401(h) Medical Reimbursement Planning

A 401(h) account is a lesser-known layer inside a qualified pension plan that may fund tax-advantaged dollars for eligible retirement medical costs.

A 401(h) account is one of the most overlooked planning layers available to business owners. It is a medical-benefits account that attaches to a qualified defined benefit or pension plan. When properly designed and administered, it may allow tax-deductible funding, tax-deferred growth, and tax-free reimbursement of eligible medical expenses in retirement — a combination of tax treatments that few other vehicles offer.

Why the tax treatment is notable

Most tax-advantaged accounts give you one or two of three benefits. A traditional 401(k) gives a deduction and deferral, but distributions are taxable. A Roth gives tax-free growth, but no deduction. A properly designed 401(h) component may combine all three for qualified medical costs: a deduction going in, tax-deferred growth inside the plan, and tax-free reimbursement coming out for eligible expenses.

How much can it hold

For some participants, funding capacity of up to approximately $750,000 per participant may be possible, depending on age, plan design, actuarial assumptions, employee demographics, and IRS limits. This is not a flat figure — it is the output of an actuarial design tied to the underlying pension benefit, and the 401(h) account is subject to rules that limit it relative to the main retirement benefit.

What the money can be used for

• Eligible out-of-pocket medical and health expenses in retirement
• Qualified long-term care costs
• Certain medical insurance premiums
• Other qualified medical expenses as defined by plan terms and applicable tax rules

The design requirements

A 401(h) account is not a standalone product you simply open. It must be established as part of a qualified pension plan, satisfy specific IRS requirements regarding the relationship between retirement and medical benefits, and be administered correctly over time. The design, funding, and ongoing compliance should be handled with certified actuarial oversight and reviewed with your CPA and ERISA counsel.

Who should consider it

The 401(h) layer is most relevant for owners who are already strong candidates for a defined benefit or Cash Balance Plan, expect significant retirement medical costs, and want to add a tax-advantaged medical pool to a coordinated plan design. It is evaluated as part of a broader strategy, not in isolation.

Authoritative sources

• IRC §401(h) (Cornell LII)
• IRS Publication 560

Frequently Asked Questions

Can a 401(h) account really reimburse medical expenses tax-free?

When properly established and administered within a qualified pension plan, a 401(h) account may reimburse eligible medical expenses tax-free, subject to plan terms and applicable tax rules.

How much can a 401(h) account hold?

For some participants, up to approximately $750,000 may be possible depending on age, plan design, actuarial assumptions, demographics, and IRS limits. The figure is actuarially determined.

Do I need a pension plan to use a 401(h)?

Yes. A 401(h) account attaches to a qualified pension or defined benefit plan; it cannot exist on its own.