What percentage is the excise tax on excess contributions not distributed timely?

The correct percentage for the excise tax on excess contributions to a 401(k) plan that are not distributed timely is 10%. This excise tax applies when a plan has contributions that exceed the allowable limits and those excess contributions are not corrected within the required time frame.

Understanding the context surrounding excess contributions is essential for compliance and effective plan administration. When a participant exceeds the annual contribution limit set by the IRS, the plan must handle these excess amounts promptly to avoid penalties. The 10% excise tax serves as a deterrent, encouraging timely action to correct the contributions.

If the excess contributions are not withdrawn by the tax-filing deadline (including extensions) for the year in which the excess contribution occurred, the excise tax applies, making it a key aspect for plan administrators to monitor and manage effectively in order to avoid unnecessary penalties.