Quiz 8: Cash or Deferred Plans Under Section 401k
Many employers that maintain qualified plans will want to provide a CODA to their employees. HCEs can defer taxes on greater amounts than their rank and file employees. These plans may appeal to employees who cannot contribute to an IRA on a tax deductible basis and want to have some kind of tax-favored savings arrangement, employees who want to save for retirement and employees who don't anticipate staying with the company long enough to accrue meaningful benefits from other retirement plans.
CODA refers to Cash and Deferred Arrangements available under retirement plans in defined contribution approach. It means section 401(k) plan of Internal Revenue Code (IRC) or CODA allows an employee to make choice regarding the method in which it wants its employer to make contribution i.e. in cash or deferred payment. CODA comes with both advantages and disadvantages for the employers and the employees. Advantages for the employee are- 1. It is a tax saving method of contribution as tax deductions are available in a CODA savings plan which increases employee's income. 2. Flexibility in making choice between cash or deferred payment available each year. Disadvantages are- 1. There are various limitations made on early or premature withdrawal. 2. In some exceptional situation, even if the withdrawal is allowed, tax in the form of early distribution tax is levied on it, making it a costly method. CODA or section 401(k) plan of IRC serves with advantages disadvantages for both the employer and the employee.
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