What is a 401(h) Plan?
It’s a medical expense account under Code Section 401(h). The plan pays for costs associated with sickness, accident, hospitalization, and medical expenses of retired employees (Employee electives, EEs) (and their spouses and dependents).
One of the largest expenses of retirees is their health-care costs. How do retirees pay for such costs? Typically, with savings or out of their taxable income.
With a 401(h) Plan, an employer can take a 100% deduction to fund a tax-free sinking fund where when retired EEs remove money from the plan to pay for medical expenses, there are NO income taxes due.
The 401(h) post-retirement medical option is perhaps the most overlooked and underutilized plan benefit in the industry today. The 401(h) benefit can add up to 33.33% to the otherwise maximum tax-deductible contribution of your pension plan.
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Is a 401(h) Plan practical and should you use one?
If you are a profitable small business owner, the answer is absolutely!
How can a 401(h) Plan help?
Example:
You could have your business fund X amount of money in a tax-deductible manner into a 401(h) Plan every year as an employee benefit for yourself and the other employees (discrimination testing for employee elective contributions is done using the classic age, years of service, and salary testing guidelines).
How do the numbers compare?
With a 401(h) Plan, a person could remove $10,000 a year tax-free until age 90.
At age 65, what is the net positive benefit of using the plan?
Example:
What if you had $10,000 in medical expenses every year in retirement? Using a 401(h) the money comes out 100% tax-free. If you removed money from a defined benefit plan to pay expenses, it would currently be 100% taxable.
Sample List 401(h) Benefits
- Insulin
- In-Home Care
- Laboratory Fees
- Alternative Healthcare
- Alternative Medicines
- Lasik Eye Surgery
- Assisted Living Facilities