DEFINITION of 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.
Cash or deferred arrangements are employee elections that require 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.
BREAKING DOWN Cash or Deferred Arrangement (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.
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.
CODA and 401(k) Plans
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 a popular qualified employer-sponsored retirement plan. Under the plan’s terms, eligible employees may make salary-deferral contributions to on a post-tax and/or pretax basis. Any earnings in a 401(k) plan, such as from capital gains or interest income, accrue on a tax-deferred basis. When the employee withdraws funds, she or he will pay taxes. In addition, if the employee withdraws the funds prior to turning 59.5, she or he may also incur an additional penalty as the U.S. government regulates retirement plans.
Generally, 401(k) plans allow participants (employees) to direct their own investments to a core group of investment products. Participants may select from among several options that balance risk and reward, based on participants’ age, investment amount and current income, and experience or appetite for risk. Many are target funds, 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.