CODA definition

[Guest cfspr]

Probably a stupid question but, what does CODA stand for as it relates to 401(k) plans or retirement plans?

[Mike Preston]

Cash or Deferred Arrangement. See regulation section 1.401(k)-1(a)(2)(i) - Definition of Cash or Deferred Arrangement..... an arrangement under which an eligible employee may make a cash or deferred election with respect to contributions to, or accruals or other benefits under, a plan that is intended to satisfy the requirements of section 401(a) (including a contract that is intended to satisfy the requirements of section 403(a)).

[MGB]

For those of us that have been around awhile, "cash or deferred arrangement" was the original term that professionals used. This was even before there was a section 401(k) of the Code (it was added in 1978). CODAs were around long before ERISA (a few dozen plans of large employers), but then ERISA put a moratorium on new ones until they could decide what to do with them (the moratorium was lifted when they added 401(k) in 1978). Even though I keep reading that Richard Benna put the first 401(k) in place in the early 1980s (so he now calls himself the "father of the 401(k)"), that is completely false because CODAs were around all the way back to the early 1960s.

ERISA was rushed through in the 3 weeks following Nixon's resignation so that Ford could pass it on Labor day (the first bill that he signed). Congress wanted to show the world that they had actually been doing something other than Watergate hearings. However, there were numerous issues that had not been settled at that point, including what to do with CODAs. One huge issue was interaction with state laws (the Monsanto case was decided by the Missouri supreme court in August of 1974 requiring all self-funded trusts, even pension, to follow state insurance law for reserving and reporting because they are effectively captive insurance companies), so in the last week before passing ERISA they added the state preemption clause, intending to readdress it later (which they never did - and it has since moved on to be the major stumbling block in health care reform).

Another interesting point was that Ralph Nader started the lobbying bandwagon for 401(k)s in the mid-1960s but the democratic leadership fought against it. Nixon's administration later picked up on it and tried to include it in ERISA, but Congress was opposed - they wanted employers to bear the responsibility for retirement income, not employees.

Even up until the early 1980s, we all referred to these as CODAs, not 401(k)s. After some proposed regulations and changes in law in the early 1980s, the term "salary reduction agreement" came into play. People were confused as to the difference. The subtlety is that CODAs were primarily profit sharing contributions at the end of the year and you could decide at that point to defer or take cash. On the other hand salary reduction requires a decision to defer before the services are rendered. Once there was both of these concepts floating around, people started using 401(k) to refer to both CODAs and salary reduction. By the mid-1980s the term 401(k) had made its way into popular culture and has stuck with us ever since. It is one of the few Code sections that everyone knows by its number instead of its title.

Just open up a copy of the Code and look up section 401(k): The title is "cash or deferred arrangements."

[Guest cfspr]

Thanks for your help!