Retiree HRAs (health reimbursement arrangements) and §401(h) sub-accounts both deliver tax-free retiree medical reimbursement, but they sit on different statutory tracks and behave differently in practice.
Funding source
Retiree HRAs are funded as an unfunded liability of the employer — generally pay-as-you-go from operating cash. §401(h) sub-accounts are pre-funded inside a qualified plan trust.
Deduction timing
HRA reimbursements are deductible to the employer in the year paid. §401(h) contributions are deductible in the year contributed, often well before the retiree incurs the expense — preserving the deduction in higher-income years.
Asset security
§401(h) assets sit in a qualified trust and are protected from the sponsor's creditors. Unfunded HRAs are a contingent corporate liability and rank with general creditors in bankruptcy.
When each one wins
For a stable, profitable, owner-controlled business that already runs a cash balance plan, §401(h) is almost always the better answer. For a larger employer with broad retiree medical commitments and no DB plan, a retiree HRA may be the only practical structure.