A §401(h) account is one of the most underutilized retiree-medical funding tools in the Internal Revenue Code. Created under IRC §401(h), it lives as a separate sub-account inside an existing qualified defined benefit (DB) pension plan and pays for the retiree's, spouse's, and dependents' medical expenses tax-free.
The three tax advantages
A §401(h) account stacks three federal tax benefits that few other vehicles combine in one structure:
- Employer contributions are tax-deductible to the sponsoring business.
- Assets grow tax-deferred inside the trust.
- Distributions for qualified retiree medical expenses are tax-free to the retiree.
Where the funds come from
A §401(h) is funded exclusively by employer contributions — there are no employee deferrals. Contributions sit alongside the DB pension assets in the same trust but are accounted for separately so that medical-purpose dollars never commingle with pension-benefit dollars.
Who can be covered
Coverage includes the retired participant, their spouse, and tax-dependents. Owner-employees may participate when the underlying DB plan covers them, subject to the same nondiscrimination testing that applies to the pension plan and the additional §401(h) subordination rule.
When distributions begin
Distributions are paid only after the participant retires from the sponsoring employer and incurs an eligible medical expense. There is no required minimum distribution, no Medicare-enrollment penalty, and no age 65 cliff.