Why are 401(h) plans common for physician-owned practices?

High-income physician owners frequently use defined benefit and cash balance plans to accelerate retirement savings well beyond 401(k) limits. That qualified pension chassis is the prerequisite for a 401(h) sub-account. Stable practice cash flow, a small long-tenured staff, and a clear retiree medical funding gap before Medicare eligibility all align with the structural requirements of a 401(h).

Can a solo physician practice add a 401(h)?

Possibly — but only if the practice sponsors (or is willing to sponsor) a qualified pension plan and the plan can satisfy the incidental-benefit limit and key-employee separate-accounting rules. Solo and small-group practices are often where 401(h) is reviewed, but every implementation needs an enrolled actuary, ERISA counsel, and a TPA before plan documents are signed.

How does a 401(h) compare to an HSA for a physician?

An HSA is an individually owned, current-year tax-advantaged account that pairs with a high-deductible health plan. A 401(h) is an employer plan sub-account that funds retiree medical benefits inside a qualified pension. They solve different problems and can coexist — many practice owners use both.

What are the main rules a medical practice has to follow?

The medical benefits inside a 401(h) must remain subordinate (incidental) to the retirement benefits in the host pension plan — generally meaning aggregate contributions for 401(h) cannot exceed roughly 25% of the total contributions to the plan. Separate accounting is required, key-employee benefits must be tracked separately, and the plan document has to specifically authorize the §401(h) sub-account.

For physicians, dentists & practice owners

401(h) plans for medical practices.

A plain-English guide for physician-owned practices, dental groups, and the CPAs and advisors who serve them — how a 401(h) sub-account works alongside a defined benefit or cash balance plan, who it fits, and the rules that govern it.

Why 401(h) plans come up for medical practices

Medical and dental practices are one of the most common contexts in which a 401(h) plan is evaluated, and the reason is structural: the prerequisite for a 401(h) sub-account is a qualified pension or annuity plan, and physician-owned practices are disproportionately likely to already sponsor one.

Defined benefit and cash balance plans are widely used inside profitable medical groups because they allow contribution levels well above what a 401(k) alone permits. That same qualified-plan chassis is exactly what §401(h) of the Internal Revenue Code requires as a host. Adding compliant 401(h) language to the plan document creates a separate sub-account that may be used to pay qualified retiree medical benefits for participants and their dependents.

For high-income physicians who plan to retire before Medicare eligibility, the gap between retirement and 65 is a known and significant healthcare-cost exposure. A 401(h) is one of several tools that can help formalize and pre-fund a portion of that exposure inside an existing qualified plan.

Where the fit tends to be strongest

Qualified pension already in place

Practices already sponsoring a defined benefit or cash balance plan have the host vehicle a 401(h) sub-account requires.

Stable, predictable collections

Actuarially funded retiree medical contributions are ongoing. Established practices with steady revenue are best positioned to sustain them.

Small, long-tenured clinical team

Smaller practices with a stable employee group tend to clear nondiscrimination and incidental-benefit testing more cleanly.

Long pre-Medicare retiree gap

Physicians who plan to retire before 65 often face a meaningful retiree healthcare runway — a recognized planning gap a 401(h) can help formalize.

How a 401(h) sits alongside a DB or cash balance plan

In a typical physician-owned structure, the practice sponsors a defined benefit or cash balance plan to drive accelerated, deductible retirement contributions for the owners and a smaller required contribution for staff. The plan document is amended to include §401(h) language, which establishes a separate accounting sub-account inside the same qualified plan.

Each year, a portion of the contributions can be allocated to the 401(h) sub-account to fund future retiree medical benefits — subject to the incidental-benefit limit, which generally caps aggregate 401(h) contributions at no more than roughly 25% of total plan contributions (excluding contributions for past service credits). The retirement-benefit side of the plan must remain the dominant purpose.

At retirement, qualified medical expenses for the participant and their dependents — premiums, deductibles, copays, and other §213(d) expenses — may be paid from the 401(h) sub-account, subject to the plan terms.

401(h) vs HSA vs 401(k) — at a glance

	401(h)	HSA	401(k)
Primary purpose	Retiree medical benefits inside a qualified pension plan	Individual current/future qualified medical expenses	Individual retirement savings (deferred income)
Who owns it	The employer plan	The individual	The individual
Requires a host pension plan	Yes — DB or cash balance is typical	No	No
Typical practice use	Formalize and pre-fund retiree medical alongside DB/CB	Pair with HDHP for current tax-advantaged medical savings	Core deferral vehicle for owners and staff

See the full comparison

Rules a medical practice has to take seriously

Incidental-benefit limit. Aggregate contributions to the 401(h) sub-account generally cannot exceed approximately 25% of total contributions to the host pension plan.
Key-employee separate accounting. Physician and dentist owners are typically key employees, which triggers separate-accounting requirements for their 401(h) benefits.
Plan-document language. The host plan must specifically authorize the §401(h) sub-account; a generic DB or cash balance document is not enough.
Nondiscrimination & coverage. Like the rest of the qualified plan, the 401(h) is subject to coverage and nondiscrimination testing that includes non-owner staff.
Ongoing administration. Annual actuarial valuation, Form 5500 reporting, and coordinated review by an enrolled actuary, ERISA counsel, the CPA, and a TPA are required.

A 401(h) is a plan-design decision, not a product purchase.

A practice cannot “open a 401(h)” the way it can open an HSA. It only exists as a sub-account of a properly drafted qualified pension or annuity plan. Every implementation belongs in front of an enrolled actuary, ERISA counsel, and your CPA before anything is signed.

Common questions from medical practice owners

A 401(h) is not a standalone account. It's a separate sub-account inside a qualified pension or annuity plan — most often a defined benefit or cash balance plan — that funds retiree medical benefits for plan participants and their dependents. For medical and dental practices that already sponsor a DB or cash balance plan, adding §401(h) language can create a structured, tax-advantaged vehicle for retiree healthcare funding.

Talk through whether a 401(h) fits your practice.

We're educational, not advisors — but we can point you toward the right professionals to evaluate a 401(h) inside your existing or planned defined benefit or cash balance structure.

Next step

Find out whether a 401(h) strategy may fit

Talk with a 401(h) specialist about your plan, participant group, and retiree medical objectives.

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