In 2020 I borrowed a loan from my 401k was supposed to pay it back in payments, was going to be deducted from my pay checks. I got a different job so I didn't pay it back. My new job does offer 401k.

[LinaJ2020]

If you lost your job due to COVID-19, the unpaid loan balance may qualify as a COVID-19 distribution. The New COVID-19 Relief package allows this distribution for a greater flexibility as far as how income taxes are paid.  You may be allowed to have an additional year to repay the loan, or upon the distribution, you will not be subject to the 10% early withdrawal penalty, and may be "recontributed" for up to three years. 

Before Covid, if you do not repay the loan, it will be treated as a taxable distribution income and subject to 10% early withdrawal penalty if you are under age 59 1/2. 

For more information, click on these links:

Delay repayment

Covid 19 tax treatment

[Opus 17]

@dmertz  please review

[dmertz]

The CARES Act does not require the plan to permit a delay in the repayment of the loan.  If the plan permits the delay in repayment, the loan is still in effect.  If the plan does not permit the delay in repayment, the result should have been an offset distribution since the loan was not in default when you left service with this employer.

If the result was an offset distribution in 2020, the plan would have reduced the balance to your credit in the 401(k), issued a code Form 1099-R with codes 1 and M (I assume that you are under age 59½) and you have until the due date of your 2020 tax return, including extensions, to come up with the money and roll over the offset distribution.  To come up with the money, perhaps you could roll the remaining balance in the old employer's plan over to the new employer's plan and take a loan from the new employer's plan.  The rollover could be to an IRA or to your new employer's plan.

[Opus 17]

So let me do a broader overview.

If you leave the employer, you normally have 60 days to repay the loan in full.  Any unpaid amount is called an "offset distribution" and is reported as taxable income to you on a 1099-R, that will likely be mailed to you by the plan administrator by January 31.

You can simply take the event as a distribution and report the taxable income. You will pay regular income tax on the amount of the distribution.  If you are under age 55, you will be subject to a 10% penalty.  If you lost your job due to the pandemic, you don't pay the 10% penalty, and you have the option of spreading the income over 3 years instead of 1 year.  (Be aware, this part of Turbotax won't be ready until mid-February at least due to IRS delays.)

If you want to pay off the loan and reinvest the money, the plan might offer an extension beyond 60 days.  If not, you can invest the money in a private IRA or in the 401(k) of your new job by calling it a rollover.  Any amount you put into a new plan as a rollover is not counted as taxable income--it's as if you withdrew it from the old account and rolled it over into the new account.  You have until April 15 to roll over as much as possible, or October 15 if you apply for the extension to file your tax return.  On your tax return, you would report the 1099-R as a taxable distribution, and then when asked "what did you do with the money" you would report that you rolled over part or all of the money into a new qualified plan. Be sure that if you do make rollover contributions to a new plan (your new 401(k) or an IRA) that you tell the plan administrator this is a rollover before you make the contribution. There may be a special form.  If you don't tell them ahead of time, it may be treated as a regular contribution instead of a rollover.

[dmertz]

Note that an offset distribution satisfies the loan, so after an offset distribution there is nothing left that needs to be paid off.  The option is either come up with money to complete a rollover of some or all of the offset distribution or not.

If a loan default occurred at a time when you would be ineligible to receive an offset distribution (say, still working for the company and under age 59½), the result would be a deemed distribution that is not eligible for rollover.  A deemed distribution means that the outstanding amount of the loan becomes taxable but the loan is not satisfied, the balance to your credit in the plan is not reduced and the loan must still be repaid, with repayments becoming after-tax basis in the plan .  A deemed distribution is reported in box 7 of the Form 1099-R with code L instead of code M.

[hbchadley]

I had changed jobs in last quarter 2019 and was between 57 at the time - I received 1099r for outstanding loan in first quarter last year.  Will TurboTax recognize my age +55 and I left a job when I enter a 1099r with a L1 for code distribution?

[Opus 17]

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@hbchadley wrote:

I had changed jobs in last quarter 2019 and was between 57 at the time - I received 1099r for outstanding loan in first quarter last year.  Will TurboTax recognize my age +55 and I left a job when I enter a 1099r with a L1 for code distribution?

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It should have a code L2, the "2" indicating you separated from service at or after age 55.  

I have not tested Turbotax for this situation, but there should be a list of questions whenever you enter a distribution with code 1, asking about various exceptions that apply to the penalty.

[dmertz]

As Opus 17 indicated, when TurboTax asks if any of the particular exceptions apply, enter the amount of this distribution as being eligible for the age-55 exception.  TurboTax will include this amount on Form 5329 line 2 with exception code 01 (not to be confused the the code 1 in box 7 of the Form 1099-R).

[hbchadley]

So what do I  do if the provider that I got the 1099r from won't change the value to L2 and turbo tax is not asking me about exceptions.  It looks to me like it calcs right with the 2, but not with the 1.

[Irene2805]

If you can't repay the loan, it is considered defaulted, and you will be taxed on the outstanding balance, including an early withdrawal penalty if you are not at least age 59 ½. 

There are certain exceptions to this additional 10% tax. The following exceptions apply to distributions from any qualified retirement plan:

• Distributions made to your beneficiary or estate on or after your death.
• Distributions made because you're totally and permanently disabled.
• Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.  [emphasis added]
• Distributions to the extent you have deductible medical expenses that exceed 7.5% of your adjusted gross income whether or not you itemize your deductions for the year. For more information on medical expenses, refer to Topic No. 502.
• Distributions made due to an IRS levy of the plan under section 6331.
• Distributions that are qualified reservist distributions. Generally, these are distributions made to individuals called to active duty for at least 180 days after September 11, 2001.
• Distributions that are excepted from the additional income tax by federal legislation relating to certain emergencies and disasters. See the Instructions for Form 5329 for more information.
• Distributions up to $5,000 made to you from a defined contribution plan or an IRA if the distribution is a qualified birth or adoption distribution. See the Instructions for Form 5329 for more information.

Source:  Topic No. 558 Additional Tax on Early Distributions from Retirement Plans Other than IRAs

It doesn't appear, from the information you've given that any of the exceptions apply.

@hbchadley

[hbchadley]

Why wouldn't the 55+ rule apply.  I was 58 at time I left employment and as a result of leaving that employment, the loan was defaulted.  I have been told by multiple sources that the 10% penalty would not apply due to this exception.

[Opus 17]

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@hbchadley wrote:

Why wouldn't the 55+ rule apply.  I was 58 at time I left employment and as a result of leaving that employment, the loan was defaulted.  I have been told by multiple sources that the 10% penalty would not apply due to this exception.

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If you enter the 1099-R with code L1, just keep going, you have to be persistent.  Eventually you will get to a screen that looks like this:

If the entire amount was withdrawn at or over age 55, enter the entire amount in the corresponding box. 

[dmertz]

Go to Other Tax Situations -> Uncommon tax situations -> Additional Tax Payments -> Extra Tax on Early Retirement Withdrawals where you'll see the page shown by Opus 17, then enter the amount in the box for Separation From Service the Year During or After Age 55.  TurboTax will place this amount on Form 5329 line 2 with code 01.