Pension medical account may cover in-service retirees

Plain-English summary

An employer proposed amending its pension plan so its IRC § 401(h) retiree medical account could pay medical, dental, and vision benefits for employees still working after reaching age 59½. The pension plan already allowed those employees to begin in-service retirement payments under § 401(a)(36). Because separation from employment was not a condition for receiving retirement benefits, the IRS concluded that these participants could be treated as retired employees for § 401(h) medical-benefit purposes. It ruled that the payments would not violate §§ 401(a), 401(a)(36), or 401(h), or the related regulation. It also ruled that adopting the amendment would not harm the plan's qualified status or its trust's tax-exempt status.

Ruling snapshot

• Question: May a pension plan's § 401(h) account pay health benefits for active employees eligible for in-service retirement distributions?
• Outcome: Approved, without adversely affecting the plan's qualification or trust exemption
• Key authorities: IRC §§ 401(a), 401(a)(36), 401(h), 501(a); Treas. Reg. § 1.401-14

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202531003 Third Party Communication: None
Release Date: 8/1/2025 Date of Communication: Not Applicable
Index Number: 401.27-00
Person To Contact:
------------------------------------------- --------------------, ID No. -----------------
--------------------- Telephone Number:
--------------------------- ---------------------
Refer Reply To:
CC:EEE:EB:QP3
PLR-102040-25
Date:
April 30, 2025

Legend

Taxpayer = --------------------------------------
Pension Plan = ---------------------------------------------------------------------

                                            -----------------------------------------

Entity A = ----------------------------
Retiree Health Benefits Plan 1 = ---------------------------------------------------------------------

Retiree Health Benefits Plan 2 = ---------------------------------------------------------------------

Active Employee Medical Plan = --------------------------------------------------
Date 1 = ----------------------
Date 2 = ----------------------
Date 3 = ----------------------
Date 4 = ---------------------------
Amount Z = -------------------
Year XX = -------

Dear -------------:

This is in response to your letter, dated January 30, 2025, as supplemented by
information dated March 27, 2025, submitted on your behalf by your authorized
representative. The letter requests rulings related to the adoption of a plan amendment
to permit active employees to receive benefits under the Pension Plan’s retiree medical
benefits account (“401(h) Account”) while eligible to commence in-service retirement
benefits under the Pension Plan pursuant to Internal Revenue Code section 401(a)(36).
PLR-102040-25 2

Facts

The following facts and representations have been submitted under penalties of perjury
in support of the rulings requested:

Taxpayer’s annual accounting period is the calendar year. Taxpayer uses the accrual
method of accounting. The Pension Plan’s plan year is the calendar year.

Taxpayer maintains the Pension Plan, a cash balance plan, for eligible employees of
Entity A and other affiliated participating employers. The Pension Plan includes the
401(h) Account.

The Pension Plan was established effective Date 1. Taxpayer continues to sponsor and
maintain the Pension Plan, which was last amended and restated effective as of Date 2
and has been subsequently amended from time to time thereafter. The Pension Plan,
including the 401(h) Account, most recently received a favorable determination letter on
Date 3.

The last contribution Taxpayer made to the 401(h) Account was on Date 4, in the
amount of Amount Z for the Year XX plan year. Taxpayer has not made any
contributions to the 401(h) Account since the Year XX plan year.

Since the 401(h) Account was established, Taxpayer has made deductible contributions
to the 401(h) Account in accordance with section 401(h). Contributions to the 401(h)
Account have been used to pay or reimburse Taxpayer for postretirement medical
expenses incurred for eligible retired employees under the Retiree Health Benefits Plan
1 and the Retiree Health Benefits Plan 2 (collectively, “Retiree Medical Plan”).

Taxpayer also maintains the Active Employee Medical Plan, which includes medical,
dental, and vision plans, and various options and component benefit programs.
The terms of the Pension Plan permit a portion of the cost of medical benefits, as
described in section 401(h), to be provided to an eligible retired participant (and the
retired participant’s eligible dependents) to the extent eligible for benefits under the
Retiree Medical Plan. Under the Pension Plan, payments of medical expenses under
the 401(h) Account are only made for eligible retired participants (and their eligible
dependents) as described in the Retiree Medical Plan.

The Pension Plan does not permit 401(h) Account assets to be used for any participant
who is or was a key employee (as defined in section 416(i)) during a plan year or any
preceding plan year in which contributions to the 401(h) Account were made, or for the
eligible dependents of such participants.

The Pension Plan permits a nonunion participant who is actively employed with a
participating employer to elect, on the first day of any calendar month coincident with or
PLR-102040-25 3

following the date the participant attains the Applicable Age (age 59 ½), to commence
in-service benefit payments in accordance with the Pension Plan’s terms.

Taxpayer proposes to amend the Pension Plan to permit the 401(h) Account assets to
be used to reimburse medical expenses incurred on behalf of Pension Plan participants
who have not separated from employment but are eligible for in-service distributions
under the Pension Plan (including Pension Plan participants who may have received
their entire vested benefits upon electing the in-service distribution option).

Taxpayer represents that the 401(h) Account was not funded, directly or indirectly, by
transferred excess pension assets to the 401(h) Account in accordance with
section 420.

Taxpayer represents that it does not have a contractual obligation to fund health
benefits, including health benefits that may be provided under the Retiree Medical Plan
and its various options and component benefit programs, or the Active Employee
Medical Plan and its various options and component benefit programs.

Rulings Requested

Taxpayer requests rulings that:

1. The payment of active employee health benefits (limited to medical, dental, and
   vision) from the Pension Plan’s 401(h) Account to employees who are eligible for
   in-service retirement benefits from the Pension Plan does not violate
   section 401(a), (a)(36), or (h) or § 1.401-14.

2. The adoption of the proposed amendment will not adversely affect the qualified
   status of the Pension Plan or the tax-exempt status of its trust.

Law

Section 401(a) describes the requirements for a qualified trust created or organized in
the United States and forming part of a stock bonus, pension, or profit-sharing plan of
an employer for the exclusive benefit of the employer’s employees or their beneficiaries.

Section 501(a) provides that an organization described in section 401(a) is generally
exempt from federal income tax.

Section 401(a)(36) provides that a trust forming part of a pension plan shall not be
treated as failing to constitute a qualified trust under section 401 solely because the
plan provides that a distribution may be made from the trust to an employee who has
attained age 59½ and who is not separated from employment at the time of the
distribution.
PLR-102040-25 4

Section 401(h) provides that, under regulations prescribed by the Secretary, and subject
to the provisions of section 420, a pension or annuity plan may provide for the payment
of benefits for sickness, accident, hospitalization, and medical expenses of retired
employees, their spouses, and their dependents, but only if—
(1) such benefits are subordinate to the retirement benefits provided by the plan;

(2) a separate account is established and maintained for such benefits;

(3) the employer’s contributions to such separate account are reasonable and
ascertainable;

(4) it is impossible, at any time prior to the satisfaction of all liabilities under the plan
to provide such benefits, for any part of the corpus or income of such separate
account to be (within the taxable year or thereafter) used for, or diverted to, any
purpose other than the providing of such benefits;

(5) notwithstanding the provisions of section 401(a)(2), upon the satisfaction of all
liabilities under the plan to provide such benefits, any amount remaining in such
separate account must, under the terms of the plan, be returned to the employer;
and

(6) in the case of an employee who is a key employee, a separate account is
established and maintained for such benefits payable to such employee (and his
spouse and dependents) and such benefits (to the extent attributable to plan
years beginning after March 31, 1984, for which the employee is a key
employee) are only payable to such employee (and his spouse and dependents)
from such separate account.

For the purposes of paragraph (6), the term “key employee” means any employee, who
at any time during the plan year or any preceding plan year during which contributions
were made on behalf of the employee, is or was a key employee as defined in
section 416(i).

Section 1.401-14(a) provides that, under section 401(h), a qualified pension or annuity
plan may make provision for the payment of sickness, accident, hospitalization, and
medical expenses for retired employees, their spouses, and their dependents. The term
“medical benefits described in section 401(h)” is used in § 1.401-14 to describe such
payments.

Section 1.401-14(b)(1) provides that, under section 401(h), a qualified pension or
annuity plan may provide for the payment of medical benefits described in
section 401(h) only for retired employees, their spouses, or their dependents. To be
“retired” for purposes of eligibility to receive medical benefits described in
section 401(h), an employee must be eligible to receive retirement benefits provided
under the pension plan, or else be retired by an employer providing such medical
PLR-102040-25 5

benefits by reason of permanent disability. For purposes of the preceding sentence, an
employee is not considered to be eligible to receive retirement benefits provided under
the plan if he is still employed by the employer and a separation from employment is a
condition to receiving the retirement benefits.

Section 1.401-14(c) sets forth requirements which must be met for a qualified pension
or annuity plan to provide medical benefits described in section 401(h):

(1) The plan must specify the medical benefits described in section 401(h) which will
be available and must contain provisions for determining the amount which will
be paid. Such benefits, when added to any life insurance protection provided for
under the plan, must be subordinate to the retirement benefits provided by such
plan.

(2) A separate account must be maintained with respect to contributions to fund
medical benefits described in section 401(h).

(3) Amounts contributed to fund medical benefits, as described in section 401(h),
must be reasonable and ascertainable.

(4) It must be impossible, at any time prior to the satisfaction of all liabilities under
the plan to provide for the payment of medical benefits described in section
401(h), for any part of the corpus or income of the medical benefits account to be
(within the taxable year or thereafter) used for, or diverted to, any purpose other
than the providing of such benefits.

(5) The plan must provide that any amounts which are contributed to fund medical
benefits described in section 401(h) and which remain in the medical benefits
account upon the satisfaction of all liabilities arising out of the operation of the
medical benefits portion of the plan are to be returned to the employer.

Analysis

The second sentence of § 1.401-14(b)(1) provides that an employee is eligible to
receive medical benefits from a 401(h) account as a “retired employee” if the employee
is eligible to receive retirement benefits under the associated pension plan. Certain
participants who, pursuant to section 401(a)(36), are eligible to receive retirement
benefits under the terms of the Pension Plan upon attainment of the Applicable Age,
thereby satisfying the definition of a “retired employee” as described in the second
sentence of § 1.401-14(b)(1).

The third sentence of § 1.401-14(b)(1) provides that an employee is not considered to
be eligible to receive retirement benefits under the plan if he is still employed by the
employer and a separation from employment is a condition to receiving the retirement
benefits. Because certain Pension Plan participants who, pursuant to
PLR-102040-25 6

section 401(a)(36), are eligible to receive retirement benefits prior to their separation
from employment once they attain the Applicable Age under the Pension Plan’s terms,
separation from employment is not a condition to receiving retirement benefits under the
Pension Plan for those participants. Accordingly, the participants covered by the
proposed plan amendment who have reached the Applicable Age and are still actively
employed would not be excluded from being considered eligible to receive retirement
benefits under the third sentence of § 1.401-14(b)(1).

Rulings

We conclude that:

1. The payment of active employee health benefits (limited to medical, dental, and
   vision) from the Pension Plan’s 401(h) Account to employees who are eligible to
   receive in-service retirement benefits from the Pension Plan does not
   violate section 401(a), (a)(36), or (h) or § 1.401-14.

2. The adoption of the proposed amendment will not adversely affect the qualified
   status of the Pension Plan under section 401(a) or the related trust’s tax-exempt
   status under section 501(a).

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalties of perjury statement executed
by an appropriate party, as specified in Rev. Proc. 2025-1, 2025-1 I.R.B. 1, section
7.01(16). This office has not verified any of the material submitted in support of the
request for rulings. This material is subject to verification upon examination. The
Associate Office will revoke or modify a letter ruling and apply the revocation
retroactively if there has been a misstatement or omission of controlling facts, the facts
at the time of the transaction are materially different from the controlling facts on which
the rulings were based, or—in the case of a transaction involving a continuing action or
series of actions—the controlling facts change during the course of the transaction. See
Rev. Proc. 2025-1, section 11.05.

Except as specifically set forth above, no opinion is expressed or implied concerning the
federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter ruling. Specifically, no opinion is provided on any income tax
consequences to Taxpayer as a result of the use of the Pension Plan’s 401(h) Account
to provide health benefits to the employees who have not separated from employment.
In addition, no opinion is expressed as to whether the Pension Plan satisfies any
requirements of section 401(a) not expressly discussed.

These rulings are directed only to the taxpayer requesting them. Section 6110(k)(3)
provides that they may not be used or cited as precedent.
PLR-102040-25 7

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                            Sincerely,

                                            Jeremy D. Lamb
                                            Senior Counsel
                                            Qualified Plans Branch 2
                                            Office of Associate Chief Counsel
                                            (Employee Benefits, Exempt Organizations, and
                                            Employment Taxes)

cc: ---------------------------------------------------------
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