25% of aggregate pension contributions (excluding contributions to fund past-service credits). The medical benefit must remain "subordinate" to the retirement benefit.
- Separate account requirement
- Treas. Reg. §1.401-14(b) requirement that the medical benefits be maintained in a separate account within the pension trust with separate accounting.
- Reversion prohibition
- Rule that 401(h) assets generally cannot revert to the employer prior to satisfaction of all medical-benefit liabilities.
- §213(d) medical care
- The tax-code definition of "qualifying medical care" used both for Schedule A deductions and for tax-free 401(h) reimbursements. Detailed in IRS Publication 502.
Pension & Actuarial Terms
- Defined Benefit (DB) plan
- A qualified retirement plan that promises a specified retirement benefit, with contributions actuarially determined.
- Cash Balance plan
- A modern type of Defined Benefit plan that expresses each participant's benefit as a hypothetical account balance, while remaining a DB plan for tax and actuarial purposes.
- Actuary
- The credentialed professional who calculates contribution requirements, valuations, and funding levels for a DB or Cash Balance plan and the §401(h) sub-account.
- TPA (Third-Party Administrator)
- The firm that handles plan-document drafting, compliance testing, Form 5500 preparation, and day-to-day administration.
- Form 5500
- The annual report a qualified retirement plan files with the DOL/IRS; the 401(h) account is reported with the host plan.
- 415 limit
- IRC §415 limits on annual additions and benefits in qualified plans.
- Past-service credit
- Pension service credit granted for years before the plan was adopted; relevant because past-service contributions are excluded from the subordination-rule denominator.
Compliance & ERISA
- ERISA
- The Employee Retirement Income Security Act of 1974; governs fiduciary duties, reporting, and participant protections.
- Fiduciary
- A person who exercises discretion over plan assets or administration; the trustee of a 401(h) account is a fiduciary.
- Nondiscrimination
- Rules ensuring benefits do not discriminate in favor of officers, shareholders, or highly compensated employees.
- HCE (Highly Compensated Employee)
- IRC §414(q) classification used in nondiscrimination testing.
- Plan document
- The legal document that establishes the plan, including the §401(h) feature, eligibility, benefits, and administrative provisions.
Frequently Asked Questions
What is the subordination rule in plain English?
Medical contributions to a 401(h) cannot exceed 25% of the contributions made to the underlying pension plan (excluding past-service funding). The pension benefit must remain the main event.
What is the separate account requirement?
Treasury Regulation §1.401-14(b) requires that 401(h) medical benefits be tracked in a separate account within the pension trust, with separate accounting.
What is §213(d) medical care?
Amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, and certain related expenses — the same definition used for Schedule A medical deductions.
Is a Cash Balance plan a Defined Benefit plan?
Yes — Cash Balance plans are a type of Defined Benefit plan that expresses the benefit as a hypothetical account balance.
What does a TPA do for a 401(h)?
Drafts and maintains the plan document, performs compliance testing, prepares Form 5500, and supports the trustee on reimbursement administration.
Who is a fiduciary of the 401(h) account?
The plan trustee and any other person who exercises discretion over the plan's assets or administration.
Is an HRA the same as a 401(h)?
No. An HRA is a §105 employer-funded reimbursement plan; a 401(h) is a §401(h) sub-account inside a qualified pension trust.
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.
