401K Loan still due?

[tulrich00]

I was taxed on a 401K loan after leaving company.  The tax and other related early withdrawal penalties were paid in 2015 as part of tax filing process yet my 401K administrator still shows the loan as outstanding.  Is the loan still due?

[VolvoGirl]

Gee I wouldn't think so.  They gave you a 1099R for it back in 2015?  For the full amount?  Only the plan would know.  You need to talk to them and ask them why.

[Opus 17]

When you end your employment, you have 60 days to repay any outstanding 401(k) loan.  If you don't repay the loan, it is deemed to be a distribution, and is subject to regular income tax plus an early withdrawal penalty if you are under age 55.  At that point, since it is a distribution, it is no longer a loan.  (Not only do you not have to pay it back, you can't pay it back.  You can only deposit money in a 401(k) via payroll withdrawals.  You can't legally put money in that account now for any reason, unless you convert it or transfer it or roll it over to a private IRA.  And then any deposits are ordinary contributions subject to ordinary contribution rules and limits.)

[tulrich00]

Thank you.  Recordkeeper insists loan is still active because it defaulted though no monies are due.

[ckeh]

What if I’m 55? Leaving work and has outstanding loan?

[SweetieJean]

If you default on a loan from your 401k, you are considered to have received a distribution from your 401k. Whether or not you will have to pay the 10 percent additional tax on early distributions from 401 (K) plan depends on a number of factors, including your age.

In order to avoid the 10 percent additional tax on early distributions from qualified retirement plans, the following ALL all must be true:

(1) you received the distribution after you left the company
(2) you left the company during or after the calendar year in which you reached age 55
(3) your departure from the company qualifies as a separation from service or, you must meet one of the other exceptions shown in IRS Publication 560, Retirement Plans for Small Business and IRS Publication 575, Pension and Annuity Income.

[Texas Roger]

This thread is 8 months old. Please ask your question in a new thread of your own.

[Opus 17]

@ckeh all distributions are subject to regular income tax.  If you are 55 or over when you separate from service, you don't pay the extra 10% penalty on your distributions.

[dmertz]

If you did not default on the loan prior to separating from service but the loan simply became due upon leaving the company, the company should have processed an offset distribution (code 1, 2 or 7 in box 7 of the Form 1099-R), not a deemed distribution (code L).  An offset distribution satisfies the loan and your 401(k) balance is reduced by the amount of the offset distribution.  With the loan satisfied in this way, the loan should no longer be shown as active.

[dmertz]

If you defaulted on the loan while still employed and you received a deemed distribution, the deemed distribution does not satisfy the loan.  You still have an outstanding loan balance that needs to be paid back and any payments you make toward the loan become after-tax basis in your 401(k).

When you later leave the company after having received a deemed distribution, your loan normally becomes satisfied by an offset distribution.  Your plan balance becomes reduced by the amount of the outstanding loan and the loan becomes satisfied.  I haven't seen the accounting procedure for this explicitly described anywhere.  When there has already been a deemed distribution, some plan administrators, simply reduce the the account balance by the outstanding balance of the loan without treating or reporting it as an additional distribution.  However, some may report the payoff of the loan as a offset distribution and increase  the after-tax basis in your account by the amount of the offset distribution.

When you have after-tax basis in your 401(k), any distribution made from the 401(k) is prorated between nontaxable and taxable amounts in the same proportions as after-tax basis has to your overall 401(k) balance.  This means that you won't end up paying taxes twice on the same money.

It's possible that you received a deemed distribution and the plan never processed an offset distribution, meaning that the loan is still outstanding, is accruing interest charges, and still needs to be paid back.  It certainly sounds like something needs to get straightened out with the plan administrator.

[tulrich00]

I did not default on loan while still employed.

[tulrich00]

Plan Admin was supposed to send me a loan offset form to effectively set loan balance to zero.  Form is now being sent.  Thank you.

[Opus 17]

You "defaulted" because you left employment before the loan was paid, it's not a moral failure.  It sounds like just the records were not properly handled and that's being fixed.

[dmertz]

If the loan is satisfied with an offset distribution upon separation, there is no default.  There would simply be repayment of the loan using a distribution from the 401(k).  (401(k) distributions are permitted after separation from service.)  However, it seems that in this case the loan was allowed to remain outstanding after separation from service and subsequently the loan was treated as defaulted.

If the 2015 Form 1099-R included code L in box 7, the distribution was processed as a deemed distribution due to defaulting.  It seems rather unusual that a plan would allow a defaulted loan to remain outstanding after separation from service instead of simply processing an offset distribution and being done with the loan.

[MightyHet]

Hello, sorry if this question has been asked before... I have a defaulted 401k loan that I've already taken the IRS hit on several years ago. The plan administrator site says that, "the defaulted loan amount has been reported to the IRS as a taxable distribution from your retirement plan, and the loan balance still remains outstanding.  As an outstanding obligation under the plan, payments must continue until the loan is paid in full (including post default interest accrual) or the loan is offset upon a full distribution from the plan." 

If I leave this employer would they still deduct the defaulted amount from my 401k balance they owe me even though I already satisfied the IRS obligation?