I took out a 401k in Nov 2020 and was paying it back via automatic payroll deductions and then in Jul 2021, I was laid off from that job. When I rolled over my 401k from that job to an individual 401k at a different investment firm, they took the remaining balance owed on the loan from my total amount to roll over to settle the loan but I still received a 1099-R form. By them taking the balance due, does that null/void the 1099-R?
[Edited: the change was contained in the TCJA, not the SECURE act.]
Suppose you had a balance of $50,000 and an outstanding loan of $10,000. You would get a 1099-R showing that you withdrew $50,000, but you would only actually receive $40,000.
You actually have 2 transactions. A $10,000 "loan offset" and a $40,000 rollover. The loan offset is taxable to you—although you did not receive that $10,000 cash when you quit, you received it earlier when it was a loan. When you go into default, that cash which has not yet been repaid counts as a taxable distribution to you. But I think the plan will only issue one 1099-R that combines all the transactions for the year.
This is correct. You would only have rolled over $40,000 into the new plan. If you then report the 1099-R correctly, you would indicate that you rolled over only part of the distribution ($40,000) and the $10,000 is counted as cashed out, and you pay income tax plus a 10% penalty unless you are age 55 or older.
Under the SECURE TCJA, you have until the tax filing deadline, including extensions, to repay the loan offset. In my above example, that means you would have until April 15 to make a rollover contribution in the amount of $10,000. You could extend the deadline to October 15 if you apply for the automatic 6 month extension to file your taxes. That way, you can file your tax return saying the entire 401(k) was rolled over into a qualified plan, so none of it is taxable.
You won't be able to repay the loan into your closed account. So you can either contribute it to the new 401(k), or you can open a private IRA. In either case, you would have to tell them in advance that this is a rollover contribution of a 401(k) loan offset under the TCJA. (Most rollovers must be made within 60 days, so make sure they will accept a loan offset rollover after 60 days. Your new 401(k) might or might not accept it, but a private IRA should.)
If you don't have the cash to make a rollover contribution, consider taking out a short term loan. The income tax and penalties you would save would outweigh the loan interest, assuming you can get a fair interest rate and pay it off in a reasonable time. Also consider making at least a partial rollover contribution, since whatever you can rollover will reduce the taxable amount to you.
Already answered here:
https://ttlc.intuit.com/community/taxes/discussion/401k-loan-settled/01/2496862