Introduction – What is Publication 11433?
IRS Publication 11433, titled “Employee Benefit Plans Explanation No. 13: Section 401(h) and Section 420 Determination of Qualification,” is a specialized technical guide issued by the Internal Revenue Service. It provides the exact legal roadmap that IRS agents and plan administrators use to evaluate pension plans that offer retiree medical and health benefits. In simple terms, it ensures that companies setting aside money for their retired workers’ medical bills follow federal tax laws.
According to the latest IRS guidance verified in 2026, Publication 11433 continues to operate under its foundational June 2021 revision (Rev. 6-2021). The IRS Employee Plans division confirmed through its updated retirement plan document review schedule in August 2026 that this publication remains the active compliance standard. It functions in tandem with IRS Form 13069 (Worksheet 13) and Form 13070 (Deficiency Checksheet 13) to review determination requests.
For everyday workers and business owners, understanding this publication demystifies how employers legally fund healthcare coverage for retirees using existing pension trusts without triggering harsh tax penalties.
Who Should Read This Publication
While Publication 11433 is written primarily as an examination tool for IRS revenue agents, several groups of people will find it invaluable:
- Business Owners and Plan Sponsors: Companies that maintain traditional defined benefit pension plans and want to help retirees pay for healthcare expenses.
- Retirement Plan Administrators and Actuaries: Professionals responsible for drafting pension plan documents, calculating contribution limits, and ensuring compliance with the Internal Revenue Code.
- Tax and ERISA Attorneys: Legal advisers preparing determination letter requests to obtain official IRS approval for an employee benefit plan.
- Retirees and Active Employees: Individuals interested in understanding the legal safeguards protecting the money set aside for their future medical care.
Key Topics Covered
Publication 11433 outlines the rules governing two critical sections of the Internal Revenue Code: Section 401(h) and Section 420. Together, these sections establish strict boundaries for funding and maintaining retiree medical accounts inside a pension plan.
| Key Topic | Governing Code Section | Core Purpose |
|---|---|---|
| Retiree Medical Accounts | IRC Section 401(h) | Allows pension plans to pay medical and hospitalization expenses for retired workers and their families. |
| Incidental Benefit Rule | IRC Section 401(h) / Reg. 1.401-14 | Ensures medical benefits remain secondary to the main goal of providing retirement income. |
| Qualified Asset Transfers | IRC Section 420 | Permits overfunded pension plans to shift surplus funds into retiree health accounts tax-free. |
| Separate Bookkeeping | IRC Section 401(h)(2) | Mandates strict separation between pension cash reserves and medical benefit funds. |
Detailed Breakdown of Main Concepts
1. What Is a Section 401(h) Account?
A Section 401(h) account is a special sub-account established inside an employer-sponsored defined benefit pension plan or annuity plan. It is dedicated exclusively to paying sickness, accident, hospitalization, and medical expenses for retired employees, their spouses, and their dependents. By using a 401(h) structure, employers can make tax-deductible contributions, investments grow tax-free, and qualifying payouts to retirees are exempt from federal income taxes.
2. The Incidental Test (The 25% Subordination Rule)
A pension plan’s main legal job is to provide retirement income, not health insurance. Because of this, medical benefits must remain “incidental” or subordinate to the pension benefits. Publication 11433 requires plans to pass a strict mathematical test: total aggregate contributions made to the 401(h) medical account, plus any life insurance protection, cannot exceed 25% of all cumulative plan contributions made since the medical account was created.
3. Section 420 Qualified Transfers
Sometimes a company’s traditional pension plan performs so well that it becomes significantly overfunded, holding far more money than needed to cover future pension checks. Under Section 420, an employer may execute a “qualified transfer” of these excess pension assets directly into a 401(h) medical account. This transfer is tax-free and allows the employer to cover upcoming retiree healthcare liabilities without using company cash.
4. Separate Accounts and Key Employee Restrictions
Plan rules must mandate separate accounting for all medical benefits. Furthermore, if a plan participant is a “key employee” (such as a 5% owner of the company), the employer must maintain an individual, dedicated 401(h) medical account for that person. Medical payments for that specific key employee can only come out of their individual balance.
5. The Non-Reversion Safeguard
Under the exclusive benefit rule, money placed into a 401(h) account can never be diverted back to the employer or used for general business operations while any medical obligations remain outstanding. Only after every single retiree medical liability has been fully satisfied may any leftover funds revert to the company.
Practical Examples or Scenarios
Scenario 1: Applying the 25% Incidental Cap
Apex Manufacturing runs a defined benefit pension plan. Over several years, Apex contributes $8,000,000 to the pension trust for retirement annuities. During that same period, Apex contributes $2,000,000 into a 401(h) retiree medical account to help past workers pay for medical insurance premiums.
To check compliance, Apex calculates the ratio: $2,000,000 in medical funding divided by $10,000,000 in total contributions equals exactly 20%. Because 20% is below the statutory 25% ceiling, Apex passes the incidental test outlined in Publication 11433.
Scenario 2: Shifting Surplus Assets Under Section 420
Heritage Logistics has a defined benefit plan that holds $150 million in assets, but actuaries determine that only $120 million is needed to fully cover all promised retirement payouts. Heritage faces an impending $4 million retiree health insurance bill for the coming year.
Instead of taking out a corporate loan or writing a check from the company treasury, Heritage conducts a Section 420 qualified transfer. They shift $4 million of excess pension money directly into their 401(h) account. The money is transferred tax-free, retirees receive their promised health coverage, and the core pension fund remains fully funded.
How This Publication Relates to Specific Forms
Publication 11433 works hand-in-hand with several practical documents used during plan creation and routine tax filings:
- Form 13069 (Worksheet 13): This is the official question-by-question checklist featured inside Publication 11433. IRS specialists complete this worksheet to verify that every paragraph of the plan document complies with Section 401(h) and Section 420.
- Form 13070 (Deficiency Checksheet 13): If a retirement plan fails an item on Worksheet 13, the IRS issues this checksheet to explain the legal flaw and tell the employer how to fix the document wording.
- Form 5300 (Application for Determination for Employee Benefit Plan): Employers submit this master form when asking the IRS to issue a formal determination letter validating the tax-exempt status of their pension plan.
- Form 5500: The annual information return filed by plan sponsors, which details plan financial condition, total assets, and transfers between pension trusts and 401(h) accounts.
Common Misunderstandings Clarified
Misunderstanding 1: You can add a 401(h) account to an ordinary 401(k) plan.
A 401(h) account cannot be added to a standard 401(k) or profit-sharing plan. The tax code restricts 401(h) accounts strictly to pension plans, primarily defined benefit plans or target benefit annuity plans.
Misunderstanding 2: Employers can use excess pension money however they want.
If a corporation pulls excess money out of a pension fund for general corporate expenses, it faces regular corporate income tax plus a punitive 50% federal excise tax. A Section 420 transfer to a 401(h) account is one of the few legal, non-taxable exceptions to this rule.
Misunderstanding 3: 401(h) benefits reduce regular monthly pension checks.
A 401(h) benefit is completely separate from your monthly retirement annuity. Funding health benefits does not reduce the base pension formula guaranteed to the employee under the plan terms.
Why This Publication Matters for Taxpayers
Medical expenses in retirement represent one of the biggest financial burdens facing American families. When an employer maintains a compliant 401(h) account, retirees can access tax-free dollars to cover Medicare supplement premiums, prescription drug expenses, and long-term care needs.
For employers, staying strictly within the guidelines of Publication 11433 protects the tax-deductible status of their pension contributions. It shields the company from costly audits, disqualification penalties, and excise taxes while providing a valuable recruitment and retention benefit for their workforce.
Frequently Asked Questions
What happens if a pension plan fails the 25% incidental rule?
If cumulative medical contributions exceed 25% of total plan contributions, the entire pension plan risks losing its qualified status under IRC Section 401(a). The IRS will require the plan sponsor to correct the imbalance or amend the plan to avoid disqualification.
Can employees make contributions to a 401(h) account?
Yes, plans may allow employees to contribute to a 401(h) account alongside employer contributions. However, all contributions must still fall within statutory limits and pass non-discrimination testing to ensure higher-paid managers do not receive preferential treatment.
Are distributions from a 401(h) account taxable to the retiree?
No. When funds from a 401(h) account are used to pay for qualified medical expenses or reimbursement of health insurance premiums, the payments are completely excluded from gross income under IRC Section 105 and Section 106.
What happens to remaining 401(h) funds if all retirees pass away?
Once every covered retiree and dependent has received all promised medical benefits and all liabilities are satisfied, any remaining funds inside the 401(h) account must be returned to the employer.
Conclusion
IRS Publication 11433 may be an internal evaluation guide, but it plays a crucial role in safeguarding retirement security. By ensuring that retiree medical accounts meet strict statutory requirements under Sections 401(h) and 420, it protects both employer deductions and employee benefits.
Whether you are designing a corporate benefit program, filing for an IRS determination letter, or tracking your future retirement healthcare coverage, following the standards of Publication 11433 ensures your retirement plans stay fully compliant, solvent, and tax-free.
