3755 / What is a cash or deferred arrangement (“CODA”) in the context of a 401(k) plan?

A “cash or deferred arrangement” (“CODA”) is an arrangement under which an eligible employee may make a cash or deferred election with respect to contributions, accruals, or other benefits in a qualified plan.¹ A cash or deferred election is any direct or indirect election (or modification of an earlier election) by an employee to have the employer either (1) provide an amount to the employee in the form of cash (or some other taxable benefit) that is not currently available, or (2) contribute an amount to a trust, or provide an accrual or other benefit under a plan deferring the receipt of compensation.²

With respect to timing, the final regulations provide that “a contribution is made pursuant to a cash or deferred election only if the contribution is made after the election is made.”³ See Q 3939 with regard to deduction timing. Under final regulations, amounts contributed in anticipation of future performance of services generally are not treated as elective contributions. A very limited exception is provided for bona fide administrative convenience (e.g., a company bookkeeper is absent the day the funds normally would be transmitted to the plan) and not for a principal purpose of accelerating deductions.⁴ Special penalties and reporting requirements apply to listed transactions ( Q 4107).⁵

Automatic enrollment. For purposes of determining whether an election is a cash or deferred election, it is irrelevant whether the default that applies in the absence of an affirmative election is that the employee receives cash or that the employee contributes the specified amount to the trust.⁶ In plan years beginning after 2007, a safe harbor is available for plans that provide for automatic enrollment (“qualified automatic contribution arrangement” or “QACA”)) and satisfy certain additional requirements ( Q 3762). Beginning in 2020, under the SECURE Act, the QACA safe harbor can provide for auto escalation of the automatic contribution.⁷ See
Q 3762 for more detail.

A cash or deferred arrangement does not qualify as such if any other benefit provided by the employer, except for matching contributions, is conditioned on the employee’s making an election under the plan. “Other benefits” is illustrated in the regulations.⁸ The IRS has privately ruled that the purchase of a group long-term disability income policy that provided continuation of benefit accumulation for disabled employees did not violate this rule.⁹

The IRS repeatedly has approved 401(k) plans involving a so-called “401(k) wraparound” nonqualified deferred compensation plan arrangement,¹⁰ whereby contributions consisting of current year salary deferrals were held initially in a nonqualified deferred compensation plan ( Q 3571). The IRS concluded that such deferrals were not impermissibly conditioned on the deferral election.¹¹ Final regulations state that a plan will not fail to be qualified merely because it includes a nonqualified cash or deferred arrangement, but special requirements will apply to its nondiscrimination testing.¹²

Elective deferral contributions to a 401(k) cash or deferred arrangement, including Roth contributions ( Q 3779), are treated as employer contributions except when they are recharacterized ( Q 3808).¹³ Contributions need not come from employer profits.¹⁴