What is a 401(h) Account? A Plain-English Guide for Business Owners [2026]
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.
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Contents
The short version
A 401(h) account is a separate, internally tracked sub-account within a qualified pension or annuity plan that may be used to pay certain retiree medical benefits for participants, their spouses, and their dependents. It is not a standalone account, it is not the same thing as a 401(k), and you cannot 'open' one the way an individual opens an HSA. It exists only because a qualified employer-sponsored retirement plan has been drafted to include it.
Where 401(h) accounts come from
Section 401(h) of the Internal Revenue Code permits qualified pension and annuity plans to provide for the payment of sickness, accident, hospitalization, and medical expenses for retired employees, their spouses, and their dependents. To do so, the plan must establish a separate account, satisfy several structural requirements, and keep the medical benefits incidental to the retirement benefits the plan is primarily designed to deliver.
401(h) accounts primarily grow through employer contributions, with optional employee contributions and investment growth playing significant roles. Understanding these funding mechanisms is crucial for business owners considering offering a 401(h) plan.
Why the law allows it
Congress created the 401(h) framework so that employers offering meaningful retirement benefits could also formalize and pre-fund a portion of retiree medical costs within the same qualified trust — instead of relying entirely on pay-as-you-go arrangements that may not survive ownership changes, downturns, or generational transitions.
What 'separate account' really means
The 401(h) portion of the plan must be tracked separately from the retirement portion. Contributions made for medical benefits must be designated as such, and assets allocable to the 401(h) account must be accounted for separately, even if they are held within the same trust for investment purposes.
Why business owners are hearing about it now
Defined benefit and cash balance plans have become a mainstream tool for owner-led businesses that want to accelerate retirement savings beyond 401(k) limits. When those plans are already in place — or being designed — adding a 401(h) sub-account is sometimes considered as a way to formalize and pre-fund certain retiree medical benefits in a tax-efficient way. The interest is structural, not promotional: more owners simply have the underlying qualified plan that 401(h) requires.
- Cash balance plans have driven a surge in owner-sponsored DB plans.
- Retiree healthcare costs are widely cited as the single largest unfunded retirement risk.
- Owners want to know whether part of that cost can be funded inside their existing qualified plan.
Important: 401(h) accounts are not standalone
There is no consumer product called a 401(h). You will not find a brokerage form, an IRA-style application, or a 'plan' you can sign up for online. A 401(h) account exists only as a feature of an underlying qualified retirement plan — typically a defined benefit or cash balance plan, occasionally a money purchase or other qualified annuity plan. The plan document, the actuarial work, the recordkeeping, and the ongoing compliance all live with that underlying plan.
Who 401(h) plans may fit
401(h) strategies are most commonly discussed in the context of stable, profitable businesses that already sponsor — or are formally evaluating — a defined benefit or cash balance plan, and that want to provide structured retiree medical benefits to a defined participant group. Eligibility, nondiscrimination, and the incidental-benefit limit all apply, and a candid fit assessment usually involves the plan's actuary, ERISA counsel, and the owner's tax advisor.
- Profitable, established businesses with predictable cash flow.
- An existing or planned qualified defined benefit / cash balance plan.
- A clear retiree population the employer intends to support.
- Willingness to maintain ongoing actuarial and compliance work.
Business Owners
Employers seeking to provide tax-advantaged healthcare benefits alongside retirement plans.
Employees
Retirees or active employees who need assistance with medical costs in retirement.
High Net Worth Individuals
Those looking for additional tax-efficient strategies to cover future healthcare expenses.
Small to Medium Businesses
Companies aiming to attract and retain talent with comprehensive benefit packages.
Organizations with Strong Union Ties
Entities that want to provide robust healthcare benefits negotiated through collective bargaining.
401(h) plans are particularly well-suited for business owners and organizations looking to offer tax-advantaged healthcare benefits to employees, especially retirees. They serve as an excellent tool for attracting and retaining talent, and for high-net-worth individuals seeking efficient ways to cover future medical expenses.
What 401(h) is not
Clearing up the most common misconceptions up front saves enormous confusion later.
- It is not a 401(k) with a different letter.
- It is not an HSA, an HRA, or an FSA.
- It is not a way to deduct your personal medical bills as a sole proprietor.
- It is not a turnkey product — it is a feature inside a designed and administered qualified plan.
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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