Direct answer. Independent studies from EBRI and Fidelity estimate that a retiring couple may need hundreds of thousands of dollars to fund out-of-pocket healthcare costs in retirement, with long-term care exposure adding meaningful additional risk. A 401(h) account inside a qualified Defined Benefit plan is one of the few tools designed specifically to prefund those expenses with tax-deductible employer dollars and reimburse them tax-free under IRC §213(d).
Scope of the Exposure
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.
Two well-known independent sources frame the exposure:
- The EBRI Issue Brief on Projected Savings Medicare Beneficiaries Need for Health Expenses — published periodically by the Employee Benefit Research Institute — models the savings needed to cover Medicare premiums and out-of-pocket healthcare for retirees.
- The Fidelity Retiree Health Care Cost Estimate — published annually — provides a widely cited industry benchmark for projected lifetime retiree healthcare spending for a 65-year-old couple.
Both have produced figures in the high six figures for a couple over an extended retirement, and both treat long-term care as a separate, additional risk.
Where the Money Goes
| Spending Bucket | Typical Composition |
|---|---|
| Medicare premiums | Part B, Part D, Medicare Advantage, Medigap |
| Out-of-pocket medical | Co-pays, deductibles, services not covered by Medicare |
| Prescription drugs | Specialty medications and gaps in Part D coverage |
| Dental, vision, hearing | Mostly outside Medicare |
| Long-term care | Home care, assisted living, skilled nursing — substantial additional exposure |
Long-Term Care Specifically
LTC is the single largest tail risk in most retiree healthcare projections. Premiums for qualified LTC insurance are §213(d) medical care up to the §213(d)(10) age-based limits — meaning a 401(h) can prefund them with deductible dollars and reimburse them tax-free. See long-term care + DB plans.
Where 401(h) Fits
A 401(h) addresses the exposure in three ways:
- Prefunding. Employer dollars are set aside on a deductible basis while the owner is still working.
- Tax-deferred compounding. Assets grow inside the qualified trust without annual tax drag.
- Tax-free reimbursement. Qualifying §213(d) medical care in retirement is reimbursed without income tax.
Per-participant accumulation can reach approximately $750,000 in a properly structured arrangement, subject to actuarial calculations and IRS limits — meaningful coverage for both routine retiree healthcare and the LTC tail.
What Other Tools Cover (and Don't)
| Tool | What It Covers | Limitation |
|---|---|---|
| HSA | Triple-tax-favored medical savings | Modest annual limits; requires HDHP |
| Traditional retirement assets (IRA / 401(k)) | Income | Taxable on withdrawal; not tax-free for medical use |
| Standalone LTC insurance | LTC services | Premiums paid with after-tax dollars unless funded through a tax-favored vehicle |
| 401(h) | Tax-free reimbursement of §213(d) qualifying care including Medicare and qualified LTC premiums | Requires qualified pension plan host |
Frequently Asked Questions
How much do retirees spend on healthcare?
Independent studies from EBRI and Fidelity estimate retiree healthcare costs in the high six figures for a couple over an extended retirement, with long-term care as a meaningful additional risk.
Does Medicare cover everything?
No. Medicare leaves substantial out-of-pocket exposure, including premiums, co-pays, dental, vision, hearing, and long-term care.
How does a 401(h) help?
It allows employer dollars to be set aside on a deductible basis, grow tax-deferred inside the qualified trust, and be distributed tax-free to reimburse §213(d) qualifying medical care in retirement.
Can a 401(h) reimburse Medicare premiums?
Generally yes — Medicare Part B, Part D, Medicare Advantage, and Medigap premiums are typically §213(d) medical care.
Can a 401(h) reimburse long-term care insurance premiums?
Premiums for qualified LTC insurance are §213(d) medical care up to the §213(d)(10) age-based limits and may be reimbursable, subject to plan terms.
How much can accumulate?
A properly structured 401(h) may accumulate up to approximately $750,000 per eligible participant, subject to actuarial calculations and IRS limits.
Does the owner have to pay tax on reimbursements?
Properly substantiated §213(d) reimbursements from a properly administered 401(h) account are generally received tax-free.
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.
