The 10% employer excise tax on excess contributions is calculated before which adjustment?

The 10% employer excise tax on excess contributions is calculated before the adjustment for allocable earnings. This is important because the calculation of excess contributions is based on the contributions made by the employer or the employee to the plan. The excess contributions are determined without considering how those contributions have performed in terms of investment returns or allocable earnings.

Allocable earnings refer to the growth in the account balance due to investment performance, which can affect the overall value of the account but does not change the initial contributions that are subject to the excise tax. The tax is assessed on the amount of contributions that exceed the permitted limit, before any adjustments for how those contributions may have accrued earnings over time.

Understanding this timing is pivotal for plan administrators and employers when assessing compliance and tax obligations related to excess contributions in a 401(k) plan.