Direct answer. A 401(h) account is governed by IRC §401(h) (statutory authority) and Treasury Regulation §1.401-14 (operational rules). The core requirements are: a separate account inside a qualified pension trust, subordination of the medical benefit to the retirement benefit, reasonableness, nondiscrimination, prohibition on reversion until liabilities are satisfied, and application of forfeitures to reduce employer contributions.
Statutory Authority — IRC §401(h)
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.
IRC §401(h) permits a qualified pension or annuity plan to provide for "the payment of benefits for sickness, accident, hospitalization, and medical expenses of retired employees, their spouses, and their dependents," subject to several requirements that are then elaborated in the Treasury Regulations.
Regulatory Framework — Treas. Reg. §1.401-14
Treasury Regulation §1.401-14 sets out the operational rules a plan must follow to qualify. The key requirements are:
- Separate account. Medical benefits must be maintained in a separate account within the pension trust, with separate accounting (Treas. Reg. §1.401-14(b)(1)).
- Subordination. Aggregate medical (plus actual life insurance) contributions cannot exceed 25% of aggregate plan contributions, excluding past-service funding (Treas. Reg. §1.401-14(c)(1)).
- Reasonableness. Contributions must be reasonable and ascertainable.
- Nondiscrimination. Benefits cannot discriminate in favor of officers, shareholders, supervisors, or highly compensated employees.
- Reversion prohibition. Funds cannot revert to the employer before all medical-benefit liabilities are satisfied.
- Forfeitures. Forfeitures must be applied as soon as possible to reduce employer contributions for medical benefits.
Host-Plan Requirements
The 401(h) account can only exist inside a qualified pension plan. Practically, that means:
- A Defined Benefit plan (traditional or Cash Balance).
- Historically, a money-purchase pension plan.
The §401(h) feature cannot be added to a standalone 401(k)/profit-sharing plan or to any IRA — see Can a 401(h) be added to a 401(k)? and Can a 401(h) be added to an IRA?.
What Qualifies for Tax-Free Reimbursement — §213(d)
Tax-free 401(h) reimbursements are limited to IRC §213(d) qualifying medical care for the retiree, spouse, and dependents. The same definitional framework used for individual Schedule A medical deductions controls — see eligible expenses and IRS Publication 502.
Deduction Rules — IRC §404
Employer contributions to the 401(h) account are deductible under IRC §404, subject to the §401(h) subordination rule and the broader §404 deduction framework applicable to the host pension plan. The deduction is taken in the year the contribution is made (or, for the prior year, by the §404 deduction deadline).
Trust-Level Tax Exemption — IRC §501(a)
Because the 401(h) sub-account is part of a §401(a) qualified pension trust, its investment earnings are exempt from current income tax under IRC §501(a).
Reporting & Administration
- Form 5500. The 401(h) account is reported with the host plan's annual Form 5500 filing.
- Actuarial valuation. The enrolled actuary calculates contributions and certifies funded status.
- ERISA fiduciary standards. The trustee and other fiduciaries operate under ERISA §404 prudent-person standards.
- Nondiscrimination testing. Required to ensure benefits are not skewed to HCEs.
Common Compliance Risks
- Failing to maintain truly separate accounting between the pension and 401(h) sub-accounts.
- Exceeding the subordination ratio.
- Reimbursing expenses that are not §213(d) qualifying medical care.
- Reimbursing the same expense twice (insurance + 401(h)).
- Plan-document drafting that fails to specify the §401(h) feature with required precision.
These are operational risks — they are manageable with disciplined TPA and actuarial work and a properly drafted plan document.
Frequently Asked Questions
What code section authorizes a 401(h)?
Internal Revenue Code §401(h), with operational rules in Treasury Regulation §1.401-14.
What is the subordination rule?
Aggregate medical (plus actual life insurance) contributions cannot exceed 25% of aggregate plan contributions, excluding past-service funding.
What is the separate account requirement?
The 401(h) medical benefits must be maintained in a separate account within the pension trust with separate accounting (Treas. Reg. §1.401-14(b)).
Can plan assets revert to the employer?
Not before all medical-benefit liabilities have been satisfied; after that, limited reversion may be permitted subject to plan terms and applicable excise taxes.
What plan types can host a 401(h)?
Qualified Defined Benefit plans (including Cash Balance DB) and historically money-purchase pension plans. IRAs and standalone 401(k) plans cannot host a 401(h).
Is the 401(h) account reported on Form 5500?
Yes — it is reported with the host plan's annual filing.
What defines a qualifying medical expense?
IRC §213(d), as elaborated in IRS Publication 502.
Are nondiscrimination rules a real concern?
Yes. Benefits cannot favor officers, shareholders, supervisors, or HCEs, and must be tested accordingly.
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.
