On October 28, 2026, the IRS released Revenue Ruling 2026-22 (“the Ruling”), confirming that a pension plan’s Code section 401(h) account can fund medical benefits for active employees who are at least age 59½ and eligible for an in-service distributions. The IRS had previously taken this position in several private letter rulings (“PLRs”), but only the requesting employer can rely on a PLR. The Ruling now formalizes that position as guidance on which all taxpayers with substantially the same facts can rely. We summarize the Ruling below. See our prior alert on the PLRs here.
Background
A 401(h) account generally allows an employer to fund retired employees’ medical expenses through defined benefit or money purchase pension plans, if certain conditions are satisfied. As relevant here, a “retired employee” is an employee who is eligible to receive retirement benefits under the pension plan. An employee is not considered to be eligible to receive retirement benefits if he/she is still employed by the employer and separation from employment is a condition of receiving the retirement benefits.
Many employers have found their 401(h) accounts to be significantly overfunded with few options for using the excess (See our prior article on this here). Beginning in 2020, the age for in-service pension distributions decreased to 59 ½. This opened the door for employers to use some of their surplus 401(h) assets for medical benefits for active employees eligible for in-service distributions. Beginning in 2023, the IRS issued eight PLRs approving this design, but only an employer that received a PLR can rely on it.
The Ruling
The Ruling provides the first guidance on which all employers can rely. The Ruling addresses the following fact pattern:
- An employer sponsors a qualified pension plan with an overfunded 401(h) account.
- The employer sponsors a retiree medical plan for pension plan participants that is funded through the 401(h) account and an active medical plan.
- The pension plan permits plan participants who have attained age 59½ and have not separated from employment to receive eligible in-service distributions.
- No Code section 420 transfers were ever made to the 401(h) account.
The employer amended the pension plan to allow the surplus 401(h) account assets to fund active medical benefits under the active medical plan for the in-service distribution-eligible employees (and their dependents). The IRS ruled that, because a separation from employment was not a condition to receiving retirement benefits, the in-service distribution eligible employees satisfied the definition of “retired” employees under the Code section 401(h) rules. Thus, the employer was permitted to use the surplus 401(h) account assets to pay for active medical benefits for the in-service distribution eligible employees (and their dependents).
Takeaways
The Ruling provides welcome certainty for the many employers with surplus 401(h) account assets and is consistent with IRS reasoning in the PLRs. The Ruling is highly fact-dependent, however, and employers should reach out to counsel to discuss the specific facts of their pension plan before amending their plan to adopt this approach. Notably, several other PLRs have permitted employers to use 401(h) account assets to pay retiree medical benefits for retired former pension plan participants, such as those involved in pension risk transfers. Hopefully, the IRS will publish guidance on those issues soon too.
If you have questions about the Ruling or how it may apply to your plan, please contact the authors or your regular Groom attorney.
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