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I think a lot of plan administrators don't understand the difference between deemed and offset, as it is somewhat subtle. The issue is that the IRS wants you to be taxable, following a grace period, if you miss a payment and don't cure, but they don't want plans to violate the general prohibition on in-service distribution. So the regulations create useful fiction of a "deemed distribution," which means that you get a 1099-R for the amount that you defaulted on, even if you have not had a distributable event, such as a termination of employment. Believe it or not, the IRS regs say that that "deemed" distributed loan lives on, ghost-like, in the plan, continuing to earn ghost interest and, potentially, blocking a future loan from the plan, after the date of the default, until you have a distributable event, at which time the outstanding amount of the loan (but not the ghost interest, thankfully) is "offset" against your account, and thus finally gone. Note that you actually can repay a deemed loan before it is distributed, and thus resurrect that portion of your account, in which case you would have tax-paid "basis" in your account for the amount you repaid, but I digress. Anyway, if the loan default occurs before the distributable event, e.g. separation from service, occurs, and certainly if it occurs in a taxable year before the distributable event occurs, things are relatively simple: You have a deemed distribution in one year, and a 1099-R reflecting that, with its own code, L, in Box 12, and then in a later year you get your distribution, which does not include the previously deemed amount, and you don't pay tax on it again. It's also pretty simple if the event of default is, as it often is, the distributable event itself, e.g. separation from service. Assume that the plan documents and administration are consistent that if you separate from service and don't repay the loan within some fairly short grace period, it defaults. In that case, you would actually have a taxable distribution of your loan (surprise! you already got the money when you took the nontaxable loan out, so the distribution now is "air," but at least you no longer have the obligation to keep paying your account back). Because in this case the loan was not previously "deemed," so that you did not pay tax on it, it's not unfair that the offset is treated as a taxable distribution on your Form 1099-R, just unpleasant. And note that in this case, because IRS treats it as an "actual" distribution, it doesn't get a code L on the 1099-R. In your case, although a review of the plan and loan policy documents, and promissory note, would be required to say this with total assurance, it seems pretty clear that what caused your loan to default was probably your separation from service, because the plan probably follows the permissible rule that it defaults the loan when you separate and it can no longer withhold repayments from payroll. (Note that not all plans do that; some permit terminated participants to keep paying by check until the loan is paid off.) I mean, you never really missed a payment, right? So why else could they be defaulting your loan. The new law states that a loan offset occurring after 2018 qualifies for the more liberal rollover timing (i.e., you would have until your filing deadline in 2019 for your 2018 1040 to roll cash up to the amount of the loan into an IRA) if the loan default is on account of "the failure to meet the repayment terms of the loan from such plan because of the severance from employment of the participant." Sounds to me like you will meet that requirement, assuming that the plan gave you at least 30 days following employment to pay the loan off without calling it a default and your termination date was after December 1, so that the 30 days would put you in 2018. However, if your employer treats the loan offset (seemingly, incorrectly) as a "deemed distribution" and codes it as such on the 1099-R, you could have problems with the IRS Service Center where you file your return, assuming you do roll it over. You might also have problems with the IRA custodian that you deposit the loan offset rollover with, although I doubt it. There's helpful discussion of the reporting issues and difference between the two types of distributions in the 2018 IRS Form 1099-R instructions. Just Google the .pdf of those and then search in the .pdf for "plan loan offset" and also "Code L." These are discussed in several places.

As noted, it can't be an 'irrevocable' waiver. I think one of the reasons for this is, for example, you have a profit sharing only plan. for someone to make an irrevocable election is not considered a 'deferral' election whether to participate or not. I guess you could create an excluded class and amend the document as such, something like "fools that want to be excluded entirely" - well of course you have to have a better description than that. the difference between someone being excluded from the plan is they don't show on the ADP test with a 0. but they still get counted as included and not benefitting for coverage.

Ouch! KEB, I'm not stating a preference, I am a baseball guy above all else (except maybe college basketball), but simply describing the landscape as I see it.

Yes I have had it happen before. I handle it the same way every time. I will not prepare or file a form with false information. The most common request is to say that there were no late deferrals. I always tell my clients what they need to do to correct the issue (and most likely I will do the correction for them) but I will not prepare or file a form with information I know to be false. If the client insists, I tell them that I am happy to recommend several good local service providers if they are not happy with my services. If they still insist, I terminate the relationship with the client in writing, citing my reasons for doing so. I have terminated a handful of clients for this reason. If Circular 230 applies (it does for me), I would point to § 10.21 (knowledge of omission) and § 10.22 (Diligence as to accuracy). The loophole of reliance on others in § 10.22 clearly can't apply if you know the information is false. What it boils down to for me is don't make your clients problems your problems.