Insurance Daily News

IRS Clarifies 401(h) Medical Benefits for Active Employees

The Internal Revenue Service (IRS) has issued a new revenue ruling that clarifies how defined benefit (DB) plan sponsors may utilize pension medical account assets. Revenue Ruling 2026-22, released on October 28, 2026, establishes that Section 401(h) retiree medical accounts can be used to pay for healthcare benefits for active employees who have reached age 59½. This guidance confirms that such distributions do not violate existing Treasury regulations or jeopardize the tax-qualified status of the pension plan.

The core of the ruling rests on the interpretation of the term “retired” within the context of Section 401(h). According to Treasury Regulation §1.401-14(b)(1), an individual is considered retired if they are eligible for retirement benefits, regardless of whether they have formally separated from their employer. Because Section 401(a)(36) of the Internal Revenue Code allows for in-service distributions for employees aged 59½ and older, the IRS now explicitly recognizes these active workers as “retired” for the specific purpose of accessing 401(h) medical benefits. The IRS noted that this definition is narrow and does not impact how these employees are classified under other sections of the tax code.

Previously, plan sponsors seeking clarity on this issue had to rely on private letter rulings (PLRs), which are non-binding for other taxpayers. By issuing a revenue ruling, the IRS has provided a broad, authoritative framework that allows sponsors and their consultants to amend plans without the need for individual requests. This shift comes at a critical time, as the IRS recently added Section 420 transfers—the process for moving surplus assets from overfunded DB plans into 401(h) accounts—to its “no-rule” list, effectively halting new PLRs on that specific mechanism.

Context/Analysis: This ruling is a significant development for large organizations managing overfunded defined benefit plans. With limited legal avenues to redirect surplus pension assets, many employers have struggled to utilize funds trapped in 401(h) accounts. While Rev. Rul. 2026-22 does not directly address the mechanics of Section 420 transfers, it removes a major administrative hurdle by providing clear, public guidance on eligibility. Sponsors should monitor how this ruling interacts with their existing plan documents, as it offers a more efficient path to deploying assets that were previously difficult to access. For consultants and plan administrators, this reduces the reliance on costly, case-by-case legal opinions.

Why it matters

This ruling provides a definitive, broadly applicable legal standard that allows employers to use surplus pension medical funds for active employees aged 59½ and older without seeking individual private letter rulings.

FAQ

What does Revenue Ruling 2026-22 allow?
It confirms that pension plans can use Section 401(h) account assets to pay medical benefits for active employees who are at least 59½ years old.

Why was a revenue ruling necessary?
Previously, this issue was only addressed through private letter rulings, which only applied to the specific taxpayer who requested them; a revenue ruling provides binding guidance for all plan sponsors.

Does this ruling impact Section 420 transfers?
No, the ruling does not directly address Section 420 transfers, which are currently on the IRS 'no-rule' list, but it does clarify eligibility rules for using 401(h) assets.

Source: Insurance Business America. See the original source for full details.