§401(h) accounts operate inside the broader qualified-plan compliance framework and are subject to specific medical sub-account rules. Failure on any of them can disqualify the §401(h) portion of the plan.
Subordination test
The cumulative §401(h) contribution cannot exceed 25% of cumulative aggregate plan contributions. This is the single most common compliance trip-up; most TPAs track the ratio quarterly.
Separate accounting
§401(h) assets must be tracked separately from pension assets within the trust. Commingled accounting is a disqualifying defect.
Reversion rules
Unused §401(h) balances cannot revert to the employer except in narrow circumstances after all liabilities are satisfied. Improper reversion is a major audit trigger.
Distribution limitations
Distributions are limited to qualified medical expenses for the retiree, spouse, and dependents. Distributions for non-medical purposes are prohibited and can disqualify the §401(h).
Reporting
§401(h) sub-account activity is reported on the DB plan's Form 5500. Missing or incomplete §401(h) reporting is a common DOL exam finding.