4077 / What is the effect of failure to make timely distributions from a tax sheltered annuity?
If an amount distributed from a tax sheltered annuity is not taken by the participant, or is less than the required minimum distribution, an excise tax equal to 50 percent of the shortfall is generally levied against the individual (not the plan).1 See Q 3910.However, the tax may be waived if the payee establishes to the satisfaction of the IRS that the shortfall was due to reasonable error, and that reasonable steps are being taken to remedy the shortfall.2 Generally, the excise tax will be waived automatically in the case of a beneficiary who receives the entire benefit to which he is entitled under the five-year rule.3
The minimum distribution requirements will not be treated as violated and, thus, the
50 percent excise tax will not apply, where a shortfall occurs because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. To the extent that a distribution otherwise required under IRC Section 401(a)(9) is not made during the state insurer delinquency proceedings, this amount and any additional amount accrued during this period will be treated as though it is not vested.4
1. IRC § 4974.
2. Treas. Reg. § 54.4974-2, A-7(a).