What Is a Cash or Deferred Arrangement (CODA)?

A Cash or Deferred Arrangement (CODA) is a method of funding any type of qualified profit-sharing, stock bonus, pre-ERISA money purchase pension plan, or a rural cooperative plan. According to the Internal Revenue Service (IRS) these are the only types of plans that can contain a CODA.

A CODA requires an employer to do one of the following:

  • Provide a specified amount in cash or another taxable benefit not currently available
  • Contribute the amount to a trust, or provide an accrual or another form of benefit

Cash or deferred arrangements also allow employees to contribute a portion of their salaries to the plan so that their savings can grow tax-deferred. The most common type of CODA is a cash bonus that is paid into employees’ 401(k) plans.

Understanding the CODA

Employees who participate in cash or deferred arrangements may still contribute to traditional or Roth IRAs as well. However, they may not receive the full deduction from a traditional IRA contribution if their incomes are above a certain level.

CODA plans allow the individual to fund their retirement and avoid immediate taxation, just as IRAs do.

According to the IRS, a cash or deferred arrangement is effective as of the first day of the plan year. However, a deferral may not be retroactive.

How a CODA Works With a 401(k) Plan

As noted above, the most common type of CODA is a cash bonus that is paid into employees’ 401(k) plans.

A 401(k) plan is an employer-sponsored retirement plan. Under the plan’s terms, eligible employees may make salary-deferred contributions on a post-tax or a pre-tax basis, depending on the plans chosen by the employer.

Any earnings in such a 401(k) plan, from capital gains or interest income, accrue on a tax-deferred basis. When the employee withdraws funds, presumably after retirement, the taxes will be owed.

If the employee withdraws the funds prior to turning 59 1/2, an additional 10% tax penalty may be imposed.

Generally, 401(k) plans allow employees to choose their own investments from a core group of investment products. Participants may select from among several options that balance risk and reward, based on their age and appetite for risk. Many popular choices are target funds that are based on the participant’s years until retirement.

Successful 401(k) contribution continues to grow. At the end of 2017, Fidelity announced that the number of people with 401(k) balances of at least $1 million that the firm runs had reached 150,000.