401(h) Contribution Limits: The #1 Way to Maximize Contributions


Most business owners have heard of Health Savings Accounts (HSAs) and 401(k) plans. But most are surprised when they hear about the 401(h) account. It could be an excellent strategy for many business owners.

So why have so few people heard of them?

It’s really because there isn’t a lot of tax guidance on the plans, and they are tied to pension plans. Because a 401(k) is not technically a pension plan in the eyes of the IRS, the 401(h) account is not really available to most people.

So what are the plans, and how do they work? In this post, we will discuss some of the mechanics of the plans and look at an example. If used correctly, they can be a great tax strategy. Let’s dive in.

Tell me more about a 401(h) account

The 401(h) is not really a “plan” itself. It is an account that is essentially tacked on to a pension plan like a defined benefit plan, cash balance plan, and money purchase plan.

A separate plan document is created to allow the company to fund medical expense benefits for retired employees. Contributions to the account are tax-deductible as well as earnings in the account. As long as the account is used to fund qualified medical benefits, the contributions will be tax-free.

The plan itself is comparable to a health savings account. But the contribution limits are substantially higher.

401(h) contribution limits

The contribution limitations are somewhat unique. There are two specific rules to make sure you understand.

  1. A 401(h) account contribution is limited to 25% of the total pension plan contribution. This percentage is cumulative, so if contributions were lower in prior years, you could catch up on the contributions in the current year to hit the cumulative limit.
  2. They are also tied to the defined contribution rules. This may be counterintuitive because 401(h) accounts are usually linked to defined benefit plans. According to section 415(l)(1), contributions allocated to a 401(h) account that is part of a pension plan are treated as contributions to a defined contribution plan.

401(h) example

Let’s assume a 48-year-old consultant has an S-Corp and makes a business profit of $300,000. He pays himself a wage of $200,000.

Let’s also assume that he has a cash balance plan and 401(k) plan. His goal is to maximize his 401(k) and 401(h) contributions and contribute $150,000 to his cash balance plan. Here is what it would look like:

Contribution Amount
Cash balance plan $150,000
401(k) deferral $19,500
401(k) profit sharing $12,000
401(h) contribution $26,500
Total $208,000

Paul Sundin

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