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401(h) Post-retirement Medical Benefit Plans
            Tax Deductible, Tax Sheltered and Tax Free Payouts

 

            What is a 401(h) plan? It’s a medical expense account under Code Section 401(h). The plan pays for costs associated with sickness, accident, hospitalization, and medical expenses of retired employees (EEs) (and their spouses and dependents).

 

            One of the largest expenses of retirees is their health-care costs. How do retirees pay for such costs? Typically, with savings or out of their taxable income. 

 

            With a 401(h) plan, an employer can take a 100% deduction to fund a tax-free sinking fund where when retired EEs remove money from the plan to pay for medical expenses, there are NO income taxes due.

 

            The 401(h) post retirement medical option is perhaps the most overlooked and underutilized plan benefit in the industry today. The 401(h) benefit can add up to 33.33% to the otherwise maximum tax deductible contribution of your pension plan.

 

            Is a 401(h) plan practical and should you use one? If you are a profitable small business owner, the answer is absolutely. Let me show you with an example.

 

            Example: Assume Mr. Smith (business owner) earns $400,000 a year (W-2) and has five employees of various ages and salaries. Mr. Smith has been funding in a tax-deferred manner $80,000 into a defined benefit plan every year. If he keeps doing this, he will ultimately have approximately $2,000,000 in the plan when he turns 65 years old. Assume that on average Mr. Smith will have $10,000 of medical expenses every year in retirement. Assume he is now and will be in the 35% income tax bracket.

 

            How can a 401(h) plan help?

 

            Mr. Smith could have his business fund X amount of money in a tax-deductible manner into a 401(h) plan every year as an employee benefit for himself and the other employees (discrimination testing for EE contributions is done using the classic age, years of service, and salary testing guidelines). 

 

            The money is allowed to grow tax free and can then come out tax free from the 401(h) plan if used for medical expenses (including elective surgery). Therefore, instead of funding $80,000 every year into a defined benefit plan, let’s assume he allocates $10,000 of the $80,000 to the 401(h) plan from ages 55-65. 

            At age 65, what is the net positive benefit of using the plan? 

 

            If we assumed a 5% rate of return in the 401(h) plan and the pension plan, the accounts would both have the same balances when Mr. Smith hits age 65: $149,171 (we are just comparing the $10,000 contribution made from ages 55-65).

 

            Now let’s assume that Mr. Smith incurs $10,000 of medical expenses every year in retirement. When Mr. Smith uses $10,000 from his 401(h) plan, the money comes out 100% tax free. When he removes it from the defined benefit plan to pay expenses, it is 100% taxable.

 

            How do the numbers compare?

 

            From the 401(h) plan, he could remove $10,000 a year tax free until he turns age 90.

 

            However, because he would have to remove $15,384 from his taxable pension plan to net $10,000 after tax, he would run out of money in this example at age 78.

 

            Therefore, the net positive benefit to Mr. Smith when allocating $10,000 to a 401(h) plan vs. a tax-deferred plan is $127,007. This is how much more after-tax money could be removed over time using the 401(h) plan in my example.

 

            As I stated earlier, virtually no one is aware of 401(h) plans and their tremendous benefits.  If you like idea of tax deducting money into a plan where it is allowed to grow tax free and be removed tax free in retirement, then you need to implement a 401(h) plan. 

 

            Getting help/More information

 

            If you would like more information or help implementing a 401(h) plan in your business, please contact our office at wealthplanner@earthlink.net or (702) 873-5555.

 

            Sample List 401(h) Benefits

           

            Below is a sample list of post-retirement medical benefits that may be provided under a Benefits are not limited to those contained in this list.

 

Acupuncture  Hospitalization Insurance 
ADD Counseling and Assistance  Hospital Bills 
Air Lift Transportation  Insulin 
Alcoholism  Laboratory Fees 
Alternative Healthcare  Laetrile by Prescription 
Alternative Medicines  Lasik Eye Surgery 
Ambulance  Hire Lead Base Paid Removal-Children  
Artificial Limbs  with Lead Poisoning 
Artificial Teeth  Retirement Home for Medical Care 
Assisted Living Facilities  Long Term Care, Nursing Homes 
Asthma and Allergy Treatment Medical Information Plan 
Birth Control Pills  Medicines 
Braces  Membership Fees for Medical Services, 
Braille-Books and Magazines Hospitalization, Clinical Care, Health 
Chiropractors  Maintenance, Health club memberships 
Christian Science Practioners’ Fees  Nurses Fees, Nurses Room and Board 
Contact Lenses Including Exam Fee  S.S. Tax (Where Paid by Taxpayer) 
Co-Pays Obstetrical Expenses 
Cosmetic Surgery (Even Though not  Operations (100% of All Costs) 
  by a Physician)  Orthopedic Shoes 
Cost for Care Outside the United States  Oxygen 
Cost of Operations & Related Treatments Personal Trainers 
Counseling  Physical Therapy 
Crutches  Physician Fees 
Deductibles  Premiums for LTC 
Dental Cosmetic Surgery  Preventive Care including but not limited to 
Dental Fees  Spa Facilities, Usage Fees for Facilities 
Dentures  Prosthetics 
Dependent Care  Psychiatric Care 
Dermatologist Care  Psychologist Fees 
Diagnostic Fees  "Seeing-eye" Dog and its Upkeep 
Drugs  Specialists and Specialized Treatments 
Electrolysis  Specially Equipped Cars 
Experimental Care  Special Care Costs for Disabled Dependents 
Eyeglasses, Including Examination Fee,  Special Diets 
Laser Surgery for Vision Correction  Sterilization Fees 
Fees of Practical Nurse  Support Groups 
Fees for Healing Services  Surgical Fees 
Fees of Chiropractors  Therapy Treatments 
Fees for Fitness Programs and Facilities  Transport Expenses for Medical Services 
Fees of Licensed Osteopaths  including Preventative Care  
Flu Shots  Tuition at Special School for Handicapped 
Hair Transplants  Viagra 
Health Insurance Premiums  Vitamins 
Hearing Devices and Batteries Wheelchair 
Hospice Weight Loss Programs 
In Home Care X-rays 


 

 
Family Wealth Planning, Inc.
3218 Rolling Acres Circle, Las Vegas NV 89117

General Telephone: (702) 873-5555
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