Using a 401(h) Account to Pay $0 Tax on Your Medicare Premiums — for Life

Most people pay their Medicare premiums with some of the most expensive dollars they own.

Think about how it usually works. You retire, you enroll in Medicare, and every month the premiums come out of your Social Security check or your bank account. Those dollars came from somewhere — usually an IRA or 401(k) withdrawal, a required minimum distribution, or investment income. And before those dollars ever reached your Medicare bill, they were taxed. If you're a retired physician or business owner in a high bracket, you may need to withdraw $1.50 or more from your retirement account just to pay $1.00 of premium.

There's a better way, but you have to set it up before you retire. It's called a 401(h) account, and it lets you pay your entire Medicare stack — Part B, Part D, Medigap, even the income-based surcharges — with dollars that were never taxed at all.

Let's put real numbers on the problem. In 2026, the standard Medicare Part B premium is $202.90 per month. But that's just the standard rate. Higher-income retirees pay income-related surcharges (called IRMAA), and at the top bracket the Part B premium alone reaches $689.90 per month in 2026 — over $8,200 per year, per person.

Now add the rest:

• A Medigap Plan G policy typically runs $130 to $180 per month at age 65, and premiums rise with age.
• A Part D prescription drug plan averages around $39 per month in 2026, plus its own IRMAA surcharge of up to $91 per month for high earners.
• The Part B annual deductible is $283 in 2026, and Plan N buyers also pay copays along the way.

For a married couple with high retirement income, the total Medicare and supplement bill can easily run $25,000 to $35,000 per year. Over a 25-year retirement, that's well north of half a million dollars — and every one of those dollars typically comes from income that was already taxed.

These figures change every year, so treat them as a snapshot. The structure of the problem doesn't change: premiums rise with age and inflation, and the tax drag compounds the whole way.

A 401(h) account is a retiree medical account that lives inside a pension plan — usually a defined benefit or cash balance plan, though a money purchase plan works too. The name comes from section 401(h) of the Internal Revenue Code, which has been on the books since 1962.

Here's the tax treatment, and it's the best deal in the code:

• Contributions are deductible. Your business deducts contributions to the 401(h) account, just like contributions to the pension itself.
• Growth is tax-free. The account grows inside the plan's trust with no tax on the earnings.
• Distributions are tax-free. When the account reimburses qualified medical expenses in retirement, nothing is taxable. No income tax. Ever.

That's triple tax-free — the same treatment as an HSA, but without the HSA's small contribution limits. A properly designed 401(h) can accumulate hundreds of thousands of dollars for retiree medical costs.

The expenses a 401(h) account can reimburse are defined by reference to medical care under section 213(d), and that definition includes premiums for insurance covering medical care. In plain English, all of the following qualify:

• Medicare Part B premiums — including the IRMAA surcharge, since the surcharge is simply part of the premium
• Medicare Part D premiums and their IRMAA surcharges
• Medigap (Medicare Supplement) premiums, whether you choose Plan G, Plan N, or high-deductible G
• Medicare Advantage premiums, if you go that route instead
• The Part B deductible, Plan N copays, and other out-of-pocket medical costs like dental, vision, and hearing

So the physician who funded a 401(h) during her working years doesn't just have a pile of tax-free money for medical bills. She has a dedicated account that pays her Part B premium, her IRMAA surcharge, her Plan G premium, and her drug plan — every month, for life — with dollars that were deducted going in, grew tax-free, and came out tax-free.

Compare that to her colleague who pays the same premiums from RMD income taxed at 37% plus state tax. Same Medicare bill. Wildly different cost.

We believe in telling you the limits up front, because a 401(h) is a powerful tool but not a magic one.

You need a pension plan to host it. A 401(h) account cannot attach to a 401(k) or profit-sharing plan. It must ride inside a pension — a defined benefit plan, cash balance plan, or money purchase plan. For high-income professionals, this usually isn't a problem, because a cash balance plan is often the right move anyway. But it means the 401(h) is part of a larger plan design conversation, not a standalone product.

Funding is capped by the subordination test. The medical benefits must be subordinate to the retirement benefits. Under the regulations, contributions to the 401(h) account generally cannot exceed 25% of the total contributions to the plan (put differently, one-third of the amount going toward retirement benefits). A well-funded cash balance plan can still support very substantial 401(h) contributions, but the medical account can't be the main event.

Key employee rules apply to owners. If you're a key employee — and most business owners reading this are — the law requires a separate account for your medical benefits, and contributions to that account count against your annual defined contribution limit under section 415. This is a real constraint that has to be modeled in the plan design, especially if you're also maxing out a 401(k) and profit sharing.

Use it for medical, or lose the advantage. 401(h) money must be used for qualified medical expenses. If the plan terminates with money left in the medical account, amounts that revert to the employer are taxable and hit with an excise tax on top. The good news: for most retirees, the risk runs the other direction. Lifetime Medicare premiums, Medigap, dental, vision, hearing, and long-term care costs consume six figures with room to spare. Funding conservatively and spending the account down is the standard approach.

This area has thin guidance in spots. The core rules are well established in the statute and regulations, but some design questions rest on private letter rulings and reasonable interpretation rather than bright-line authority. Work with an administrator who lives in this space.

The 401(h) strategy works best for:

• Business owners and self-employed professionals with high, stable income — physicians, dentists, attorneys, consultants
• People already considering (or already running) a defined benefit or cash balance plan
• Anyone within 5 to 20 years of retirement who wants to pre-fund retiree medical costs with deductible dollars

If that's you, the sequence is straightforward: design the pension plan first, size the 401(h) account against your projected retiree medical costs, and fund both on the actuary's schedule. By the time you enroll in Medicare, the account is waiting.

Medicare premiums are one of the largest, most predictable expenses of retirement — and for high earners with IRMAA surcharges, they're dramatically larger than most people expect. Paying them with after-tax dollars is the default. It isn't the requirement.

A 401(h) account turns your lifetime Medicare bill into a deductible business expense today and a tax-free benefit tomorrow. For the right business owner, it's the difference between spending $600,000 of pre-tax equivalent income on healthcare and spending $350,000. Same coverage. Same doctors. Very different math.

If you want to see what a 401(h) could look like alongside your retirement plan, that's exactly the kind of design work we do every day.