Mechanics
How 401(h) plans work.
At a structural level, contributions flow from the business into a qualified pension or annuity plan. A portion of that plan — the 401(h) sub-account — is set aside to fund qualified retiree medical benefits.
The flow
From business to retiree medical benefits
A simplified visualization. Actual plan mechanics depend on plan design and applicable law.
Business
Employer contributions
Pension Plan
Qualified DB / Cash Balance
401(h)
Separate sub-account
Retiree Med
Qualified expenses
Illustrative. A 401(h) account is a separate sub-account within a qualified pension or annuity plan — not a standalone consumer account.
Retirement benefits first
Medical benefits remain subordinate
A core rule: the medical (401(h)) benefits must be incidental — subordinate — to the retirement benefits provided by the plan.
Retirement benefits
The primary purpose of the qualified plan — and the dominant share of plan benefits, on a present-value basis.
401(h) medical benefits
Subordinate / incidental to retirement benefits. Plan design must respect this limit on an ongoing basis.
Illustrative — actual ratios depend on plan design, actuarial methodology, and applicable rules.
Timeline
A retiree healthcare planning horizon
A 401(h) strategy is typically aimed at the post-retirement medical cost horizon — a period that often spans decades.
Working years
Contributions to qualified plan
Employer funds DB / cash balance plan; 401(h) portion accrues separately.
Pre-retirement
Retirement benefits accrue
Medical benefits remain subordinate / incidental to retirement benefits.
Retirement
Retiree medical needs begin
Out-of-pocket healthcare costs typically rise materially in early retirement.
Age 65+
Medicare premiums & supplements
Certain Medicare-related premiums may be qualified medical expenses, depending on plan design.
Later retirement
Ongoing qualified expenses
Prescriptions, deductibles, copays, dental, vision — subject to plan terms and tax rules.
Long term
Long-term care considerations
Plan design, eligibility, and applicable rules determine treatment.
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.
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.