Eligibility for §401(h) is gated by the underlying retirement plan. There is no path to a §401(h) account without first having (or adopting) a qualified defined benefit pension plan.
Plan-level requirements
The sponsoring plan must:
- Be a qualified defined benefit pension plan (cash balance or traditional DB).
- Include a written §401(h) provision in the plan document.
- Maintain separate accounting for the medical sub-account.
- Pass the 25% subordination test on a cumulative basis.
Participant eligibility
Anyone covered as a participant under the DB plan can be designated as a §401(h) participant, including owner-employees. The same nondiscrimination tests that apply to the DB plan extend to the §401(h) sub-account.
Dependent coverage
The retiree's spouse and tax-dependents (per IRC §152) qualify for §401(h) reimbursements. Adult children may qualify if they meet the dependent definition for medical-care purposes.
What disqualifies a plan
A §401(h) is disqualified if benefits are not subordinate to retirement benefits (the 25% rule), if the sub-account is commingled with pension assets, or if it discriminates in favor of highly compensated employees beyond what the underlying plan allows.