Can a Cash Balance Plan Include a 401(h) Account?
Cash balance plans look like account-based plans but are defined benefit plans for IRC purposes — which means they can also host a 401(h) sub-account.
Contents
Key takeaways
- Cash balance plans are defined benefit plans under the Code.
- A 401(h) sub-account can be paired with a cash balance plan with appropriate plan language.
- Adding 401(h) changes the actuarial and administrative profile of the plan.
- Incidental-benefit and nondiscrimination rules apply just as they do to traditional DB plans.
Cash balance plans are DB plans
Although cash balance plans display hypothetical account balances and look operationally like account-based plans, they are defined benefit plans for tax-code purposes. That distinction matters here, because Section 401(h) attaches to qualified pension or annuity plans — and a cash balance plan qualifies.
What changes when you add 401(h)
Adding a 401(h) component to a cash balance plan alters the actuarial valuation, the contribution methodology, and the administrative workload. The incidental-benefit limit must be respected on an ongoing basis, and the nondiscrimination analysis expands to cover the retiree medical benefit.
Design considerations
Common design questions advisors work through:
- Which participant class is eligible for retiree medical benefits?
- What benefit formula or reimbursement framework will apply?
- How will the medical benefit be funded — at adoption and over time?
- How does the addition affect the plan's overall funding posture?
Documentation and amendments
If an existing cash balance plan is being amended to add a 401(h) sub-account, the amendment must include the required 401(h) language: separate-account establishment, eligible benefits, participant class, funding mechanics, and forfeiture rules. ERISA counsel and the plan actuary should collaborate on the language.
Frequently asked questions
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.
401h.com Editorial
401h.com
The 401h.com editorial team publishes plain-English explainers on 401(h) retiree medical benefit plans. Educational only — not tax, legal, actuarial, investment, or ERISA advice.
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