IRS OKs using 401(h) account to fund active medical (sometimes) 

November 9, 2026

Employers may use defined benefit (DB) plan assets originally set aside for retiree medical benefits to pay for active-employee medical benefits in certain circumstances. Rev. Rul. 2026-22 confirms that a plan sponsor can use surplus assets in an Internal Revenue Code (IRC) Section 401(h) account to provide medical benefits to participants who are still employed and eligible to take in-service distributions from the DB plan. Sponsors whose facts are substantially the same as those in the revenue ruling can rely on it to employ this strategy without having to request IRS’s approval in a private letter ruling (PLR).

Section 401(h) lets employers establish separate accounts within the DB plan to pay for medical expenses of retired employees, their spouses, and their dependents. The assets in these accounts are subject to strict usage requirements and generally can’t be diverted for other uses or revert to the employer — even if the DB plan is terminated — before all retiree health liabilities are satisfied. These requirements can trap surplus assets in the 401(h) account, leaving the sponsor with no clear course to use or recover the excess. (Proposed Senate legislation would let sponsors use these surplus assets to pay DB benefits or transfer the assets to a voluntary employees’ beneficiary association (VEBA) to pay health benefits to certain employees. See Bill would let defined benefit plan sponsors free trapped assets.)

An IRS 2023 private letter ruling (PLR) opened the door for sponsors to take a more expansive view of whose benefits can be funded from Section 401(h) accounts. Treasury regulation § 1.401-14(b)(1) says that for 401(h) purposes, employees are considered retired if they are “eligible to receive retirement benefits provided under the pension plan” or else are permanently disabled. The regulation further specifies that employees do not satisfy this condition if they are “still employed by the employer and a separation from employment is a condition to receiving the retirement benefits.”

The PLR says that participants who are eligible to receive an in-service distribution under IRC Section 401(a)(36) may be considered retired employees for purposes of Section 401(h) because they are eligible for retirement benefits and needn’t separate from employment to get the benefits. (Plans may provide for in-service distributions starting as early as age 59-1/2.)

Since issuing the original PLR, IRS has released seven more PLRs reaching the same conclusion. However, those PLRs are not precedential and can be relied on only by the employers that requested them. Rev. Rul. 2026-22 now provides broader reliance — sponsors with facts that are substantially the same as those in the ruling don’t need to request a PLR to get reassurance that they are not violating the 401(h) rules or risking the plan’s qualified status. 

Key facts from the ruling include the following:

• The DB plan permits participants age 59-1/2 or older to take in-service distributions of their retirement benefits (including in the form of a lump sum).
• Participants who take in-service distributions are eligible for benefits under the medical plan for active employees.
• The employer maintains a medical plan for retired employees and their spouses and dependents.
• The company has no contractual obligation to fund medical benefits under either medical plan.
• The 401(h) account pays for medical benefits for DB plan participants, spouses, and dependents covered by the retiree medical plan.
• The 401(h) account does not cover key employees as defined under the top-heavy rules of IRC Section 416(i). (Accounts for key employees must be maintained separately.)
• The 401(h) account has never received a Section 420 transfer — meaning the account has only been funded by direct employer contributions, not a transfer of surplus DB plan assets.
• The 401(h) account is substantially overfunded.
• The plan is amended to permit payment from the 401(h) account of medical benefits for participants who are eligible for in-service distributions and covered by the active medical plan.

“Substantially overfunded” undefined. The revenue ruling states that the Section 401(h) account is “substantially overfunded” but gives no indication of what that means as a practical matter, nor do the prior PLRs provide any clear guidance. The original PLR says that the 401(h) account “has significantly more assets than needed to satisfy liabilities for post-retirement medical benefits,” and some of the other PLRs use similar language. However, two of the PLRs do not mention the funded status of the 401(h) account at all, and two others (including the most recent PLR, issued in December 2025) suggest only that the plan has a surplus without characterizing the magnitude. Sponsors considering employing this strategy without obtaining a PLR should make sure to discuss their 401(h) account’s funding level (and all other relevant facts) with legal counsel.

• Rev. Rul. 2026-22 (IRS, October 28, 2026)
• PLR 202551032 (IRS, December 19, 2025)
• PLR 202305001 (IRS, February 3, 2023)

• Bill would let defined benefit plan sponsors free trapped assets (July 11, 2025)