3835 / When can health insurance benefits be provided under a pension plan?

A pension plan may provide for the payment of a pension due to disability, but it may not provide benefits for sickness, accident, hospitalization, or medical expenses for active plan participants or their beneficiaries.¹ These benefits may be provided for retired employees, their spouses, and their dependents, but only if:

(1)  the benefits are subordinate to the retirement benefits provided by the plan,

(2)  a separate account is established and maintained for the benefits,

(3)  the employer’s contributions to the separate account are reasonable and ascertainable,

(4)  no part of the account may be diverted to any other purpose,

(5)  the plan calls for return to the employer of any amounts remaining after satisfaction of all liabilities, and

(6)  in the case of an employee who is a key employee ( Q 3931) at any time during the plan year (or any preceding plan year when contributions were made on behalf of such employee), a separate account is established and maintained for the benefits payable to the employee, spouse, and dependents ( Q 3836).²

Medical benefits generally are considered subordinate to retirement benefits as required under (1) above if, at all times, the aggregate of employer contributions made (after the date on which the plan first includes such medical benefits) to provide such medical benefits and any life insurance protection does not exceed 25 percent of the aggregate pension contributions made after that date (other than contributions to fund past service credits).³ The IRS has provided guidance on the calculation of this limit, as well as the coordination of benefits between an IRC Section 401(h) account and a VEBA.⁴

See Q 3945 for a discussion of the tax aspects of IRC Section 401(h) contributions and benefits; and see Q 3719 for the effect of IRC Section 401(h) contributions on behalf of key employees on the IRC Section 415 limitation on benefits in a defined benefit plan.