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 Cash or Deferred Arrangement.

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.

Key Takeaways

  • A cash or deferred arrangement (CODA) is a method of funding either a qualified profit-sharing, stock-bonus, pre-ERISA money-purchase pension plan, or a rural cooperative plan.
  • These are the only types of plans that may contain a CODA, according to the IRS.
  • If you participate in a CODA as an employee, you may contribute to a traditional or Roth IRA as well.

Understanding Cash or Deferred Arrangement (CODA) Plans

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 individuals to fund their retirement accounts 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- or 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, they will owe taxes.

If the employee withdraws their 401(k) funds prior to turning age 59½, the IRS may impose an additional 10% penalty tax.

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 include target-date funds that are based on the participant’s years until retirement.

U.S. Retirement Saving Continues Its Upsurge

Meantime, the number of Americans with more than $1 million in a 401(k) plan has hit a record high, according to Fidelity Investments' second-quarter 2020 retirement-analysis report. The report found that 262,000 Americans in the 3rd quarter of 2020 have at least $1 million in a 401(k) plan.