Extending a pension plan's 401(h) retiree-medical account to in-service participants over age 59½ does not jeopardize the plan's qualified status

Plain-English summary

An employer runs a pension plan that includes a Section 401(h) account, a separate
pot inside the pension used to pay retiree medical benefits. That account is
overfunded, and the employer has not contributed to it in years. The employer had
already amended the pension to let participants start drawing retirement benefits
at age 59½ while still working (allowed under Section 401(a)(36)), and now it wants
to use the 401(h) account to pay medical benefits for those still-employed
participants too. It asked the IRS whether doing so would break the 401(h) rules or
disqualify the pension. The key issue is the regulation's definition of a "retired
employee": someone is treated as retired if they are eligible to receive retirement
benefits, and they are not disqualified merely for still working unless separation
from employment is a condition of getting those benefits. Because these in-service
participants can draw benefits without separating, they count as retired for 401(h)
purposes. The IRS ruled the proposed amendment does not violate Section 401(h) or
the regulation and does not hurt the plan's qualified status under Section 401(a).
The letter expressly gives no opinion on the income tax consequences to the
employer of using the account this way.

Ruling snapshot

• Question: Does using a pension plan's 401(h) account to pay medical benefits for in-service participants (eligible for benefits at 59½ without separating) violate Section 401(h) or disqualify the plan?
• Outcome: Approved (no violation; qualified status preserved)
• Key authorities: IRC § 401(a), § 401(a)(36), § 401(h); Treas. Reg. § 1.401-14

Full text (IRS public release)

Internal Revenue Service                        Department of the Treasury
                                                Washington, DC 20224

Number: 202551032                               Third Party Communication: None
Release Date: 12/19/2025                        Date of Communication: Not Applicable
Index Number: 401.00-00, 401.27-00
                                                Person To Contact:
-----------------------------------------------   ----------------, ID No. -----------------
----------------------------------------------  Telephone Number:
--------------------------                      --------------------
-------------------------                       Refer Reply To:
                                                CC:EEE:EB:QP3s
                                                PLR-103923-25
                                                Date:
                                                August 04, 2025


LEGEND

Taxpayer                      = ----------------------------------------------
Pension Plan                  = --------------------------------------------------------------------
Pension Plan's 401(h) Account = --------------------------------------------------------------------
                                --------------------
Medical Plan                  = --------------------------------------------------------------------
                                --------------------
Date 1                        = ----------------------
Date 2                        = --------------------------------------------------------------------
Date 3                        = -----------------------
Year 1                        = -------


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

This is in response to your letter dated February 6, 2025, submitted on your behalf by
your authorized representative. The letter requests a ruling related to the expansion of
eligibility for the payment of benefits provided for by a post-retirement medical account
under section 401(h) of the Internal Revenue Code. The expansion involves the
inclusion of certain employees who are eligible to commence in-service retirement
benefits under section 401(a)(36).

Facts

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

The Taxpayer maintains Pension Plan, which was established on Date 1 and received
its most recent favorable determination letter on Date 2. The Pension Plan has a retiree
medical account described in section 401(h) (Pension Plan's 401(h) Account). The
Taxpayer also maintains Medical Plan. The Pension Plan's 401(h) Account funds post-
retirement medical benefits under the Medical Plan.

The Pension Plan's 401(h) Account is overfunded. The Taxpayer has not made a
contribution to Pension Plan's 401(h) Account since Year 1.

The Taxpayer amended the Pension Plan, effective Date 3, to allow Pension Plan
participants to elect to receive Pension Plan benefits on or after attainment of age 59½,
but prior to their termination of employment (In-Service Eligible Participants). All benefit
forms available under the Pension Plan are available to the In-Service Eligible
Participants.

The Taxpayer is proposing to amend the Pension Plan (Proposed Amendment) to use
the Pension Plan's 401(h) Account to fund medical benefits incurred on or after Date 3
under the Medical Plan for the In-Service Eligible Participants (including their spouses
and dependents) who are eligible for benefits thereunder.

The Taxpayer represents that the Pension Plan's 401(h) Account was not funded by a
section 420 transfer and the Taxpayer does not have a contractual obligation to fund
medical benefits for any In-Service Eligible Participants who would be impacted by the
Proposed Amendment.

Ruling Requested

Taxpayer requests a ruling that the Proposed Amendment will not violate section 401(h)
or § 1.401-14 or otherwise adversely affect the qualified status of the Pension Plan
under section 401(a).

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(a) 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.

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; and

      (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.

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
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 pension plan. Here, the In-Service
Eligible Participants will be eligible to receive retirement benefits under the terms of the
Pension Plan. Thus, the In-Service Eligible Participants will satisfy 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 In-Service Eligible Participants will be eligible to receive retirement
benefits prior to separation from employment, separation from employment will not be a
condition to the In-Service Eligible Participants receiving retirement benefits under the
Pension Plan. Accordingly In-Service Eligible Participants will not be excluded from
being considered eligible to receive retirement benefits under the third sentence of
§ 1.401-14(b)(1).

Ruling

We conclude that the Proposed Amendment does not violate section 401(h) or
§ 1.401-14 or otherwise adversely affect the qualified status of the Pension Plan under
section 401(a).

The ruling contained in this letter is based upon information and representations
submitted by the Taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party, as specified in Rev. Proc. 2025-1, 2025-1 IRB 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 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 ruling was
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 the Taxpayer as a result of the use of the 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.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.

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

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