New 401k loan repayment rules (Tax cuts & jobs act)

[mitsuhide]

I quit my job in November 2019 with an outstanding 401k loan balance. Per plan rules, they say I have 90 days to pay it back or they mark it as a distribution and send that info to the IRS.

When I asked about the new law about having more time to repay it, they had no idea and just referred back to the 90 days plan rules.

I have a new job with a new 401k plan under a new fund management company. My old 401k funds are still with the old company's plan for now.

What are my options for paying back that loan before my taxes are due this year?

Can I roll over my 401k money from my old company into my new company's 401k and then take out a loan from that new 401k to pay back my original loan?

If I don't take out a new loan, can I just write a check to someone for the outstanding loan balance? Can I write that check out to my new company's 401k plan? Should they know how to handle that payment?

Seems everyone I speak to about this has no idea how the new law about this works. I get conflicting answers everywhere. Some people say I have to pay back the loan to my original place or origin (Vanguard) yet others have said I don't have to do that, as long as I put the money into an eligible retirement account, it doesn't matter who facilitates that account.

It would be nice if someone actually knew how it all worked with this new law.

[dmertz]

First, unless you waive the requirement, before the 401(k) plan is permitted to make a distribution to you they are required by law to provide you with a statement of your options with regard to this distribution, including the details of your option to roll over this distribution.  By not being able to providing you with this information they are in violation of this law.  Perhaps it's just that the representative that you talked to is ill informed.

But to your question, the distribution that you receive after separation from service that satisfies the loan is an offset distribution that reduces the balance to your credit by the amount of the outstanding loan balance without giving you any money.  It's equivalent to making a reportable, taxable distribution of cash to you from the 401(k) and you immediately turning that money around to pay off the loan.  An offset distribution is reported with code M in box 7 of the Form 1099-R for the year in which the distribution occurs (possibly along with code 1 or 2 depending on your age).

What the 401(k) plan is required to tell you is that you have until the due date, including extensions, of your tax return for the year in which the offset distribution occurs to come up with whatever portion of the amount of the offset distribution you can and roll it over to another retirement plan, say, to your new employer's plan or to a traditional IRA, to continue to defer the taxes and possible early-distribution penalty on the amount rolled over.

Your new employer's plan is not required to accept rollovers, so you might have to roll it over to a traditional IRA instead.

[mitsuhide]

So this 'rollover' that would equal the unpaid loan balance can be paid by simply sending a check (or wire or similar) to someone (Fidelity) and saying this either needs to be a rollover into my new 401k plan here or a brand new IRA? Is that pretty universal? Would you anticipate any problem with this? Is there a risk Fidelity would not accept even an IRA rollover in this fashion? 

If this seems to be fine to do, then it seems there is no specific loan-related reason to keep existing funds in my old 401k. And rolling over those funds into my new company's 401k should have no bearing on repayment of the loan?

Then what are your thoughts on rolling the balance over, then taking out a new loan from the new 401k, and then rolling over that money into an IRA? Doable in theory? I am not aware of any specific reasons this would not work, considering 401k loans can be made for any reason. The only difference would be that I'd have 5 years to repay the loan balance rather than the original 15 years I had before. 

[dmertz]

401(k) and similar plans have the option to refuse receiving rollovers.  Keep in mind that you can only roll over to a 401(k) or similar plan the otherwise taxable amount of the offset distribution (usually the entire amount).  You can roll over to an IRA the taxable and nontaxable nontaxable amounts.   The code M Form 1099-R that you receive for the offset distribution will indicate the taxable amount in box 2a.

You must follow the rollover procedures of the receiving plan or IRA custodian.  In the case of a rollover of an offset distribution you must tell the receiving plan or IRA custodian, generally using their rollover contribution form, that it's a rollover of a offset distribution so that they will accept it after the normal 60-day rollover deadline for other distributions that are eligible for rollover and so that they record the rollover correctly.

"Then what are your thoughts on rolling the balance over, then taking out a new loan from the new 401k, and then rolling over that money into an IRA?"

You are not the first person to propose this.  This is perfectly reasonable if your new plan accepts rollovers and allows loans.  You would be completing the rollover of the offset distribution by using the cash that you get from taking out the new loan.  Yes, you would be limited to a 5-year repayment period.  (I assume that the original loan was for the purchase of a home which permits a payback period longer than 5 years.)

[vivek_mutalik]

Hi,

We are dealing with the same situation. Did you find a solution to this issue? 

Looks like no one has heard about "Tax cuts and Jobs act" even though there are huge number of articles saying now the 401K loan can be repaid till next  April 15. That is borrower gets 21 months instead of 60 days. 

[dmertz]

To be clear, you are not repaying the loan.  The loan was paid off by the offset distribution, so the loan no longer exists.  As you stated, you now have until the due date of your tax return, including extensions, not just 60 days, to roll the offset distribution over to another qualified retirement account such as an IRA, assuming that you can come up with the money to do so.

I'm not sure what "issue" you are talking about.  If you received a code M Form 1099-R and you roll over some or all of this offset distribution within the allotted time (by October 15 of the following year as long as you timely file your tax return or a request for filing extension), it's reported as a rollover the same way that any other eligible rollover is reported.  In the follow-up to entering the Form 1099-R, indicate that you moved the money to another retirement account and indicate the amount that you rolled over.  TurboTax will include the entire gross amount of the offset distribution on Form 1040 line 4c but will exclude the amount rolled over from the taxable amount on line 4d.  TurboTax will also include the word ROLLOVER next to line 4d.

[vivek_mutalik]

Really appreciate your reply. Thank you.

long story short: last year my wife was working in a start up, took 401K loan and then got laid off abruptly on 31st May 2019. No one contacted us about this loan, so we got in touch with the former 401k company (“for us all ”) about options. They told (very rudely!) us that we need to repay the loan within 60 days or else we will have to pay 10% penalty and 30% tax of this unpaid loan.

Luckily we then came across articles on “2018 law of tax cuts and jobs act” which at-least  clarified that we have time till April 15, 2020 to pay back the loan.

Now, My wife has moved on to another job and we managed to save funds to pay this ‘offset distribution’. My wife hasn’t yet rolled her former 401k to the new company’s 401k.

now the questions is: how and whom should we pay the offset distribution? 

thanks to your message we now know about 1099-R. Not sure how to get this filed and when? That’s why we may need a professional help to file this year’s tax return. Please let us know if you have any additional suggestions/advice. 

thank you

[dmertz]

If the credit to your wife's benefit in the old employer's plan is above a certain threshold, $5,000, I believe, the old plan cannot require that the balance be moved out, but your wife might want to do that anyway to consolidate retirement savings.

The offset distribution can be rolled over to your wife's new employer's plan if they will accept the rollover (they are not required to do so), or to an IRA.  To roll it over to the new employer's plan, contact that plan's administrator for instructions and confirmation that they will except the rollover.  Otherwise she can contact any IRA custodian and open an IRA to receive the rollover.

From your response it's not entirely clear, but I believe that your wife has received a 2019 Form 1099-R reporting this distribution.  Simplest will be to complete the rollover before April 15 so that in the questions that follow entering the details of this Form 1099-R into TurboTax you can say that the distribution was rolled over to another retirement account and indicate the amount rolled over.  Otherwise, request a filing extension to extend the deadline to October 15.  There is no difference between reporting the rollover of an offset distribution and reporting the indirect rollover of any other distribution.  Probably much easier than finding a competent tax professional unless you are generally uncomfortable preparing a tax return under any circumstances.

[snowbug]

Thanks for all the answers above, very informative. I want to ask a follow up question that would complete the answers in this thread:

What if I simply payback the remaining outstanding loan amount by April 15th (as oppose to roll it over)? In that case, will I still receive a 1099-R, and if so, what would be the correct code in box 7? I assume in this case the box 2 taxable amount should be $0.00. 

Thanks!

[dmertz]

If the distribution was an offset distribution (code M included in box 7), the loan was paid off by the distribution and there is no longer a loan to repay.  All you can do is roll over the distribution by the due date of your tax return, including extensions, to avoid the immediate tax consequences of the distribution by returning the money to a retirement account.

If the distribution was a deemed distribution (code L included in box 7), the loan is still outstanding and must be repaid.  The amount becomes unconditionally taxable and the loan still must be repaid.  However, because taxes have already been paid on this money, the repayments become after-tax basis in the plan that will not be taxed again when later distributed.  There is no particular deadline for paying off the loan.

Whatever you do in either case does not change the reporting required to be made by the plan on the Form 1099-R.  In the case of the offset distribution, the rollover only affect how you report that Form 1099-R on your tax return.

[swanE261]

Hello-

I'm seeing multiple threads on this and others sharing the pain and confusion our plan managers have around the new law.

I indeed had an loan in 2019, left my employer and was unable to pay within 60 days.  I have proactively worked with my plan manager to make sure this was documented correctly, however when 1099 came around it was still coded as a deemed distribution.  I have been working for weeks to get the code changed to 'M' in box 7 to be told yet again, it was correct the first time.  I'm hitting a wall and black hole with representatives and don't want to move through the IRS channels to report this if not needed.  Any words of wisdom out there on how you get this corrected and or why they are dismissing my ask?  With each escalation and denial, I'm given no documentation or reasoning other than a verbal "after internal operations review it was determined the original 1099 is correct"....how do they truly not know of this change and why is it so challenging to make this correction?

[dmertz]

Lack of code M accompanying a code 1, 2 or 7 probably does not mean that the distribution is not eligible for the extended rollover deadline.  However, code L being present would mean that the distribution is not eligible for rollover.

[snowbug]

This is indeed confusing add to that the plan manager have no idea the existence of the law and simply won't listen, I feel the pain described above.

It's strange, this case I am facing, the 1099-R has M1 in box 7 (offset distribution) but the box 2 taxable amount is equal to the amount owe when leaving the employer. There is no rollover. But then the employment was resumed with the same employer and the loan was reinstated (still with a "default" flag as what was told). Then the remaining balance is repaid back in full to the same 401k account, which is after 60 days. 

Since there was no rollover involved, I guess the final full repayment was allowed because the employment was resumed? In this case, what a correct 1099-R should show? I'm thinking 1099-R would still have a M1 in box 7 but zero taxable amount in box 2?

Thanks!

[dmertz]

"It's strange, this case I am facing, the 1099-R has M1 in box 7 (offset distribution) but the box 2 taxable amount is equal to the amount owe when leaving the employer"

snowbug, it sounds like in your case everything was handled entirely properly.  The Form 1099-R is correct.  Apparently the repayment that you did indeed was a rollover and you were issued a new loan; the loan that you have now is not the loan that you originally had.  Simply report the Form 1099-R in TurboTax as a distribution that was entirely rolled over.

[snowbug]

"snowbug, it sounds like in your case everything was handled entirely properly.  The Form 1099-R is correct.  Apparently the repayment that you did indeed was a rollover and you were issued a new loan; the loan that you have now is not the loan that you originally had.  Simply report the Form 1099-R in TurboTax as a distribution that was entirely rolled over."

What I don't understand is why the taxable amount (equals to the remaining balance on the loan before it was fully paid off). Because of this, when I enter it into TurboTax, there is tax assessed. - How do I avoid this tax?

From looking at the account history, technically, the same employer admin just re-instated the account and allowed the repayment so it didn't create a new loan. The money went back into the same 401k account where the loan took from. 

Thanks for the helps!