Additional 401(k) qualification requirements — Benefits

As discussed in Chapter 09: Retirement plans, some defined contribution plans allow participants to agree to contribute a portion of their anticipated wages to their plan accounts on a pre-tax basis. These plans are commonly referred to as 401(k) plans because they are subject to certain special qualification requirements under Section 401(k) of the Internal Revenue Code (IRC). The feature of a plan that permits pre-tax employee contributions is also sometimes called a qualified cash or deferred arrangement.

Rules for employee elections

The term “cash or deferred arrangement” (CODA) reflects one of the essential features of 401(k) plans that distinguishes them from all other qualified plans. The essence of a qualified CODA is that each participant must be allowed to make an election between either of the following two choices:

1. receiving the full amount of his or her expected cash compensation 
2. deferring the receipt of a portion of the compensation in exchange for an equivalent contribution to his or her plan account.

It is essential that the election to defer is made with respect to wages or salary that is not yet due at the time the...

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