“The only potential disadvantage is that the money can’t be used for anything not on the approved list,” MacCollum said. “However, money can easily be transferred into other types of accounts to be used for anything while the balance transferred is recognized and taxed as ordinary income. The best fit for these types of plans is the high-income earner who is seeking asset protection and wealth preservation.”
Among the tax disadvantages of 401(h)s, “only qualified medical expenses are covered,” Pon noted. “If you want to use the funds for a non-medical expense, you can roll the funds into your cash balance account and take the distribution there.” Such a move constitutes a retirement plan distribution, he added, meaning it is taxable and possibly subject to penalty.
“There is the expense of hiring a pension plan administrator to manage this plan, but costs are nominal,” Pon said.