Also known as a CODA, a cash or deferred arrangement is a type of investment plan that offers employees the options of contributing a portion of their salary to the plan. The most recognized version of a CODA plan would be the 401(k) plan. Employees approve of a specific level of contribution that is taken from their paycheck automatically.
These deposits are placed into investments which are considered reasonably safe and secure so as to generate interest income. The total investment can be drawn upon after retirement, and in some other specific circumstances.
There are a couple of key advantages to a CODA plan. The main benefit is that a CODA offers an easy and relatively painless way to save money for the future. Since the employee never sees the funds, and the amount is fixed, once the contributions are initiated it is rare that they are skipped. It also helps that every few months they see how quickly their savings are growing, offering added incentive to keep depositing.
An additional benefit is that the funds are taken out pre-tax. This means that the employee may fall into a lower tax bracket when paying Federal and State taxes. In a way this offers double savings with a minimum amount of effort. If the employee is also making deposits in another IRA their CODA contributions may not qualify for tax-deferred status.
To prevent employees from opting in and out of a CODA plan constantly most companies only allow them to make changes to their status annually.
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