Code 1 is a regular distribution. That will be taxable to you as regular income, plus a 10% penalty for early withdrawal unless you are
age 55 or older when you separated from service with the company. If you want to reduce your tax liability, you would have to deposit some or all of the money into a new qualified retirement plan such as an IRA within 60 days, which would be considered a rollover. If you kept the money, you will owe tax and the penalty.
Code 1M is a “deemed distribution.” This occurs when you took a loan and had a balance outstanding when you separated from service with the company. This counts as a distribution because you previously received the money and did not pay it back. Under new rules, you have until October 15, 2021, to put some or all of the money into an IRA or other qualified plan and have it count as a rollover, which would make that portion of the deemed distribution not taxable. Any portion that you keep is subject to regular income tax plus an early withdrawal penalty.
The 1099 with code 1 should be the amount of money you actually withdrew, and the 1099 with code 1M should be the amount of your
outstanding loan balance. If you really had completely paid off the loan, then you should not receive a 1099 with code 1M. You would need to contact the trustee of the 401(k) plan and discuss with them whether you repaid the full loan amount and if you are correct, they would need to issue a corrected 1099 before you file your tax return.
