Code M is used when there is a qualified plan loan offset. If the loan had been maintained in good standing prior to separation from service, I don't know why the plan wouldn't consider the offset distribution to be qualified. Perhaps the plan simply made a mistake in omitting code M from box 7; the plan should be asked about that. (Code M has only been in existence since 2018 and some plans may still be ignorant of this change in the tax code.)
To be a qualified plan loan offset, the offset distribution is solely by reason of the termination of the qualified employer plan or the failure to meet the repayment terms of the loan from such plan because of the severance from employment of the participant (the latter in this case).
