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Level 2

1099-R box 7 incorrect coding on 401k loan plan offset

I received a 1099-R coded 1 but I believe it should have been coded 1M. I had a 401k loan in 2019 in good standing when I left the company. Because plan rules prevented me from making repayments, the loan defaulted and converted to a distribution. I am now ready to rollover the full balance into an IRA but would feel more comfortable if the 1099-R was corrected. 

 

When I contacted Fidelity and explained the situation (including walking the representative through the 1099-R instructions and pointing out the specific paragraph on page 8 which explained my circumstance), they did a review (took 5 business days ) and today I got the answer that they would not be issuing a correction. I contacted the IRS after the fidelity news and they stated that I can submit a 1099 complaint form on 2/15/20 but I'm not sure if that is the best course of action.  Right now I am trying to work with my previous employer to have them petition Fidelity to correct the 1099-R.

 

The questions I have are:

1. Turbotax software doesn't go in-depth and ask about code M when filling out the 1099-R, it simply asks if I have rolled that money into an IRA. Is this the correct way of filing this transaction?

2. If Fidelity still refuses to change the 1099-R, would a 1099 complaint filed with the IRS help this situation.

3. I do not want to miss the deadline for rolling the money into an IRA, should I continue with the rollover and get the proper 5498 with boxes 13a checked and 13c coded PO or should I wait until the 1099-R is corrected?

 

Any help with this would be greatly appreciated. 

 

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Level 15

1099-R box 7 incorrect coding on 401k loan plan offset

All of the information that you've provided suggests this is indeed an offset distribution that is eligible for rollover with a rollover deadline of the due date of your tax return, including extensions.

 

I don't see how the lack of the code M that should be accompanying the code 1 would make it fail to be an offset distribution.  As an example, the Instructions for Form 1099-R indicate that an offset distribution from a designated Roth account in a 401(k) that is an early distribution would not include code M in box 7 because there can only be two codes in box 7 and those code positions are already taken by codes 1 and B.  I can only imagine that Fidelity simply deems correction to be unnecessary or has not yet implemented code M in their system (despite nothing in the Instructions for Form 1099-R indicating that using code M is optional).

 

As I mentioned earlier, it's up to the receiving IRA custodian to accept or reject the rollover.  Out of curiosity, I looked at Fidelity's Deposit Slip available as a pdf online to see how they handled a deposit of an offset distribution and the form has not been changed to provide a way to indicate either a rollover of an offset distribution or a late rollover under self-certification, only a way to indicate a "60-day Rollover" (which in this context I'm guessing simply means an indirect rollover).  In fact, so far I've been unable to find a form from any financial institution that allows one to indicate that a rollover is a rollover of an offset distribution (although I found one that refers to nonspecific "exceptions" to the 60-day deadline).

 

With regard to convincing the financial institution to accept the rollover beyond 60 days from the date of the distribution, it's entirely possible that such a rollover contribution is made during the same year as the offset distribution, but well after 60 days and well before any code M Form 1099-R is issued, so it seems like lack of a Form 1099-R with code M should not be an impediment to completing the rollover.  Aside from convincing the receiving financial institution to accept the rollover, the only entity that has to be satisfied that the rollover is a legitimate rollover of an offset distribution, if they question it at all, is the IRS.  The presence of code M would be helpful in convincing the IRS of that.

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Expert Alumni

1099-R box 7 incorrect coding on 401k loan plan offset

TurboTax is not going to ask you about a Code M, if your 1099-R, box 7 is coded with a 1.  I can't advise you as to whether or not you should file a 1099 complaint.  If your intention is to rollover the amount of the outstanding loan that was deemed a distribution, then I would ask Fidelity to accept it as Rollover Contribution into an IRA.  Complete your return indicating the distribution was rolled over to an IRA

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Level 15

1099-R box 7 incorrect coding on 401k loan plan offset

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.

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Level 2

1099-R box 7 incorrect coding on 401k loan plan offset

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

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Level 15

1099-R box 7 incorrect coding on 401k loan plan offset

"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:

  1. No.
  2. Not Applicable
  3. I can't comment on any legal recourse you might have.
  4. 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

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Level 15

1099-R box 7 incorrect coding on 401k loan plan offset

I suggest reviewing CFR 1.72(p)-1, particularly Q&A 13

https://www.law.cornell.edu/cfr/text/26/1.72(p)-1

 

Also, CFR 1.402(c)(2) Q&A-9:

https://www.law.cornell.edu/cfr/text/26/1.402(c)-2

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Level 15

1099-R box 7 incorrect coding on 401k loan plan offset

An additional thought:  If you can't get this rolled over, as you suggested you could make contributions to traditional IRAs, but since these would not nondeductible they would not help your immediate tax situation.  I would probably consider traditional IRA contributions as being a vehicle to get the money into a Roth IRA where growth would be tax-free instead of only tax-deferred.  Absent that, it might be better to use the money to invest in capital investments outside of a retirement account where long-term capital gains are taxed at long-term capital gains rates which are substantially lower than the tax rates for ordinary income that apply to taxable retirement-account distributions.  You would also generally have unrestricted access to the funds as long as you were willing to pay the taxes on short- and log-term capital gains.

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Level 2

1099-R box 7 incorrect coding on 401k loan plan offset

This was not a hardship withdrawal as I made a payment to the loan prior to leaving the company. Also, there was additional interest added to the distribution amount after default.

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Level 2

1099-R box 7 incorrect coding on 401k loan plan offset

I just read the IRS guidelines on self-certification and this sounds like one of the things the IRS agent I spoke to was asking me questions for. I do not think that the self-certification would work in my situation because I do not qualify for any of the reasons listed. 

 

Here is the link to the IRS page: 

https://www.irs.gov/pub/irs-drop/rp-16-47.pdf

 

From my research, am I wrong in concluding that a deemed distribution for loan default would be coded L or 1L? 

 

And along the lines of the previous question, is it absolutely necessary that my 1099-R is coded M or 1M?

 

Or is it possible to still rollover the money with the 1099-R coded just 1?

 

 

 

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Level 2

1099-R box 7 incorrect coding on 401k loan plan offset

Also, reading up on your suggested sites, this is the closest example to my situation:

 

Also, CFR 1.402(c)(2) Q&A-9:

https://www.law.cornell.edu/cfr/text/26/1.402(c)-2

 

A-9(c) example 3  - in my case, my plan was 60 days 

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Level 15

1099-R box 7 incorrect coding on 401k loan plan offset

All of the information that you've provided suggests this is indeed an offset distribution that is eligible for rollover with a rollover deadline of the due date of your tax return, including extensions.

 

I don't see how the lack of the code M that should be accompanying the code 1 would make it fail to be an offset distribution.  As an example, the Instructions for Form 1099-R indicate that an offset distribution from a designated Roth account in a 401(k) that is an early distribution would not include code M in box 7 because there can only be two codes in box 7 and those code positions are already taken by codes 1 and B.  I can only imagine that Fidelity simply deems correction to be unnecessary or has not yet implemented code M in their system (despite nothing in the Instructions for Form 1099-R indicating that using code M is optional).

 

As I mentioned earlier, it's up to the receiving IRA custodian to accept or reject the rollover.  Out of curiosity, I looked at Fidelity's Deposit Slip available as a pdf online to see how they handled a deposit of an offset distribution and the form has not been changed to provide a way to indicate either a rollover of an offset distribution or a late rollover under self-certification, only a way to indicate a "60-day Rollover" (which in this context I'm guessing simply means an indirect rollover).  In fact, so far I've been unable to find a form from any financial institution that allows one to indicate that a rollover is a rollover of an offset distribution (although I found one that refers to nonspecific "exceptions" to the 60-day deadline).

 

With regard to convincing the financial institution to accept the rollover beyond 60 days from the date of the distribution, it's entirely possible that such a rollover contribution is made during the same year as the offset distribution, but well after 60 days and well before any code M Form 1099-R is issued, so it seems like lack of a Form 1099-R with code M should not be an impediment to completing the rollover.  Aside from convincing the receiving financial institution to accept the rollover, the only entity that has to be satisfied that the rollover is a legitimate rollover of an offset distribution, if they question it at all, is the IRS.  The presence of code M would be helpful in convincing the IRS of that.

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Level 2

1099-R box 7 incorrect coding on 401k loan plan offset

First and foremost, I can't thank you enough for the time and effort you have put into helping me with this.

 

I think the last line of your last response is the whole reason I am stressing over this. I don't want any IRS issues. 

 

I have another call in to fidelity and should hear back by tuesday. I will keep you up to date with any changes.  I am starting to lean toward this being an offset and the lack of L in box 7 eases my apprehensions some, the addition of M would ease them completely. 

 

More to come later

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New Member

1099-R box 7 incorrect coding on 401k loan plan offset

Hello daman100169,

I have a very similar issue except my timeline is as follows:

 - 401k Loan taken for $32,650 in Nov 17, 2016. My 401k Vested balance was reduced by the loan amount.

 - Made payments for 2 years from biweekly paychecks until I left the company in Nov 2018. 

 - Since payment to the loan was made in Nov'18, the 401K loan remained in good standing for Q4 2018 but no payments could be made per plan guidelines.

 - Loan defaulted on 3/29/19 with a balance of $21,103. 

- A 1099 R issued by the fidelity with code 1 in Box 7 and $21,103 in Box 1 and 2(a) of 1099R

- I rolled over the remaining 401k Balance to a Rollover IRA in June 2019. 

 

My understanding has been that I should be able to rollover the loan offset amount of $21,103 in the rollover IRA until the 2020 tax year deadline. Based on your experience could you please confirm if my understanding is correct??

Also, I am wondering if i rollover the loan offset amount to the existing rollover IRA how do i make sure i get the correct form 5498? Could you please share your experience??

Thanks,

Sumit

 

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New Member

1099-R box 7 incorrect coding on 401k loan plan offset

Also in my case the plan offered 90 days following the quarter in which a  payment was made to the 401 K loan before the loan defaulted.

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Level 2

1099-R box 7 incorrect coding on 401k loan plan offset

In the time since my last post, I have been working diligently to get Fidelity to give me an answer on the Box 7 question. My research showed that box 7 needed to have "M" to indicate plan loan offset. After being handed to 2 different departments, they came back and said the original code of "1" was correct and they were not going to change anything. 

 

With that being said, I am now working with Etrade to ensure that on my 5498, box 13a is filled in for late contribution and box 13c is coded "PO" for plan loan offset. I am within the time frame allowable by tax law, so I do not believe I should be penalized by Fidelity's refusal to change a code in the 1099R. 

 

That is where I stand up to this point. Thanks for your interest and its comforting to hear from someone else in this situation, especially someone that has dealt with Fidelity. 

 

Dan