Company was bought out by another, I did have a loan with the previous company, but I never asked for a cash out/disbursement, and I am now confused about 1099-R

[davyjones1978]

I have since determined, after reading some other posts, that the 1099-R form still needs to be entered because obviously the IRS received it too. Reading those other posts, I saw that the suggestion was to enter a note on the screen saying that I did not ask for a disbursement, and that I wanted to keep it with them. But I don't see that option at all. In fact, I read that forum post before I went to do it myself, and I was never asked that. 

Is there a way for me to fill that out? 

My understanding is that the company (the retirement one, not my former employer) automatically decided to list it as a distribution. (I also thought I had already paid off my load from my 401k but that's a whole different story) 

Anyway, if I want to keep my 401k with them, that shouldnt be taxable, right? If correct, then how do I tell Turbotax then? 

[Opus 17]

Sorry, but I don’t understand your question at all.  Why do you have a 1099-R, what was the distribution?

If you have a deemed distribution because you left your employer with an outstanding 401(k) loan, that is one procedure. If the 401(k) administrator closed your account involuntarily and sent you all the remaining funds, that is a different set of rules.  (In particular, you had 60 days to roll over the funds into a private IRA or into a different workplace plan. If you didn’t, I think the money is still taxable to you with a penalty. Even if the withdrawal was involuntary, you had the option of rolling it over.)

[davyjones1978]

"Sorry, but I don’t understand your question at all.  Why do you have a 1099-R, what was the distribution?" - your guess is as good as mine? I left my old company (well, we were bought out), and I checked the company's web site (retirement company, Corebridge) - and all my stuff is still there. I was never sent any funds. 

So if I don't take action after 60 days, it will stay where it is, no? 

"If you have a deemed distribution because you left your employer with an outstanding 401(k) loan, that is one procedure." - forgive my ignorance, but what does this mean? If I left the employer with an outstanding 401k loan, is that a deemed distribution? What is a deemed distribution? 

But anyway, to circle back, I guess that's where my confusion is. I received a 1099 R for a distribution.....that never happened. 

[Opus 17]

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@davyjones1978 wrote:

But anyway, to circle back, I guess that's where my confusion is. I received a 1099 R for a distribution.....that never happened. 

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You need to call the 401k trustee, not your former employer.

What is the code in box 7?  What is the amount in box 1, box 2a, and is box 2b checked?

[davyjones1978]

7 is L 

box 1 and 2a have amounts and match (id rather not put them here) and 2B is not checked 

[Opus 17 · Accepted solution]

Code L is a deemed distribution because you left the company with an outstanding 401k loan balance.  Since the loan can only be repaid via payroll deductions, if you leave with an outstanding balance, you have 60 days to payoff the loan by sending money to the 401k plan, otherwise the balance is considered a taxable distribution to you.  

If this is the case, you may have other options.  If you think you fully repaid the loan, you will have to prove it to the 401k custodian and get them to issue a corrected 1099-R.  

[davyjones1978]

Ok, thank you for your assistance. 

I guess it had a lot to do with confusion on my end. I thought they were "distributing" my entire 401k balance. I understand I can see a balance still there, but BECAUSE of that, I didn't understand why it was phrased that way. Having said that, it appears to have nothing to do with that, and you clarified it for me, thank you. 

I didn't have the money to pay off the loan so it does make sense they've handled it the way that they did. I guess my incorrect assumption was that if I didn't ask for my 401k to get rolled over to another company there was no immediate rush to get the loan paid off. But apparently, the 401k balance and loans are two separate things, in that regard, at least. 

I understand now. Thanks again. 

[dmertz · Accepted solution]

The code L indicates that you defaulted on the loan by not continuing to make payments.  A code-L distribution distribution does not satisfy the loan and you are still required to pay the loan back.  Perhaps the purchasing company failed to continue payroll deductions needed to keep the loan from defaulting, but it still ends up being your responsibility to stay current on the loan repayment.

If the plan instead reduced your balance in the plan by the amount of the loan, this should have been reported as an offset distribution rather than a deemed distribution.  If it was an offset distribution you would have until the due date of your tax return, including extensions, to come up with the funds to do a rollover of a qualified offset distribution.

It might be informative to ask the plan why this became a deemed distribution instead of an offset distribution.

[davyjones1978]

Thank you, that was very informative. And I mostly understand what you're saying. My apologies I do have two follow up questions. 

1. I do intend to pay the loan back. It is a couple hundred dollars however, so I don't have that amount of extra money lying around at this time to satisfy the loan. Maybe I could have been more diligent with this, but I have been with the same company for 15 years up to that point so 401k and rollover, etc etc. was all foreign to me. Something I didn't think I'd have to think about for decades. 

To answer your question, they definitely didn't reduce the balance, so it seems to be a "legitimate" deemed distribution. Anyway, regarding one of the things you mentioned "to come up with the funds to do a rollover of a qualified offset distribution." - meaning that I couldn't move the 401k amount to another company until that's satisfied, correct? Would/wouldn't that be the same with the deemed distribution? Or did I misunderstand that? 

2. So if I understand correctly, if they DO reduce the balance, and redo it as a offset distribution, I have up until the end of tax season to pay it off. Does the deemed distribution not have that same timeframe? And if not, is that the reason why I am being taxed on it? I am mostly asking because the offset distribution cuts into your balance and gives you a deadline,  I was just curious if the "upside" of that is that you aren't taxed. Otherwise if there are only downsides, I don't see why anyone wouldn't prefer a deemed distribution. 

[Opus 17 · Accepted solution]

I should let @dmertz answer because they are much smarter than me, but...

As I understand it, if you are in good standing with loan payments when you leave the company, and the only reason for the deemed distribution is that you left the company, then it is considered a "qualified" offset distribution.  You would have until the April 15, 2024 tax filing deadline to either repay the loan (if they will accept the funds) or deposit an equal amount into a private IRA, and call it a "rollover" and it won't be taxable (because you--sort of--moved the retirement money from one qualified account to another).  And it would be a different code, not code L.

However, if you are in default on loan payments, then it is not considered an offset that is eligible for rollover.

It's very hard to be in default on a 401k loan since I believe it is mandatory for the payments to be withheld from your paycheck.  Maybe you're paid by the hour and you don't get enough hours to enable the payroll deduction for the payment?

At this point, if code L is correct (that you were in default) you can't cure that by making a repayment.  You owe income tax on the 1099-R amount and a 10% penalty if you are under age 59-1/2.  If you do make a loan repayment, that creates an after-tax basis in what is usually a pre-tax account, and as a result, some small portion of your retirement earnings would be non-taxable (to reflect the amount that was already taxed.)

Given that fact, I'm not sure there is any real value to repaying the loan at all.  Unless I am missing something.

In order to treat this as a qualified offset distribution that is eligible for rollover, you would have to find out why the plan considered you in default, and see if you can get them to issue a corrected 1099-R.  Maybe there,was a mixup due to the company buyout, and they mistakenly thought you were in default when you were not. 

[dmertz]

Opus 17 is correct.  Now that it has become a deemed distribution, the taxable amount on the code-L 2023 Form 1099-R must be included in your 2023 income.  Your loan repayments will become after-tax basis in the plan, so when you later take distributions from the plan that money won't be taxed a second time.