What is the most common form of election under a cash or deferred arrangement (CODA)?

The most common form of election under a cash or deferred arrangement (CODA) is a salary reduction agreement. This type of agreement allows employees to choose to defer a portion of their salary into a qualified retirement plan, such as a 401(k). By doing so, employees not only reduce their taxable income for the year, but they also build their retirement savings.

Salary reduction agreements are fundamental to the design and operation of 401(k) plans because they provide a straightforward mechanism for participants to contribute to their retirement plans by directing a portion of their earnings into the account on a pre-tax basis. This process is essential in maximizing participation and encouraging savings for retirement.

Other options, while related to compensation and benefits, do not represent a common election mechanism within a CODA framework. Deferred compensation agreements typically refer to arrangements outside of the immediate context of salary reduction into retirement accounts. Contribution allocations describe how already accumulated funds are divided among different investment options, while compensatory stock options pertain to equity compensation, which is not the mechanism utilized in a typical CODA scenario. Thus, salary reduction agreements serve as the primary election within CODAs, clearly aligning with the intent and structure of 401(k) plan participation.