how to handle 401K default

[Jtang7681]

Hi guys

I got a letter from IRS for tax penalty of my 401k load defaut in 2018, I changed my job, called 401k for any option about my loan, but the guy didn't give correct solution. It's my fault, but now I have paid off 401k loan balance.

Please please help how can I don't pay the tax penalty? it's too high to affordable.

Thanks a lotin advance.

[Critter-3]

Did you get a 1099-R for the loan distribution with a code M in box 7  ?   Did you repay the loan by the due date of the return ?    Did you even enter the 1099-R in the original return ?

[Opus 17]

You have two problems. One, if you do not pay off the 401(k) loan within 60 days of separating from service, it is deemed a distribution and you must pay taxes in a penalty on it.

two, you can’t pay off the loan after 60 days, and you aren’t supposed to be allowed to make deposits to a 401(k) except via payroll deposits while you are working for the employer. So I have no idea what the plan did with the money you sent them. They should not have been allowed to put it back in your account.

The distribution can’t be reversed if it’s more than 60 days. You owe the tax and the penalty, there’s no way around that. If the company took your money and put it back in the account that’s an illegal contribution, but I think the enforcement of that is on the administrator and not on you.

@dmertz ??

[dmertz]

If you were current on your loan payments at the time of separation from service in 2018, the plan should have satisfied the loan with an offset distribution, not a deemed distribution, if you chose, or were not permitted, to continue to have the loan and make payments.  An offset distribution would have been reported with code M being included in box 7 of the Form 1099-R reporting this distribution, along with code 1 if you were under age 59½.  Code L (along with code 1 if under age 59½) would indicate a deemed distribution that is not eligible for rollover.  If not rolled over, the distribution is subject to ordinary income tax and, if you were under age 59½, to a 10% early-distribution penalty; there would be no avoiding these.

For rolling over an offset distribution, the SECURE Act extended the deadline to the due date of the tax return for the year of the distribution, including extensions, rather than the usual 60 days for an eligible rollover distribution such as an offset distribution, but it's too late for that now and you would have had to have come up with the money from some other source to be able to complete the rollover.