Deduction

[JBones]

Our client sponsors a safe harbor 401(k) plan. The company fiscal year end is June 30. The plan was on the same year end as the company through June 30, 2009 until the plan year was changed to calendar year end, with a 6 month short plan year ending December 31, 2009. Going forward, they would like to base their deduction on the plan year beginning in the fiscal year.

The company plans to make a profit sharing contribution for the short plan year and one for the 2010 calendar year. Both plan year's begin in the fiscal year. Can they deduct both contributions for the 6/30/2010 fiscal year?

[Mike Preston]

You can not take a deduction for contributed, but unallocated monies. Hence, the deduction for the plan year that begins on 7/1/09 and ends of 12/31/09 is fine on the 7/1/09 through 6/30/10 fiscal year. The deduction for the contributions to the 1/1/10 through 12/31/10 year on the 7/1/09 through 6/30/10 fiscal year is limited to those contributions allocated as of 6/30/10. In most plans, that would mean zero profit sharing contributions and all of the deferrals made through 6/30/10.

You might want to check the language of the ps plan, though, it is quite possible that some of the safe-harbor monies are, in fact, allocated as of a date other than the last day of the year. If that is the case, some of the profit sharing can be deducted as well, as long as if it is contributed by the due date of the tax return, of course.