401(h) accounts

401l(h) accounts can add up to 25% tax deductible contributions to a pension plan.  Are 401 (h) accounts which provide incidental post retirement medical benefits appropriate for small Cash Balance and Defined Benefit plans, where all the participants take lump sum distributions or rollovers on retirement or termination.  Suppose an employer has 3 owners and 10 non-key employees.   If one of the non-key employees retires and distributes or rolls over their full lump sum pension amount, are they still eligible thereafter to benefit from post retirement medical expenses, or must they be receiving a monthly pension from the plan to be eligible for post retirement medical expenses.   Similarly, suppose an employee terminates prior to retirement and takes a full distribution at termination, and later reaches the plan's retirement age while the plan is still inexistence.   Are they then eligible for post retirement medical benefits.   If a key employee is past the plan's retirement age, but still an active participant, can they start to received post retirement medical benefits.  

What actuarial requirements are needed for a pension plan with a 401 (h) account.  Is anyone actively administrating plans with 401 (h) accounts for many of their clients.    

Recent IRS PLR may be helpful for your last question (key employee past plan's retirement age, but still an active participant). 

Also a summary article from Groom..

Thanks Lois.   There are also several problems with administering these accounts.     For key employees, any employer contribution to their 401 (h) account reduces the company's limits to their profit sharing account.    Also, the employer contributions for the non keys are apparently not pooled, but separate for each eligible participant.  It appears to be an administrative nightmare.    Do you agree.  

Experts - I have a key question and is exploring opening a 401-h plan as part of my Defined benefit Plan by contributing up to 25% of the amount for next 5 years. I am a single employee organization with me and my spouse as managing members with me as the only working employee. I have a specific question on the benefits. I am currently 56 and my spouse is 49. I plan to retire at 62 along with my spouse at 55 after 5 years. Hence, I will need to buy private health insurance for 3 years for self and 10 years for my spouse till we both become eligible for medicare at 65. Can the balances in my 401-h plan be used pay the health insurance premium for Obamacare/private health insurance during this period since we will not be working as early retirees and will need health insurance coverage prior to getting medicare. I saw the benefits usage for 401-h  include health insurance premiums for 401-h but was not sure whether it is post 65 years or prior to medicare applicability. Please clarify on this detail to enable me to make a decision and move forward on this. 

A few quick Google searches will provide a significant amount of information about 401(h) accounts.   Also, whoever is going to administer the plan for you should be able to provide this information.

I don't think there are very many people on this board who work closely with 401(h) accounts.  There are some believers out there, but I think most practitioners are treading carefully.  

Sorry I couldn't be more helpful.  Good luck.

401(h) accounts are something of a niche practice these days. Assuming the 401(h) account is associated with your pension plan (you need to be mindful of any DC funding implictions if you or your spouse are "key employees") and you are able to fund it (subject to a subordination limit of 25% of pension contributions once the 401(h) account is established), the 401(h) account assets can be used to pay or remiburse for medical plan expenes including pre- and post-Medicare expenses and related premiums.

I think (?) 401(h) arrangement with the DB Plan cannot rely on the prototype plan and has to use the individually designed plan.  Which makes it cost-prohibitive proposition.

Thanks for your comments Effen, TWM ERISA Attorney, truphao.

TWM ERISA Attorney - can you please send an email (narayanm28@gmail.com) for the list of established plan administrators for small businesses with 1 employee organization and who could be cost effective for DBP with 401(h) plans please.