"offsets are only triggered when you rollover the whole 401k while you have a loan."
An offset distribution is simply a reduction in the balance to your credit that satisfies the loan. There is no statutory requirement that the entire 401(k) balance be distributed, except when the remaining balance is low enough to be required to be distributed independent of the offset distribution, but that's apparently not the case since the balance of you 401(k) has not been distributed. I also can't imagine that the plan agreement could requiring the entire plan balance to be distributed just to be able to call an offset distribution an offset distribution. A distribution that reduces the balance to your credit to satisfy the loan is, by its nature, an offset distribution.
Of course if you take a distribution and pay off the loan yourself prior to the plan initiating an offset distribution, that would be a regular distribution. But you indicated that no such repayment was permitted, so this has to be an offset distribution (unless it was actually not a loan as I address in the next paragraph).
Perhaps what you thought was a loan was actually hardship distribution; a hardship distribution would be reported with code 1 and without code M, in agreement with the coding on the Form 1099-R that you received. Not only is a hardship distribution not an offset distribution, a hardship distribution is not permitted to be rolled over or paid back in any way. It's up to the plan to decide if your reason for obtaining the distribution constituted a true hardship, so you would have had to have provided the plan with some description of your need for the money for them to be able to make that determination. A plan loan, on the other hand, requires no explanation, except in the case where the loan is used for a home purchase, allowing a longer repayment period than the normal 5 years.
After receiving the money and before leaving the company, did you make any repayments?
Note that a 401(k) loan is limited to the lesser of $50,000 or 50% of the balance to your credit. If you received more than that, it couldn't have been a loan.
To specifically answer your questions:
- No.
- Not Applicable
- I can't comment on any legal recourse you might have.
- It's up to the IRA custodian to accept the rollover based on the circumstances, including whatever documentation they deem necessary to support that this was an offset distribution. However, just because the custodian accepts it as a rollover of an offset distribution doesn't mean that the IRS will agree.
Assuming that this was not actually a hardship distribution, one possible alternative might be to self-certify under IRS Rev. Proc. 2016-47 that you would qualify for a waiver of the regular 60-day deadline due to financial-institution error. However, if this really was an offset distribution, I don't see how what seems to be just a coding error on the Form 1099-R would qualify as a financial-institution error in this context. With this or an offset-distribution the rollover, the rollover would be reported by the receiving IRA in boxes 13a, b and c of Form 5498, the only difference between the two being the code in box 13c indicating either a rollover of an offset distribution ("PO") or a rollover under self-certification ("SC").
https://www.irs.gov/pub/irs-drop/rp-16-47.pdf
