Note that this is not a deemed distribution.
Yes, an offset distribution should have been coded 1M. There is obviously some miscommunication somewhere among you, your former employer and Fidelity. It's impossible to say where, but it's likely between your former employer and Fidelity. If you somehow received a hardship distribution as might be suggested by the code 1, rather than a loan, no paying back would have been permitted.
1. Yes, the rollover of an offset distribution is reported the same as any indirect rollover. The code M has no meaning with respect to preparing your tax return, so TurboTax ignores it. Code M simply indicates that the deadline to roll this distribution over to another retirement account is the due date of your tax return, including extensions, rather than the regular 60-day deadline for an indirect rollover.
2. If it's clear that this was indeed a loan, yes, you should contact the IRS if you are unable to obtain a correction to include code M. The IRS tends more to contact payers more for failure to issue a Form 1099-R at all rather than for issuing an incorrect Form 1099-R. but they might do so. Even if they do not contact the payer, contacting the IRS is still technically a required step toward filing a substitute Form 1099-R (Form 4852) where you can indicate what should have been reported and provide explanation. I believe that filing Form 4852 requires mailing your tax return.
See Tax Topic 154: https://www.irs.gov/taxtopics/tc154
3. You have until the due date, including extensions, to complete the rollover and then report it as a rollover on your tax return. I suggest requesting a filing extension just in case you don't file by April 15, that way you have until October 15 to complete the rollover. Of course if the distribution occurred in December less than 60 days ago, get it rolled over by the 60-day deadline and you won't have to worry about getting the coding corrected.
