On November 21, 2025, the IRS released private letter ruling (“PLR”) 202547007, which provides helpful clarification that retirees whose pension benefits have been annuitized are considered “retired employees” for purposes of the Code section 401(h) account. This means that the 401(h) can continue to pay medical benefits for retirees post-annuitization. We summarize the PLR below.
General 401(h) Account Rules
A 401(h) account allows an employer to fund retirees’ “qualified medical expenses” through defined benefit or money purchase plans, if certain conditions are satisfied. A qualified medical expense is defined as a payment made for “sickness, accident, hospitalization, and medical expenses of retired employees, their spouses and their dependents.” The Code section 401(h) regulations further provide conditions that must be satisfied to preserve the retirement plan’s tax-qualified status under Code section 401(a), including maintaining separate accounts, specifying the benefit terms, and complying with a “subordination” requirement. Since the addition of Code section 401(h) in 1962, and the subsequent publication of corresponding Treasury regulations, the IRS has offered little guidance on the design and administration of 401(h) accounts except through a handful of PLRs.
Qualified pension plans are subject to longstanding requirements that they pay benefits primarily to retired employees. Treas. Reg. § 1.401-1(b)(1)(i). Under the Code section 401(h) regulations, the 401(h) account can only pay medical benefits for employees who are eligible to receive retirement benefits under the pension plan or are permanently disabled. An employee is not considered to be eligible to receive retirement benefits under the pension plan if he/she is still employed by the employer and a separation from employment is a condition to receiving the retirement benefits.
Pension “Lift Outs”
In recent years, many employers have adapted strategies to “de-risk” their pension plans by transferring the liabilities for a segment of retired participants to an insurance company that assumes liabilities under an annuity contract and guarantees the payment of benefits to the retired employees. After the pension plan purchases the annuity covering the liabilities, the retiree is no longer treated as a “participant” for purposes of ERISA, including payment of PBGC premiums. Some employers have asked whether an annuitized participant in such a pension “lift out” continues to be considered eligible to receive pension benefits for purposes of receiving retiree medical benefits from the plan’s 401(h) account.
The IRS Ruling
An employer requested a PLR that a 401(h) account can pay for the medical benefits of retirees whose pension benefits have been annuitized in a “lift out” under the employer’s two pension plans.
The PLR concludes that the payment of medical benefits from the 401(h) accounts for annuitized retirees does not violate Code section 401(h) or the Code section 401(h) regulations or otherwise jeopardize the tax-qualified status of the pension plans under Code section 401(a).
The IRS explained its ruling as follows:
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. Before the Lift Out, the Annuitized Retirees were eligible to receive retirement benefits under the Pension Plans. The Annuitized Retirees therefore met the definition of “retired” under§ 1.401-14(b)(1) prior to the Lift Out.
Annuitized Retirees are currently eligible, post-Lift Out, to receive retirement benefits under the Pension Plans. The Annuitized Retirees therefore meet the definition of “retired” under § 1.401-14(b)(1 ). The Pension Plans may therefore provide for the payment of medical benefits described in section 401(h) for the Annuitized Retirees.
While the analysis of the ruling is somewhat confusing, the holding is quite clear – the 401(h) account can pay medical benefits for annuitized retirees. While only the recipient of this PLR may rely on it, the PLR provides insight into IRS’s current thinking on the administration of 401(h) account benefits under the widely used strategy for annuitizing retiree benefits.
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