Legal Definitions - cash or deferred arrangement

A Cash or Deferred Arrangement (CODA) is a specific provision found within certain employer-sponsored retirement plans, such as profit-sharing or stock-bonus plans. It offers employees a crucial choice regarding a portion of their compensation.

Essentially, a CODA allows an employee to decide whether to:

• Receive a certain amount of their compensation immediately as cash, or
• Have that same amount contributed directly into their retirement account on their behalf, often with significant tax advantages.

This arrangement empowers employees to save for retirement by deferring current income, rather than receiving it as a taxable cash payment in the present.

Here are some examples illustrating how a Cash or Deferred Arrangement works:

• Annual Performance Bonus: Imagine "Innovate Solutions Inc." has a highly profitable year and decides to award its employees a substantial annual performance bonus. Instead of simply issuing a cash bonus check to everyone, the company's profit-sharing retirement plan includes a CODA. Employees are given the option to either receive their full bonus amount as a direct cash payment or elect to have a percentage (e.g., up to 75%) of that bonus contributed directly into their individual profit-sharing retirement account. This choice allows employees to boost their retirement savings without receiving the cash upfront.

• Company Profit Distribution: "Green Acres Farm Co-op," a successful agricultural cooperative, periodically distributes a share of its profits to eligible long-term employees through its stock-bonus plan. Under the plan's CODA, employees receive a notification stating their allocated share of the profits. They can then choose to either take this profit share as a taxable cash distribution or have the entire amount used to purchase company stock, which is then held within their tax-advantaged stock-bonus retirement account. This provides a flexible way for employees to benefit from company success while saving for the future.

• Sales Commission Deferral: Consider "Global Reach Sales," a company that pays its sales team substantial commissions. To encourage retirement savings, their qualified retirement plan incorporates a CODA for these commission payments. A top-performing salesperson, Sarah, earns a large commission check. She has the option to receive the full commission as cash, or she can elect to have a pre-determined portion of it (e.g., 25%) automatically contributed to her retirement plan account. This allows Sarah to defer taxes on that portion of her commission until retirement, while growing her nest egg.