Why a Solo Owner's 401(h) Contribution Is Capped at the Defined Contribution Limit

A 401(h) account rides on a defined benefit pension plan, so it's natural to assume its funding follows defined benefit logic — large, actuarially driven, uncoupled from the annual-addition dollar caps that constrain 401(k)s and profit-sharing plans.

For most participants in a large plan, that assumption is roughly right. For a solo business owner, it's exactly wrong. When you're the only participant, the 401(h) contribution is governed by the defined contribution annual-addition limit under §415(c) — $72,000 for 2026. This article explains why that's unavoidable in an owner-only plan, and the one piece of good news buried in the rule.

The result isn't arbitrary. It follows from four links, each of which is forced once you assume a single owner-participant:

• The owner is a key employee. A 100% owner is a 5% owner, which makes them a key employee under §416(i). In an owner-only plan, the sole participant is always a key employee.

• A key employee's medical benefits must sit in a separate account. §401(h)(6) requires that the retiree-health benefits payable to any employee who is (or ever was) a key employee be allocated to that individual's own separate account. There's no discretion here.

• That separate account is an "individual medical benefit account." §415(l)(2) defines the term as any separate account established for a participant under a pension or annuity plan from which §401(h) benefits are payable solely to that participant, their spouse, or their dependents. The key employee's mandatory separate account fits the definition precisely.

• Contributions to that account are annual additions to a defined contribution plan. §415(l)(1) provides that contributions allocated to an individual medical benefit account are treated as an annual addition to a defined contribution plan for purposes of §415(c). So the 401(h) contribution is measured against the DC dollar limit — even though the plan funding it is a defined benefit plan.

Put the four together and the conclusion is inescapable for a solo owner: your 401(h) contribution is a §415(c) annual addition, tested against the $72,000 dollar limit for 2026 (indexed annually).

In a large plan, a 401(h) account can operate as a pooled reserve that pays medical benefits for the general (non-key) workforce. Contributions to that pooled account aren't allocated to any individual's account, so they aren't individual annual additions — the pooled medical reserve is constrained at the aggregate level (by the 25% subordination test) rather than by a per-person DC dollar cap.

A solo owner has no access to that structure. There are no non-key employees, so there is no pooled non-key reserve — the entire 401(h) account is, by definition, the key employee's separate account. Every dollar of it is an individual medical benefit account contribution, and every dollar is swept into §415(c). The pooled-reserve relief that a large employer's rank-and-file participants effectively enjoy simply doesn't exist when you're the only person in the plan.

§415(c)(1) normally caps annual additions at the lesser of two figures: the dollar limit ($72,000 for 2026) or 100% of the participant's compensation. For most DC contributions, a low-compensation owner is squeezed by that second prong.

The 401(h) medical addition gets a carve-out. §415(l)(1) states that §415(c)(1)(B) — the 100%-of-compensation prong — does not apply to the amount treated as an annual addition for the medical account. Only the dollar limit applies.

That matters for the classic S-corp owner who runs modest W-2 wages. Suppose the owner takes $50,000 in W-2 compensation:

• A regular profit-sharing contribution to that owner is capped at 100% of compensation — $50,000.

• The 401(h) medical addition is not subject to the compensation cap. It can be funded up to the $72,000 dollar limit (subject to the other constraints below), even though that exceeds the owner's compensation.

So the "capped at the DC limit" headline comes with a silver lining: for the medical piece, it's capped at the dollar limit specifically, not the tighter compensation-based figure that governs ordinary DC contributions.

Because the 401(h) addition lives inside the §415(c) dollar limit, it shares that single limit with every other defined contribution addition for the same owner. If the owner also maintains a 401(k), profit-sharing, or money purchase plan, those contributions and the 401(h) contribution draw from the same $72,000 bucket.

A quick illustration: an owner already putting $45,000 of deferrals and profit sharing into a 401(k)/PS arrangement has only $72,000 − $45,000 = $27,000 of annual-addition room left for the 401(h) — regardless of how much the medical benefit design or the subordination test would otherwise permit. Owners frequently don't anticipate this; a companion DC plan can quietly consume most of the space the 401(h) needs.

Two things keep this from being the whole story:

• §415 is one gate, not the only gate. The 401(h) contribution must also clear the 25% subordination test (roughly one-third of the pension contribution) and the §404 deduction limit (the actuarially reasonable cost of funding the defined medical benefit). In a clean solo defined benefit + 401(h) design, §415 is often the slack constraint and one of the other two actually sets the number. (See the companion article on which limit binds first.)

• The compensation carve-out doesn't override those other limits. Switching off the 100%-of-compensation prong helps the low-W-2 owner clear §415 — but the 25% test and §404 don't care, and for a modest-compensation owner one of them may still be the operative cap.

For a solo business owner, the intuition that a 401(h) is "defined benefit money" and therefore uncapped by DC limits is simply false. Because the sole owner is always a key employee, the account is always an individual medical benefit account, and §415(l) always routes it into the §415(c) dollar limit — $72,000 for 2026.

The saving grace is that only the dollar limit applies, not the compensation prong, which preserves meaningful funding room even for owners who pay themselves modestly. Plan around the single shared limit, watch the interaction with any companion DC plan, and remember that §415 is only the first of three gates the contribution has to clear.