On October 28, the IRS published Rev. Rul. 2026-22, and the holding sounds like a contradiction: a pension plan may use its retiree medical account to pay health benefits for employees who have not retired. The resolution is a single sentence buried in a 1960s-era regulation — and the ruling is careful to fence off what it does not mean.
The mechanics
Internal Revenue Code section 401(h) lets a qualified pension plan carry a separate account that pays sickness, accident, hospitalization, and medical expenses for retired employees, their spouses, and dependents. Money in that account is locked: until all the medical liabilities are satisfied, it cannot be diverted to any other purpose, and only then does the remainder revert to the employer.
The word "retired" is defined not in the statute but in Treas. Reg. § 1.401-14(b)(1). Its second sentence says an employee is retired if the employee is eligible to receive retirement benefits under the pension plan. Its third sentence says eligibility doesn't count if the worker is still employed and separation is a condition of getting those benefits.
Code section 401(a)(36) removes that condition. It permits a pension plan to distribute to an employee who has reached age 59½ and has not separated from service. So in a plan that allows in-service distributions at 59½, a working participant is eligible for retirement benefits without quitting — which, the IRS concluded, satisfies the regulation's definition of "retired." The holding: using 401(h) assets for those participants' active medical coverage does not violate section 401(h) or § 1.401-14, and does not jeopardize the plan's qualified status under section 401(a).
The sentence that limits it
The ruling adds: "no implications are intended regarding whether the 401(a)(36)-Eligible Participants are treated as retired for any other purpose under the Code."
That is the line to remember. This ruling does not make a 59½-year-old worker retired for Medicare coordination, HSA eligibility, separation-from-service distribution rules, or anything else. It answers one question about one account.
Why the IRS answered now
Corporate pension surpluses are the backdrop. The Milliman 100 Pension Funding Index closed September 30, 2026 at a 114.5% funded ratio — a $160 billion surplus, with $1.263 trillion in assets against $1.103 trillion in projected benefit obligations, helped by a discount rate that climbed to 6.47%.
Meanwhile the private route narrowed. In Rev. Proc. 2026-3, the IRS added section 420 transfers of excess pension assets into 401(h) accounts to its "no-rule" list, so sponsors can no longer obtain a private letter ruling on them. Rev. Rul. 2026-22 is published guidance all taxpayers may rely on, rather than a PLR binding only its requester.
Practical takeaways
- This is a plan-design option, not an election you make. Your employer must amend the plan. Nothing happens automatically.
- The fact pattern carried conditions. In the ruling, no section 420 transfers had ever been made to the account; the account did not fund benefits for key employees (section 416(i)); the employer had no contractual obligation to fund either medical plan; and the account was substantially overfunded. A plan that differs materially cannot simply assume the same answer.
- If you are weighing phased retirement, ask two separate questions. Does the plan permit in-service distributions at 59½, and does the 401(h) account now fund active coverage? Eligibility creates the "retired" status here — but actually starting pension payments has its own tax and accrual consequences.
- Don't extrapolate the label. Treat "retired for section 401(h)" as a term of art, not a status change.
Sources: IRS Rev. Rul. 2026-22 (October 28, 2026); Milliman Pension Funding Index, October 2026 (data as of September 30, 2026); Mercer analysis of Rev. Proc. 2026-3; Insurance Business America.