How is the excise tax on excess contributions typically calculated?

The excise tax on excess contributions to retirement plans, such as 401(k) plans, is indeed calculated as a percentage of the excess contributions. This percentage is typically set at 6%. This means that when contributions exceed the allowable limits established by the Internal Revenue Service, the plan sponsor or individual is responsible for paying a tax based on the dollar value of those excess contributions.

The focus of the calculation being on a percentage of the excess amount provides a straightforward method of determining the tax owed, as it directly correlates the tax burden with the extent of the over-contribution. This design serves to discourage excessive contributions to retirement accounts and encourages compliance with contribution limits.

Other approaches, such as flat rates, salary-based calculations, or variable rates based on contribution types, do not align with how the IRS administers the excise tax for excess contributions, making the option regarding percentage of excess contributions the most accurate and applicable.