Understanding 401(h) Plans and Medicare: A Retirement Health Strategy

As retirees face rising healthcare costs, many employers seek ways to offer stronger support beyond basic Medicare. That’s where 401(h) plans come in—offering a powerful, tax-advantaged tool to pre-fund retiree medical expenses. But how do 401(h) plans and Medicare work together? When properly coordinated, they provide a stronger safety net for retirees and a smarter funding strategy for employers.

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What Are 401(h) Plans and Medicare?

The Role of a 401(h) Plan

A 401(h) plan is a special medical account established under a defined benefit pension or 401(a) plan. Its primary purpose is to cover post-retirement medical expenses with tax advantages:

• Tax-Free Growth: Employer contributions are tax-deductible, assets grow tax-free, and distributions for qualified medical costs are also tax-free.
• Pre-Funding Strategy: It allows employers to proactively fund long-term retiree healthcare liabilities.
• IRS Subordination Rule: Contributions to the 401(h) account must not exceed 25% of total contributions to the base plan.

Medicare Basics

Medicare is a federal insurance program for people aged 65+, younger individuals with disabilities, and those with End-Stage Renal Disease (ESRD). It has four key parts:

• Part A: Covers hospital and inpatient care.
• Part B: Covers outpatient services and doctor visits.
• Part C: Also called Medicare Advantage, includes A, B, and often D.
• Part D: Covers prescription drugs.

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How 401(h) Plans and Medicare Work Together

When retirees qualify for Medicare, the 401(h) plan typically becomes a secondary payer, covering expenses that Medicare does not fully pay.

Understanding Payer Order

Situation	Primary Payer	Secondary Payer
Retired, Age 65+	Medicare	401(h) Plan
Retired, Under 65	401(h) Plan	N/A
Working, Age 65+ with GHP	Group Plan	Medicare / 401(h) Plan

Covered Expenses After Medicare Eligibility

• Premiums for Medicare Parts A (if applicable), B, C, and D
• Copayments, deductibles, and coinsurance
• Approved dental, vision, and hearing expenses
• Long-term care premiums, where eligible

Pie Chart Suggestion
Title: Post-Medicare Costs Covered by 401(h) Plans

• Medicare Premiums – 35%
• Deductibles/Copays – 30%
• Prescription Gaps – 15%
• Dental/Vision/Hearing – 10%
• Other Qualified Expenses – 10%

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Key Advantages of Coordination

For Retirees

• Lower Out-of-Pocket Costs: 401(h) funds help bridge the gap in Medicare coverage.
• Tax-Free Healthcare Spending: All qualified distributions remain untaxed.
• Financial Confidence: A reliable source of medical funding after retirement.

For Employers

• Manage OPEB Liabilities: Prefund healthcare costs with actuarial support.
• Boost Benefit Value: A valuable addition to retirement packages.
• Tax Efficiency: Contributions are deductible and reduce long-term costs.

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Planning Matters: Best Practices for Employers

To maximize the benefits of 401(h) plans and Medicare, employers should take a proactive planning approach:

• Educate Employees: Explain how the plan works with Medicare and what’s covered.
• Customize Your Plan Document: Clearly allow post-65 medical expense coverage.
• Use Accurate Forecasting: Factor in medical inflation and Medicare changes.

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Why Choose Talk Retirement?

Successfully integrating 401(h) plans and Medicare requires both regulatory knowledge and strategic foresight. At Talk Retirement, we help employers build, manage, and communicate these plans with precision and care.

Our Services Include:

• Full 401(h) Plan Administration
• IRS and DOL Compliance Oversight
• Retiree Communication Tools
• Actuarial Coordination for Long-Term Funding
• Ongoing Plan Maintenance and Support

📞 Contact us at Talk Retirement to build a coordinated retirement health strategy that works for your business and your retirees.