No, you can’t move the balance around. If the loan was taken from the pre-tax account, that is where the 1099R comes from. That would’ve been determined by your plan’s policies and the loan documents that you originally signed.
However, you should be aware of a new provision in tax law. When you have an offset distribution that results from defaulting on a plan loan after leaving employment, you have until the following year’s tax deadline to make a rollover contribution to a new account. Funds that you roll over are not taxed.
This means that you have until April 18, or October 15 if you get the automatic extension, to make a rollover contribution to a private IRA or to the qualified retirement plan at your new workplace. For example, the outstanding loan balance was $10,000 and you can afford to re-pay $6000 by October 15, then you would have a $6000 rollover and the taxable part of the offset distribution would only be $4000.
Because you will pay an additional 10% penalty for early withdrawal if you are under age 55, it may be worth it to take out a short term loan to gather the funds needed to make the rollover contribution. A rollover contribution is not a regular contribution and is not subject to the normal limits, but it is also not tax-deductible. You would have to inform the receiving plan that this is a rollover due to an offset after termination, because most rollovers must be completed within 60 days and you are well past that.
