What Is an Excess TX Fee and How Do You Fix It?

An “excess TX fee” is an additional charge or penalty incurred when financial or tax limitations are surpassed. These are not typical transaction costs but specific disincentives designed to enforce regulatory boundaries. Understanding these fees helps individuals avoid unexpected financial burdens.

Understanding Excess Fees

Excess fees represent additional charges or penalties applied when individuals exceed statutory or regulatory limits governing financial accounts. These are often excise taxes, levied on certain activities. Unlike standard fees, excise taxes are levied by the government as a disincentive for actions beyond established financial thresholds.

These fees apply to various tax-advantaged accounts, such as retirement savings plans and health savings accounts. The purpose of these penalties is to encourage compliance with tax laws and to prevent misuse of accounts designed for specific long-term savings goals. For instance, contributing more than the allowed annual limit to a retirement account can trigger an excess fee. Similarly, failing to withdraw funds as required from certain accounts can also lead to these penalties.

Adhering to the rules governing tax-advantaged accounts is important. These rules ensure accounts serve their intended purpose and maintain tax system integrity. Ignoring limits can negate tax benefits and result in additional financial liabilities.

Common Scenarios Involving Excess Fees

Excess fees commonly arise in financial planning, particularly with tax-advantaged retirement and health savings accounts.

Excess Contributions to IRAs

Excess contributions to Individual Retirement Accounts (IRAs), including Traditional and Roth IRAs, occur when deposits exceed the annual IRS limit.

Over-contributing to Employer-Sponsored Plans

Over-contributing to employer-sponsored retirement plans like 401(k)s or 403(b)s is another trigger. This can happen if an employee contributes more than the annual elective deferral limit, or if combined employee and employer contributions surpass overall plan limits. Exceeding these limits can lead to an excise tax.

Health Savings Accounts (HSAs)

HSAs are also subject to excess contribution rules. If an individual or their employer contributes more than the annual maximum allowed for their high-deductible health plan, the excess amount can incur a penalty.

Failing to Take Required Minimum Distributions (RMDs)

Failing to take Required Minimum Distributions (RMDs) from retirement accounts is a common cause of excess fees. Once an individual reaches a certain age, they must begin withdrawing a minimum amount from Traditional IRAs, 401(k)s, and other pre-tax retirement accounts each year. If the RMD is not taken, or an insufficient amount is withdrawn, an excise tax can be imposed on the undistributed portion.

Calculating Excess Fees

The calculation of excess fees varies depending on the type of financial oversight.

Excess Contributions (IRAs and HSAs)

For excess contributions to Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs), a 6% excise tax is levied on the excess amount. This tax applies annually for each year the excess contributions remain in the account. For example, if an individual contributes $1,000 more than the allowed limit to an IRA, they would owe $60 for that year, and another $60 for each subsequent year the $1,000 remains in the account.

RMD Shortfalls

For a shortfall in Required Minimum Distributions (RMDs) from retirement accounts, the excise tax is 25% of the undistributed amount. This penalty can be reduced to 10% if the RMD shortfall is corrected within a specified correction window. For instance, if an RMD of $10,000 was required but not taken, the penalty would be $2,500 (25% of $10,000).

Addressing Excess Fee Situations

Individuals facing excess fee situations must take prompt action to mitigate penalties.

Excess Contributions (IRAs and HSAs)

For excess contributions to IRAs or HSAs, the corrective step involves removing the excess amount along with any attributable earnings. If the excess contribution and its earnings are withdrawn by the tax filing deadline, including extensions, for the year the contribution was made, the 6% excise tax can be avoided for that year. Earnings on the excess contribution are taxable in the year the contribution was made.

Reporting and Payment

IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, is used to report and pay these excise taxes. This form is filed with your annual income tax return, Form 1040. If the excess amount is not removed by the extended due date of the tax return, the 6% excise tax will apply for each year the excess remains in the account, requiring Form 5329 to be filed for each affected year.

RMD Shortfalls

For RMD shortfalls, the undistributed amount must be withdrawn as soon as the error is identified. The 25% penalty can be reduced to 10% if corrected promptly. Taxpayers can request a waiver of the penalty if the shortfall was due to a reasonable error and reasonable steps are taken to remedy it. This request is made by attaching a statement to Form 5329 explaining the circumstances. Failure to pay applicable excise tax can lead to further penalties and interest.