401K Loan still due?

Forum|Forum|7 years ago
June 7, 2019
4 replies
12 views

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?

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VolvoGirl

Level 15

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

Level 15

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.)

tulrich00Author

Level 2

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

dmertz

Level 15

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

Level 15

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.

MightyHet

Level 2

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?

dmertz

Level 15

MightyHet, if you do not entirely pay back the loan when you leave the employer, the balance to your credit in the plan would be reduced by the amount of the outstanding loan, but that reduction would not be taxed a second time. Amounts that you did pay back after the deemed distribution become after tax basis in the plan that would proportionately reduce the amount of any distributions that you subsequently receive from the plan, so the paid-back amounts are not taxed again either.