Educational · For owners, CPAs, advisors & TPAs
The retiree medical benefit strategy most business owners have never heard of.
A 401(h) account may allow qualifying retirement plans to fund retiree medical benefits in a tax-efficient way — when the plan, participant group, and applicable rules support it.
Educational resource for business owners, CPAs, advisors, and plan professionals.
Grounded in primary sources
- IRC §401(h)
- Treas. Reg. §1.401-14
- ERISA
- IRS Form 5500
Business
Employer contributions
Pension Plan
Qualified DB / Cash Balance
401(h)
Separate sub-account
Retiree Med
Qualified expenses
Illustrative. A 401(h) account is a separate sub-account within a qualified pension or annuity plan — not a standalone consumer account.
What is a 401(h)?
A separate sub-account inside a qualified pension or annuity plan — for retiree medical benefits.
It is not a 401(k). It is not an HSA. It is not a standalone consumer account. A 401(h) is a structurally distinct portion of a qualified employer retirement plan designed to fund retiree medical benefits, subject to specific rules.
Under §401(h) of the Internal Revenue Code, qualified pension and annuity plans may include a separate account for retiree medical benefits. The medical benefits must remain subordinate (incidental) to the underlying retirement benefits.
That structural requirement is one reason 401(h) strategies are typically discussed in the context of businesses already sponsoring — or considering — a defined benefit or cash balance plan.
Read the full plain-English explainerWhy it matters
Retiree healthcare is one of the largest unfunded costs facing business owners.
Across most planning models, retiree medical costs are a leading source of late-career financial uncertainty — and they have grown faster than general inflation for decades.
20+ years
Typical retirement horizon for a healthy 65-year-old
Faster than CPI
Long-run healthcare cost growth relative to general inflation
6 figures+
Common planning estimates for lifetime retiree medical costs per household
Illustrative figures for context only — actual outcomes vary based on individual circumstances.
How it works
Three structural steps
In high-level terms, money flows from the business to the qualified plan, with a portion allocated to a separate 401(h) sub-account that funds qualified retiree medical benefits.
01
Sponsor a qualified plan
The business sponsors a qualified pension or annuity plan — often a defined benefit or cash balance plan.
02
Add a 401(h) sub-account
The plan document includes §401(h) provisions establishing a separate account for retiree medical benefits.
03
Pay qualified retiree medical
On retirement, qualified medical expenses may be paid from the 401(h) sub-account, subject to plan terms.
Potential benefits
Where a 401(h) strategy may add value
Not all of these apply to every situation. Plan design, participant population, and applicable rules determine whether — and how — a 401(h) account may be useful.
Retiree medical benefit funding
May provide a structured way to formalize and pre-fund retiree medical benefits within a qualified plan.
Tax-efficient planning potential
Depending on plan design, contributions and qualified retiree medical expenses may receive favorable tax treatment.
Integrates with qualified plans
401(h) accounts sit inside qualified pension or annuity plans — including defined benefit and cash balance plans.
Useful in owner-led planning
May fit certain owner-led businesses that already sponsor (or are considering) a DB or cash balance plan.
Formal retiree health structure
Helps create a documented, plan-based framework for retiree medical benefits, not an ad-hoc arrangement.
Built for plan professionals
Designed to be reviewed and implemented with actuarial, tax, ERISA, and plan-administration expertise.
Availability, tax treatment, and plan design depend on the facts and circumstances of the employer, plan document, participant group, and applicable law. 401h.com provides general educational information only — not tax, legal, actuarial, investment, or ERISA advice. Consult qualified tax, legal, actuarial, and plan professionals.
A 401(h) is not a standalone account.
You cannot "open a 401(h)" the way you open an HSA or IRA. It only exists as a sub-account within an employer-sponsored qualified pension or annuity plan with the right plan document language, design, and ongoing administration. That structural reality is essential to understanding the strategy — and its limits.
Compare
401(h) vs HSA vs HRA — at a glance
A high-level comparison. See the full comparison page for detail.
| 401(h) | HSA | HRA | |
|---|---|---|---|
| Primary purpose | Retiree medical benefits inside a qualified plan | Individual current/future qualified medical expenses | Employer-funded reimbursement of qualified medical expenses |
| Standalone? | No — sub-account of qualified pension/annuity plan | Yes — individually owned | No — employer-sponsored arrangement |
| Funding source | Employer, via qualified plan actuarial design | Individual + sometimes employer | Employer |
| Common business owner use case | Formalize / pre-fund retiree medical alongside DB/CB plan | Current-year tax-advantaged medical savings with HDHP | Provide post-retirement or active-employee medical reimbursement |
Common questions
The questions business owners and advisors ask first.
A short preview. The full FAQ goes deeper on rules, eligibility, funding, and design considerations.
From the blog
Plain-English 401(h) education
Long-form explainers for business owners, CPAs, advisors, and plan professionals.
What Is a 401(h) Plan? A Plain-English Guide for Business Owners
A 401(h) account is a separate sub-account inside a qualified pension or annuity plan that may be used to fund retiree medical benefits. Here's the plain-English version every business owner should read first.
401(h) Plan Rules: What Business Owners and Advisors Need to Know
401(h) accounts are powerful but rule-driven. Five buckets — documentation, accounting, incidental benefit, nondiscrimination, and funding — determine whether the structure stands up.
401(h) vs HSA: What's the Difference?
An HSA is an individual, portable account you own. A 401(h) is a sub-account of an employer's qualified retirement plan. They are not substitutes for each other.
Next step
Find out whether a 401(h) strategy may fit
Talk with a 401(h) specialist about your plan, participant group, and retiree medical objectives.
Availability, tax treatment, and plan design depend on the facts and circumstances of the employer, plan document, participant group, and applicable law. 401h.com provides general educational information only — not tax, legal, actuarial, investment, or ERISA advice. Consult qualified tax, legal, actuarial, and plan professionals.