A new IRS revenue ruling has resolved a question that defined benefit (DB) plan sponsors and their advisors have navigated through private letter rulings for years: whether pension medical account assets can be used to pay healthcare benefits for employees who are still working.
In Rev. Rul. 2026-22, published October 28 and set to appear in the Internal Revenue Bulletin of November 16, 2026, the IRS confirmed that using assets from a pension plan’s Section 401(h) retiree medical account to pay medical benefits for active employees eligible to take in-service distributions at age 59½ does not violate Section 401(h) or the associated Treasury regulations, and does not affect the plan’s tax-qualified status.
The ruling turns on how the IRS defines “retired” for Section 401(h) purposes. Under Treasury Reg. §1.401-14(b)(1), an employee qualifies as retired if they are eligible to receive retirement benefits under the pension plan, and separation from employment is not a condition of that eligibility. Because Section 401(a)(36) of the Internal Revenue Code permits pension plans to distribute benefits to employees who have reached age 59½ without requiring them to leave their jobs, those employees meet the definition of retired for 401(h) purposes even while still on the payroll. The IRS was explicit that this determination carries no implications for how those employees are treated under any other provision of the Code.
Previous IRS guidance on this question existed only through private letter rulings, which bind only the taxpayer who requested them. A revenue ruling applies broadly, giving plan sponsors and their consultants a firmer basis for amending plans to extend 401(h) coverage to eligible active employees without seeking their own PLR.
Earlier in 2026, the IRS added Section 420 transfers to its no-rule list via Rev. Proc. 2026-3, meaning it will no longer issue private letter rulings on those transactions. Section 420 transfers are the mechanism that allows overfunded DB plans to move surplus assets into 401(h) accounts. That decision left plan sponsors with less individual guidance on 401(h) matters at the same moment that many large employers are sitting on substantially overfunded 401(h) accounts accumulated over decades.
Rev. Rul. 2026-22 does not address Section 420 transfers directly, but it does provide binding public guidance on a related eligibility question that had previously required a PLR to answer.
For large employers with overfunded DB plans, the ruling removes one obstacle to using surplus assets in the 401(h) account more broadly. Plan sponsors have limited options for deploying those funds under current law, as they cannot be redirected to pension benefits or other purposes.
