A 401(h) trust is a tax-advantaged trust component used in some qualified retirement arrangements to fund post-retirement health costs for eligible participants.
Contributions are employer-controlled, and the trust exists to support benefits during retirement, not to replace all insurance purchasing decisions.
Insurance mechanics
- Funds are segregated by plan design and used for qualifying post-retirement medical exposures.
- Participants generally do not contribute directly to a 401(h) trust.
- Payout design depends on plan language, including coverage thresholds and permissible medical categories.
Underwriting and benefit administration
Because this is a plan design feature rather than a standalone policy, underwriting is usually about plan eligibility, benefit sufficiency, and actuarial projections for retirees.
Regulation and governance
- Internal Revenue Code section 401(h) governs contribution limits and qualified medical expense handling.
- ERISA applies to administration, disclosure, and fiduciary obligations.
- Compliance teams must ensure that plan distributions and accounting treatment align with federal tax limits.
Practical scenario
An employer wants to improve retiree support without changing payroll benefits directly. It funds a 401(h) trust to cover specified medical payments after retirement, while health plans remain separate, improving predictability of retirees’ claims under written benefits.