How to Set Up a 401(h) Plan: A Step-by-Step Overview
Setting up a 401(h) account isn't a single form — it's a coordinated amendment to a qualified pension or annuity plan with actuarial, legal, and administrative steps.
Contents
Key takeaways
- You don't 'open' a 401(h) — you add it to a qualifying defined benefit, cash balance, or money purchase plan.
- Plan amendment language must be drafted by ERISA counsel.
- Funding is set by the plan actuary, not by a fixed contribution form.
- Administration spans recordkeeping, claims, Form 5500, and ongoing testing.
- A realistic setup timeline runs weeks to months, not days.
Step 1 — Confirm (or design) the underlying qualified plan
401(h) attaches to a qualified pension or annuity plan. In practice that means a defined benefit plan, a cash balance plan, or, less commonly, a money purchase pension plan. A 401(k)-only sponsor cannot bolt on a 401(h) without first establishing a qualifying plan.
- Confirm the plan type and current document language.
- If no qualifying plan exists, design one alongside the 401(h) feature — not after.
- Identify the plan sponsor, trustee, and fiduciaries.
Step 2 — Engage the team
A 401(h) setup is a team activity. Solo legal or solo actuarial work is usually where problems originate.
- ERISA counsel — plan-document language and fiduciary structure.
- Plan actuary — funding methodology and incidental-benefit modeling.
- Third-party administrator (TPA) — recordkeeping and claims procedures.
- CPA — deduction timing and integration with the owner's tax plan.
Step 3 — Draft the amendment
The plan must contain explicit 401(h) provisions: establishment of the separate sub-account, eligible participant class, qualifying medical benefits, funding mechanics, forfeiture provisions, and claim procedures. Boilerplate is rarely enough.
Step 4 — Build the funding model
The actuary projects the stream of retiree medical benefits and integrates it into the plan's overall funding valuation, then confirms the design satisfies the incidental-benefit limit on a forward-looking basis.
Step 5 — Stand up administration
Recordkeeping must separately track the 401(h) sub-account. The TPA needs documented procedures for substantiating and reimbursing eligible retiree medical expenses, plus reporting alignment with Form 5500.
Step 6 — Communicate to participants
Updated Summary Plan Descriptions and clear claim instructions prevent the slow-motion confusion that defines poorly-launched plans.
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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