What's Happening?
On October 28, 2026, the IRS issued Revenue Ruling 2026-22, formalizing its position that a pension plan's Code section 401(h) account can be used to fund medical benefits for active employees. This applies to employees who are at least age 59½ and are eligible
for in-service distributions from their pension plan. Previously, this stance was only available through private letter rulings (PLRs), which could only be relied upon by the specific employer that requested them. The new ruling provides general guidance that all taxpayers with similar circumstances can now rely on. This development is particularly relevant for employers with overfunded 401(h) accounts, offering them a new avenue to utilize surplus assets for active employee medical benefits.
Why It's Important?
This ruling is significant for U.S. employers, especially those with substantial surpluses in their 401(h) accounts. Many employers have faced challenges in utilizing these overfunded accounts, and this new guidance provides a clear pathway to deploy these assets for current employee medical benefits. By allowing 401(h) funds to cover medical expenses for active employees eligible for in-service distributions, companies can potentially reduce their healthcare costs or enhance their benefits packages without incurring additional expenses. This could improve employee retention and satisfaction, particularly among older workers. The formalization of this position through a Revenue Ruling, rather than individual PLRs, offers broader applicability and certainty for a wider range of businesses, simplifying compliance and planning for employee benefits.
What's Next?
Employers with overfunded 401(h) accounts are now likely to review their pension and medical plans to determine if they can leverage this new IRS guidance. Companies may amend their pension plans to allow the use of surplus 401(h) assets for active employee medical benefits, provided they meet the specific conditions outlined in the ruling. While the ruling offers clarity, employers are advised to consult with legal counsel to ensure their specific plan facts align with the IRS's requirements. This could lead to a trend of more employers utilizing these funds, potentially shifting how medical benefits are financed for a segment of the active workforce. The IRS may also consider issuing further guidance on other related issues, such as the use of 401(h) assets for retiree medical benefits in pension risk transfers, as suggested by previous PLRs.
Beyond the Headlines
The IRS's ruling on 401(h) accounts reflects a broader evolution in how companies manage employee benefits and retirement funds. The ability to use surplus pension assets for active employee medical benefits highlights a creative solution to address both overfunded accounts and rising healthcare costs. This could lead to a more integrated approach to retirement and health benefits, potentially blurring the lines between traditional pension and welfare plans. Ethically, it raises questions about the allocation of funds originally intended for retirement, though the ruling specifies conditions to ensure proper use. Legally, it provides a precedent that could influence future interpretations of ERISA and other tax codes related to employee benefits. Culturally, it might foster a perception of greater employer responsibility for employee well-being, extending beyond retirement into active employment healthcare needs.
