Employers with surplus funds in certain retiree medical accounts can use those assets to pay health benefits for eligible employees who are still working, the IRS confirmed in Revenue Ruling 2026-22.
The ruling addresses employees aged 59½ or older whose pension plans permit them to receive retirement benefits without leaving their jobs. Using a pension plan’s Section 401(h) account to fund their medical benefits does not violate the applicable retiree medical rules or jeopardize the plan’s tax-qualified status, the agency concluded.
A 401(h) account allows a pension or annuity plan to set aside funds for medical benefits for retired employees and their spouses and dependents. These arrangements must meet requirements including separate accounting, reasonable and ascertainable contributions, and restrictions on how funds can be used. Medical benefits must also remain subordinate to the plan’s retirement benefits.
For some employers, those accounts have accumulated substantial surpluses with limited options for using the excess, according to Groom Law Group. A change that lowered the minimum age for permitted in-service pension distributions to 59½ beginning in 2020 opened a path to funding medical benefits for eligible active employees, the firm explained.
The IRS ruling describes an employer with an overfunded 401(h) account and separate medical plans for retirees and active workers. Its pension plan allowed qualifying employees to take in-service distributions. The employer amended the plan to let the medical account fund health benefits for those employees and their families.
The decision turns on the regulatory definition of “retired.” Because separation from employment was not required to receive pension benefits, the workers met that definition for purposes of Section 401(h). Eligibility, rather than actually beginning pension payments, was central to the analysis.
Groom said the IRS had approved similar arrangements in eight private letter rulings beginning in 2023. Those rulings could be relied upon only by the employers that requested them. The new revenue ruling establishes guidance available to taxpayers with substantially similar facts, providing greater certainty for employers considering this approach.
The ruling’s facts excluded key employees from the account-funded benefits and specified that no Section 420 transfers had been made into the account. The IRS also emphasized that treating these employees as retired for this provision has no implications for their retirement status under other tax-code provisions.