Thank you for your response. Today I had a development after talking to my previous employer. I detailed all the new information I received.
My employer contacted Fidelity and they again stand firm in their assessment that the 1099-R was coded correctly and that I received a disbursement per the terms of the 401k plan. The timeline of the whole situation is the following:
May 2019 - Got the loan
June 2019 - New job came along and I left the company
June 2019-August 2019 - Payments could not be made due to the plan terms (not allowed to make repayments if you don't work there)
September 2019 - Loan defaults and converts to distribution
1099-R Details
Box 1 - 12,253.51 (not really the number, just used for example)
Box 2a - 12,253.51
Box 7 - 1
IRA/SEP/SIMPLE box is not checked
Throughout the process, I was in contact with Fidelity about what I needed to do to make this happen (at the time I did not know about the offset) but no one in the company could/would give me an answer beyond telling me to consult a financial advisor and accountant.
I did not roll over the remaining balance of my 401k to my IRA (kept at ETrade) or my new employer (plan did not allow for 401k loan transfer). My understanding was that I could simply replace the money by the filing deadline.
With the news I received today, I did more research on offsets and came across something that stated that offsets are only triggered when you rollover the whole 401k while you have a loan. I think this is what Fidelity is holding strong to.
1. In the case of leaving a company with a 401k loan, do you have to remove the whole balance from the 401k account to be able to trigger the plan offset in order to get the 1099-R coded 1M?
2. If the answer to question 1 is yes, what is my next available step to still be able to avoid tax penalty by rolling this money over into an IRA if Fidelity does indeed decide that there in no change that can be done?
3. If the answer to question 1 is no, do I have legal recourse (with a tax attorney's help) against my former employer for not having an up to date 401k plan which allowed for this to happen and for not having the HR representative knowledgeable on the recent tax change?
4. If I perform the rollover with the 1099-R as it currently stands (details above) and I perform a matching deposit into an IRA, will this suffice or is it necessary that I get a 1099-R coded 1M?
I had an idea today that if I just gave up now, I might be able to reduce my tax burden by making 2019 IRA contritions for both myself and my wife and that way I would reduce the tax burden on this whole situation. Unfortunately, if I take the 1099-R as income, it will raise my MAGI over the retirement contribution deduction limit. So my ability to make this happen is extremely important right now and a top priority in my life at this moment.
Any help you can provide is greatly appreciated.
Thanks
