My 401k loan converted to a deemed distribution. I'm under 59 & received 1099R. Why is early withdrawal penalty not showing up in other tax situations?

[dmertz]

What codes in in box 7 of the Form 1099-R provided by the payer?  Since this Form 1099-R was issued to someone under age 59½, it would be expected to have codes 1 and L.

[AnnetteB]

There is an exception to the early distribution penalty for 401k distributions for separation from service during or after the year when the plan participant reaches age 55. 

So, if you turned 55 or older during 2017, your deemed distribution will not be subject to the penalty.  If that is not the case, then your distribution code on the Form 1099-R may indicate that there is another exception that applies.

For more information, see Retirement Topics – Exceptions to Tax on Early Distributions

[dmertz]

Code 2 paired with code L is not a permitted paring.  A deemed distribution should only occur if the employee is still employed with the company at the time of default on the loan being declared.  If the employee is no longer employed, an offset distribution should be processed instead and, if separation occurred after age 55, code 2 only would be used to report the offset distribution.  But if a deemed distribution somehow occurs after separation from service in or after the year that the employee reaches age 55, it should be possible to claim the age 55 exception to the penalty.

However, in this case there is as yet no indication that the deemed distribution occurred after separation from service in or after the year they reached age 55.