There is no fixed-dollar annual limit on §401(h) contributions. Instead, IRC §401(h)(1) requires that the medical benefit be 'subordinate' to the retirement benefit — interpreted by the IRS as a 25% cumulative cap.
The 25% rule, restated
Cumulative §401(h) contributions cannot exceed 25% of cumulative aggregate contributions made to the DB plan, including the §401(h) sub-account itself. The test is cumulative, not annual — which gives some flexibility year to year.
A worked example
A practice contributes $300,000 per year to a cash balance plan. The combined 'aggregate' annual contribution including §401(h) capacity is $375,000, of which the §401(h) portion is $75,000 — exactly 25% of the combined total ($75,000 ÷ $375,000 = 20%, well inside the cap on a cumulative basis).
Modeling capacity correctly
Because the rule is cumulative, early-year §401(h) underfunding creates room in later years, and vice versa. Most actuaries set the annual §401(h) contribution as a fixed percentage of the cash balance contribution so that the cumulative ratio stays well under 25% across the plan's life.
What happens at the cap
Once cumulative §401(h) contributions approach the 25% threshold, additional contributions must wait until subsequent DB contributions rebuild the headroom. The plan does not 'overflow' or trigger excise tax — it simply caps further §401(h) funding.