401K loan balance distribution

[taxxman02]

T/P had an outstanding 401K loan when she was laid off due to Corona Virus in 2020. The loan balance was reported as a distribution on 1099-R. Does this type of distribution qualify for the nullification of the 10% penalty and use the 3 year average  

[DanaB27 · Accepted solution]

Yes, if the loan was in good standing at the time of the layoff then she qualifies for the 10% penalty waiver and can choose to spread out the distribution over 3 years since the she lost her job because of COVID.

Please follow these steps to enter your 1099-R and trigger Form 8915-E:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “1099-R”
3. Click on “Jump to 1099-R” and enter your 1099-R (if you started this before you should see the “Your 1099-R Entries” screen and will click "edit")
4. Continue until "Tell us if any of these uncommon situations apply" screen
5. Select "I took out this money because of a qualified disaster (includes COVID-19)"

Those who qualify as individuals directly impacted by the pandemic will be able to withdraw up to $100k from their retirement accounts without facing the 10% early withdrawal penalty.

You qualify if:

• You, your spouse, or your dependent are diagnosed with COVID-19
• You experience adverse financial consequences as a result of being quarantined, furloughed, or laid off or having work hours reduced because of COVID-19
• You’re unable to work due to child care closure or hour reduction because of Covid-19
• You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

You can choose to have the distribution taxed over 2020, 2021, and 2022 instead of only in 2020. You’ll have three years to pay back the funds you withdrew, without the amount impacting that year’s cap on contributions. If you pay back the amount within that time, you’ll be able to claim a refund on those taxes paid when you file an amended tax return. Please see IRS Coronavirus-related relief for retirement plans and IRAs for more details.

Please see What happens if I have a 401(k) loan but later lose or quit my job? for additional information.

[Edited 3/22/2021 | 8:15am PST]

[dmertz]

Only if the loan was in good standing at the time of the layoff.  If the loan was not in good standing and the distribution was therefore a deemed distribution reported with code L in box 7 of the Form 1099-R, it is not eligible to be treated as a CRD on Form 8915-E.

[TaxFriendNeedsHelp]

Are there any exceptions to this other than Covid? Client lost his job in Dec 2019 and loan was in good standing at that time. He could not repay anything in 2020 due to the layoff (unrelated to Covid - market downturn in his industry) and a very large home expense (had to install a brand new pool due to contractor negligence on separate repair and insurance wouldn't accept the claim but pool area was a safety issue). Also trying to see if any portion of the pool expense is deductible given the situation. He was in default then on the loan and received a 1099-R.

[AmyC]

No. While the layoff was before COVID, the COIVD may or may not have made finding another job difficult. Choosing to install a pool was the client's choice. Many people would have put dirt in the hole or put up a safety fence.

I hope you are not using TurboTax software for your client as it is not made for tax professionals and does not contain the right forms.

@scgreg99