Omitted IRA distribution due to financial institution’s error and subsequent make-up distribution were not modification of substantially equal payments

A failure to make a required annual IRA distribution to an IRA owner who was under age 59½ due to a financial institution’s error and the make-up distribution in the following year were not considered a modification to a series of substantially equal periodic payments under Code Sec. 72(t)(4) and did not subject the IRA owner to a 10% additional tax under Code Sec. 72(t)(1), according to an IRS letter ruling.

After several years of receiving annual distributions from an IRA that were intended to be substantially equal periodic payments, an IRA owner did not receive a payment. An employee of the financial institution holding the IRA retired and her responsibility for making the annual payments was not transferred to another employee. The IRA owner was unaware of the missed distribution until she received her Form 1099-R the following year. After she contacted the financial institution, the institution acknowledged the administrative error and the IRA owner took a make-up distribution.

Based on a letter from the financial institution acknowledging the administrative error and the IRA owner’s representations that she did not intend to modify the series of substantially equal periodic payments and that, other than the make-up payment, she would continue her arranged payment schedule, the IRS concluded that the missed distribution and the subsequent make-up payment would not modify the series of substantially equal periodic payments. The make-up payment would not result in the imposition of the additional 10% tax on early distributions, according to the IRS.

Source: IRS Letter Ruling 201309020.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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