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May 20, 2009

CODA (Cash or deferred arrangement)

Your Guide

An arrangement under which employees can make a cash or deferred election to have money withheld from their wages and credited to their account under a qualified plan. The qualified plan is usually a 401(k) plan.
A qualified CODA must satisfy certain nondiscrimination requirements, including either the actual deferral percentage (ADP) test or one of the safe harbors under §401(k)(11), (12) or (13).
A CODA can be made as a result of a direct or indirect election. With a direct election, the employee completes the paperwork, indicating how much of salary must be withheld and credited to the 401(k) account. With an indirect election, the employee participates in the CODA by default, if the plan provides for default elections and the employee does not make an election to (or not to) participate.
A CODA is not qualified unless it is part of a profit sharing plan, a stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan and provides for an election between contributions to the plan or payments directly in cash. In addition, a CODA is not qualified unless it meets the following requirements:
  1. the elective contributions under the CODA satisfy either the ADP test under § 401(k)(3) or one of the design-based alternatives in section 401(k)(11) or (12);
  2. elective contributions under the CODA are nonforfeitable at all times;
  3. elective contributions are distributable only on the occurrence of certain events, including attainment of age 59 ½ , hardship, death, disability, severance from employment, or termination of the plan;
  4. the group of employees eligible to participate in the CODA satisfies the coverage requirements of section 410(b)(1);
  5. no other benefit (other than matching contributions and certain other specified benefits) is conditioned, directly or indirectly, upon the employee’s making or not making elective contributions under the CODA; and
  6. no more than 1 year of service is required for eligibility to elect to make a cash or deferred election.
Referring Cite
IRC § § 401(k), 401(m)
Additional Helpful Information
  • In order to be a qualified CODA, the arrangement must provide an employee with an effective opportunity to elect to receive the amount in cash no less than once during the plan year, Whether an employee has an effective opportunity is determined based on all the relevant facts and circumstances, including adequacy of notice of the availability of the election, the period of time before the cash is currently available during which an election may be made, and any other conditions on elections.
  • Elective contributions under a qualified CODA generally are not included in the employee’s gross income at the time the cash would have been received (but for the cash or deferred election) or at the time contributed to the plan. However , elective contributions under a qualified CODA are included in the employee’s gross income if the contributions are in excess of the section 402(g) limit for a year, are designated Roth contributions , or are recharacterized as after-tax contributions as part of a correction of an ADP test failure.
  • Subject to certain exceptions, State and local governmental plans are not allowed to include a qualified CODA. Plans sponsored by Indian tribal governments and rural cooperatives are allowed to include a qualified CODA. 

Important: The Tax Cuts and Jobs Act of 2017 repealed the option to recharacterize Roth conversions, for Roth conversions done after 2017. As such, only regular contributions to traditional IRAs and Roth IRAs may now be recharacterized.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


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