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Use 401(h) Plans to Remove Money Tax-Free from Pension Plans!

This is my annual 401(h) newsletter reminding advisors about one of the best tools you can use to pick up new affluent business clients99.9% of advisor don’t know about and are NOT helping their clients with so it’s a HUGE competitive advantage for those who know it.

401(h) Plan Webinar–On Recording

To watch the 401(h) webinar, click on the following link:


I’ve been doing a newsletter on 401(h) plans every year for at least 6 years and it still amazes me how advisors choose NOT to learn about this terrific topic.

Fixed Indexed Annuities in Defined Benefit (DB) Plans and 401(h) Plans

I’m very excited to announce that advisors can NOW sell FIAs in DB Plans AND 401(h) plans. There are billions of untapped dollars in DB plans and FIAs are the perfect tool to use for protected growth. If you are interested in selling FIAs in DB Plans and 401(h) plans, click on the following link:


401(h) plans are the most powerful tax-planning tool available today!

Would you agree with me that the most powerful tax-planning tool a client can use is one that:

1) is funded with deductible money
2) allows money to grow tax-free
3) allows money to come out tax-free

A 401(h) plan has all three of the above mentioned attributes.

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 retired EEs is their healthcare costs. How do retired EEs 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.

Is a 401(h) plan practical and should you recommend them? Absolutely. Let me show you with an example.

Example: Assume Dr. Smith earns $400,000 a year (W-2) and has five employees of various ages and salaries. Dr. 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 Dr. Smith will have $10,000 of medical expenses every year in retirement. Assume he is now and will be in the 40% income tax bracket.

How can a 401(h) plan help? Dr. Smith could have his medical practice 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).

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

Now let’s assume that Dr. Smith incurs $10,000 of medical expenses every year in retirement. When Dr. 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? Therefore, the net positive benefit to Dr. Smith when allocating $10,000 to a 401(h) plan vs. a tax-deferred plan is $116,000. This is how much more after-tax money could be removed over time using the 401(h) plan in my example.

What do 401(h) plans mean to advisors? OPPORTUNITY!

Roccy DeFrancesco, JD, CAPP, CMP
Founder, The Wealth Preservation Institute
Co-Founder, The Asset Protection Society