A cash or deferred arrangement, or CODA, is an investment plan that allows employees to contribute a portion of his or her salary to the plan. One of the best examples of a cash or deferred arrangement is the 401(k) plan, which allows employees to authorize amounts to be deducted from each paycheck and contributed to the plan. These contributions are often invested in relatively safe and secure investments, making it possible for the plan to generate interest income for the employee that can be drawn upon in later years.
One of the main advantages of a cash or deferred arrangement for an employee is that saving money for the future is relatively easy and painless. Because the contributions are structured as fixed amounts that are deducted on a consistent basis, there is no temptation to forego making a contribution. Because the deduction is automatic, many employees forget all about the cash or deferred arrangement, until the quarterly or annual statement arrives to show the amount of cash that has accrued in the plan.
Most companies do not allow employees to enroll and then resign from a cash or deferred arrangement on a whim. Often, a new employee is given the opportunity to sign up for the plan at the time of hire. Other employees may have the chance to enroll or drop from the plan once per calendar year. These guidelines ensure that once enrolled in the plan, the employee will begin to build a nest egg for the future without having to go to any extra effort.
Along with an employer sponsored cash or deferred arrangement such as a 401(k) plan, some employees also choose to maintain an Individual Retirement Account or IRA. When both plans are used to create resources for the future, it should be noted that the amount of the contribution to the CODA may not be deductible. To determine whether or not this is the case, it is a good idea to check with a tax professional who is well versed in local, state, and national tax laws relating to these types of plans.