Can a 401h account cover active workers over 59?
A defined-benefit pension plan that also carries a section 401(h) retiree medical account is a familiar structure for larger employers, hospitals, utilities, and public-sector-adjacent plans. The 401h account is a separate account inside the pension trust that pays for medical benefits for retired employees, their spouses, and their dependents. For decades, the practical limit on using the account was that the employee had to be retired. In Rev. Rul. 2026-22, the IRS said something new: a participant who has reached age 59½ and is eligible to take an in-service distribution under section 401(a)(36) is already “retired” for 401(h) purposes, even if the employee has not separated from service. For employers with substantially overfunded 401(h) accounts, that changes the arithmetic.
What is a 401h account and why does Rev. Rul. 2026-22 matter? π©Ί
A 401h account is a separate medical-benefits account funded inside a qualified pension plan. Rev. Rul. 2026-22 extends its reach to active participants who are age 59½ or older and are eligible for in-service distributions.
Section 401(h) of the Internal Revenue Code § 401 permits a qualified pension or annuity plan to provide for the payment of sickness, accident, hospitalization, and medical expenses of retired employees, their spouses, and their dependents, so long as six conditions are met. The benefits must be subordinate to the retirement benefits. A separate account must be maintained. Contributions must be reasonable and ascertainable. The corpus and income of the account cannot be diverted to any other purpose prior to the satisfaction of all plan liabilities. Any remaining amount after those liabilities are satisfied reverts to the employer. And a separate account must be maintained for any benefits payable to a key employee under Internal Revenue Code § 416(i).
Those rules are mechanical. The piece that has moved is the definition of “retired.” Treas. Reg. § 1.401-14(b)(1) defines a retired employee, for purposes of 401(h) eligibility, as an employee who is eligible to receive retirement benefits under the pension plan, or who is retired by reason of permanent disability. It then adds a limitation: an employee is not considered eligible to receive retirement benefits if the employee is still employed by the employer and a separation from employment is a condition to receiving those benefits. For most of the regulation’s life, the limitation effectively required a separation.
Section 401(a)(36) permits a qualified pension plan to pay an in-service distribution to a participant who has reached age 59½, with no separation required. Where the plan takes advantage of that permission, the second half of the regulation’s limitation stops applying: separation is not a condition to receiving retirement benefits. The participant is “eligible to receive retirement benefits” without leaving the payroll. In IRS Rev. Rul. 2026-22, the IRS closed the loop and held that such a participant is “retired” for 401(h) eligibility, so the 401(h) account can pay that participant’s medical benefits under the active medical plan.
Who qualifies as a 401(a)(36)-eligible participant? β±οΈ
A 401(a)(36)-eligible participant is a pension plan participant who has reached age 59½ and whose plan permits in-service distributions on that basis.
The qualifying facts the IRS relied on are narrower than the slogan. The revenue ruling’s taxpayer, Company A, sponsored a qualified pension plan that:
- included a section 401(h) retiree medical account from the outset;
- permitted 401(a)(36)-eligible participants to elect in-service distributions on reaching age 59½;
- made every form of benefit payment, including a lump-sum option, available to those participants;
- did not fund 401(h) benefits for any employee who was a key employee under section 416(i);
- had not received any section 420 transfer of excess pension assets into the 401(h) account;
- carried a substantially overfunded 401(h) account.
Company A then amended the plan to allow the 401(h) account to pay medical benefits for 401(a)(36)-eligible participants and their spouses and dependents under the active medical plan. The ruling’s reasoning hinges on each of those facts. Employers whose plans differ on any of them (for example, plans that fund 401(h) benefits for key employees, or plans that have received section 420 transfers) should not assume the same answer.
Does Rev. Rul. 2026-22 change the 401(h) key-employee rules? π§±
No. The key-employee separate-account and subordination rules in sections 401(h)(1) and 401(h)(6) are unchanged. The ruling only addresses when an employee counts as retired for 401(h) eligibility.
Section 401(h)(6) requires a separate account to be maintained for any 401(h) benefits payable to an employee who is a key employee as defined in Internal Revenue Code § 416(i). Benefits for that key employee (and the employee’s spouse and dependents) attributable to plan years beginning after March 31, 1984 are payable only from that separate account. The subordination rule in section 401(h)(1) and Treas. Reg. § 1.401-14(c)(1) still requires that 401(h) benefits, when added to any life insurance protection in the plan, be subordinate to the retirement benefits provided by the plan.
The Company A plan in the ruling sidesteps the key-employee question by design: the 401(h) account does not fund any benefits for key employees. An employer that wants to use Rev. Rul. 2026-22 as a template but whose active medical plan covers key employees has to decide, before amending, whether the 401(h) account will be used for those key employees at all, and if so, how the separate-account requirement will be satisfied for them.
What should plan sponsors do with an overfunded 401h account now? π
Review the pension plan document, confirm that the 401(h) account is not funding key-employee benefits, line up a plan amendment, and coordinate with the actuary before changing any funding assumptions.
- Read the plan document, not the summary plan description. The 401(h) account provisions, the section 401(a)(36) in-service distribution provisions, and the key-employee carve-out all have to be checked in the base document and any applicable amendments.
- Confirm the account’s history. Has the 401(h) account received any section 420 qualified transfer? Rev. Rul. 2026-22 is silent on section 420 and assumes no transfers were made. If the account has a transfer history, section 420’s maintenance-of-cost, maintenance-of-effort, and vesting rules under Internal Revenue Code § 420 come back into the analysis.
- Identify the population. Count the current participants who are age 59½ or older and eligible for in-service distributions under the plan. That is the set of active employees whose medical benefits might now be funded from the 401(h) account, subject to the key-employee exclusion.
- Amend before paying. The ruling’s Company A amended Plan Z to allow the 401(h) account to fund medical benefits for 401(a)(36)-eligible participants under the active medical plan. An amendment is the right order of operations.
- Coordinate with the actuary. Reallocating the use of an overfunded 401(h) account changes the future funding profile of the retiree medical program. That affects the actuary’s work and may affect the sponsor’s financial statements.
From our practice: the real benefit is reducing a stranded asset
In our practice, 401(h) accounts tend to become stranded over time. The retiree medical program narrows, the retiree population shrinks, and the account quietly accumulates. Rev. Rul. 2026-22 does not let the employer take the surplus out. The corpus and income remain locked inside the separate account until all liabilities are satisfied. What the ruling does do is widen the set of liabilities the account can discharge, which is a meaningful planning win for a plan with a large surplus and a small retiree roster. Treat it as reallocation, not as a release.
Are there traps and limits employers should still watch for? β οΈ
Yes. Subordination, separate-account, non-diversion, key-employee exclusion, and ERISA fiduciary duties all survive the ruling. The plan amendment also has to honor the non-diversion and reversion rules of section 401(h)(4) and (5).
Subordination is the quietest trap. Section 401(h)(1) requires that the medical benefits, when added to life insurance, be subordinate to the retirement benefits. The regulations apply that subordination test on a historical contribution basis. A plan that expands its 401(h) benefits to an active population without adjusting its retirement funding pattern can drift out of compliance. The non-diversion requirement in section 401(h)(4) means that once funds are in the 401(h) account, they stay committed to medical benefits for retirees (now including 401(a)(36)-eligible participants) and cannot be used for any other purpose while any medical liability remains outstanding.
| Issue | What the ruling changes | What stays the same |
|---|---|---|
| “Retired” for 401(h) eligibility | An active participant who is 59½ and eligible under section 401(a)(36) is treated as retired for 401(h). | Permanent-disability retirement; actual separation with retirement-benefit eligibility. |
| Key-employee rules | Nothing. The ruling’s facts exclude key employees from 401(h) funding. | Section 401(h)(6) separate-account requirement and section 416(i) key-employee definition. |
| Section 420 transfers | Nothing. The ruling assumes no section 420 transfers were made. | All of section 420’s maintenance and vesting conditions. |
| Subordination | Nothing. | Medical benefits plus life insurance remain subordinate to retirement benefits. |
| Other Code treatment | The ruling expressly disclaims any implication about whether 401(a)(36)-eligible participants are retired for other purposes. | Payroll, FICA, and other provisions that depend on separation from service. |
Do not confuse eligibility with release
Rev. Rul. 2026-22 does not release 401(h) assets back to the employer. The corpus and income of the separate account remain non-divertible until all medical liabilities are satisfied, and only the residual, if any, reverts to the employer under section 401(h)(5). An employer that reads the ruling as a way to “get at” the surplus is reading it wrong. It is a way to use the surplus for an additional qualifying purpose.
Summary: Rev. Rul. 2026-22 and your 401h account
- A pension plan’s 401(h) account may pay medical benefits for active participants who are 59½ or older and eligible for in-service distributions under section 401(a)(36).
- The ruling’s reasoning turns on Treas. Reg. § 1.401-14(b)(1): because section 401(a)(36) removes separation as a condition, the active participant is already “retired” for 401(h) eligibility.
- The key-employee carve-out in section 401(h)(6) and section 416(i) still applies. The ruling’s facts exclude key employees from 401(h) funding.
- The ruling disclaims any implication for other Code provisions and is silent on section 420 transfers.
- Order of operations: review the plan document, confirm no key-employee funding and no section 420 history, amend before paying, and coordinate with the actuary.
Frequently asked questions about the 401h account ruling β
Q. What is the holding of IRS Rev. Rul. 2026-22?
Rev. Rul. 2026-22 holds that a qualified pension plan’s section 401(h) retiree medical account may be used to pay medical benefits for plan participants who have reached age 59½ and are eligible for in-service distributions under section 401(a)(36), even though those participants have not separated from employment. Doing so does not violate section 401(h) or Treas. Reg. § 1.401-14, and it does not adversely affect the plan’s qualified status under section 401(a).
Q. Do the section 401(h) key-employee rules still apply after this ruling?
Yes. The ruling expressly assumes that the 401(h) account does not fund benefits for key employees as defined in section 416(i). The key-employee separate-account requirement in section 401(h)(6) and the subordination-to-retirement-benefits requirement in section 401(h)(1) are unchanged. Rev. Rul. 2026-22 only addresses the active-employee eligibility question, not the structural rules of 401(h).
Q. Can an overfunded 401h account be used for active-worker medical costs?
Yes, within the ruling’s facts. The ruling covers a pension plan with an overfunded 401(h) account used to pay for medical benefits under an active medical plan covering 401(a)(36)-eligible participants who are not key employees. The plan still has to be amended to permit that use, the medical benefits must continue to be subordinate to the retirement benefits, and the account must remain a separate account that satisfies every other requirement of section 401(h) and Treas. Reg. § 1.401-14.
Q. Does Rev. Rul. 2026-22 affect section 420 transfers?
No. The ruling states that no section 420 transfers had been made to the 401(h) account in question, and it does not address section 420. Employers that use section 420 qualified transfers of excess pension assets to a 401(h) account need to continue to apply the section 420 maintenance-of-cost and vesting rules on their own terms. Mixing a section 420 transfer with the active-worker funding allowed by this ruling raises additional issues that a benefits counsel should review.
Q. Are 401(a)(36)-eligible participants treated as retired for other Code purposes?
No. The ruling explicitly states that no implications are intended regarding whether 401(a)(36)-eligible participants are treated as retired for any other purpose under the Code. The same employee can be treated as retired for 401(h) eligibility under Treas. Reg. § 1.401-14(b)(1) while remaining an active employee for payroll, FICA, retirement-plan, and other Code purposes.
Q. Does an employer need a letter ruling to rely on Rev. Rul. 2026-22?
No. A revenue ruling is public guidance and may be relied on by any taxpayer whose facts are not materially different from those stated in the ruling. The fact pattern here is specific. If the plan or the employer’s facts diverge (for example, key employees are in the active medical plan, the account is not overfunded, or section 420 transfers were made), the safer path is a formal plan review before amendment.
This article is general information, not tax or legal advice for your plan. Section 401(h) interacts with ERISA fiduciary duties and with each plan’s unique funding history. If your plan has an overfunded 401(h) account and you are weighing an amendment in response to Rev. Rul. 2026-22, contact SW Accounting & Consulting Corp for a confidential plan review.
