Both the §401(h) account and the Health Savings Account (HSA) deliver tax-free retiree medical dollars, but they sit at very different scales and play very different roles in a business owner's plan.
Annual contribution capacity
The 2025 HSA family limit is $8,550 (plus a $1,000 catch-up at 55). A §401(h) sub-account inside a DB plan can absorb up to 25% of cumulative aggregate DB contributions — for a practice contributing $300,000/year to a cash balance plan, that is roughly $75,000/year of additional medical-purpose deduction.
Effect of Medicare enrollment
Medicare enrollment ends HSA contributions. A §401(h) account is unaffected — contributions, growth, and distributions all continue normally for the retiree and spouse.
Use beyond medical
An HSA can be used for non-medical purposes after 65 (taxable as ordinary income). A §401(h) cannot — funds must be used for qualified retiree medical, or they revert to the plan.
Estate and beneficiary treatment
An HSA passes to a spouse tax-free but is fully taxable to a non-spouse heir. A §401(h) does not pass as an inheritable asset; unused balances revert to the plan per the document's terms.
When each one fits
An HSA is the right starting point for nearly every household with HDHP coverage. A §401(h) is layered on top when a business already runs a cash balance plan and the owners want to convert pre-retirement income into post-retirement tax-free medical capacity.