What Is a 401(h) Plan?

Q: What is a 401(h) plan?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: A 401(h) plan, named for the Internal Revenue Code section on which it is based, is not actually a stand-alone plan type but rather a retiree medical benefit that is established within either a defined benefit or a money purchase plan.

The purpose of a 401(h) plan is to provide for the payment of benefits for sickness, accident, hospitalization and medical expenses for retired employees, their spouses and dependents. To satisfy the provisions of Section 401(h), such medical benefits must be subordinate to pension benefits under the plan and a separate account must be established and maintained to fund these benefits.

Arrangements under Section 401(h) used to be fairly common in state retirement systems and other defined benefit plans but have declined over the years with the decline in employers offering retiree medical benefits (and defined benefit plans). 

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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