Code 2 paired with code L is not a permitted paring. A deemed distribution should only occur if the employee is still employed with the company at the time of default on the loan being declared. If the employee is no longer employed, an offset distribution should be processed instead and, if separation occurred after age 55, code 2 only would be used to report the offset distribution. But if a deemed distribution somehow occurs after separation from service in or after the year that the employee reaches age 55, it should be possible to claim the age 55 exception to the penalty.
However, in this case there is as yet no indication that the deemed distribution occurred after separation from service in or after the year they reached age 55.
