Legal Definitions - CODA

CODA stands for Cash or Deferred Arrangement.

A Cash or Deferred Arrangement (CODA) is a specific provision within an employer-sponsored retirement plan, most commonly a 401(k) plan, that gives employees the choice to either receive a portion of their current compensation in cash or have that amount contributed directly by their employer into a retirement account on their behalf. This election typically allows the deferred amounts to be excluded from the employee's taxable income until retirement, offering significant tax advantages for long-term savings.

• Example 1: Standard 401(k) Contributions

  Maria starts a new job and enrolls in her company's 401(k) plan. She elects to contribute 8% of her bi-weekly salary to her retirement account. Her employer automatically deducts this amount from her paycheck before taxes are calculated.

  How this illustrates CODA: Maria has the option to receive her full salary in cash or to defer 8% of it into her 401(k). Her decision to defer a portion of her current compensation into a retirement account, rather than taking it as immediate cash, is a direct application of a Cash or Deferred Arrangement.

• Example 2: Bonus Deferral Option

  David receives an annual performance bonus of $10,000. His company's 401(k) plan allows employees to choose whether to receive the bonus as a taxable cash payment or to contribute all or part of it directly to their 401(k). David decides to defer $6,000 of his bonus into his retirement account.

  How this illustrates CODA: The $10,000 bonus represents a form of cash compensation. David's ability to choose between receiving that bonus in cash or deferring a portion of it into his retirement account demonstrates a Cash or Deferred Arrangement. The $6,000 he defers is not immediately subject to income tax.

• Example 3: Profit-Sharing Deferral

  A small tech company has a profit-sharing plan that distributes a percentage of its annual profits to employees. The plan includes a CODA feature, allowing employees to either take their profit-sharing distribution as a lump sum cash payment or have it contributed to their individual 401(k) accounts. Sarah, an employee, opts to have her entire $3,000 profit-sharing distribution deposited into her 401(k).

  How this illustrates CODA: Sarah's choice between receiving the $3,000 profit-sharing as immediate cash or deferring it into her retirement account exemplifies a Cash or Deferred Arrangement. This arrangement provides her with the flexibility to manage her compensation for either immediate financial needs or long-term savings with associated tax benefits.