death benefit to spouse, outstanding 401k loan

[pmacduff]

I found some prior threads but most were 7+ years old and dealing with non-spousal beneficiaries. I have a spousal beneficiary.

It appears that if he rolls over the balance of the account to a traditional IRA then he'll receive the 1099-R with a Code of 4G. If that happens this year (the year of death) then the 1099-R for the loan offset will go under the deceased participant's name/SSN and is part of her final personal income.

My question is...does the 10% "early distribution" penalty apply in this case to the loan offset? I'm assuming that the 1099-R won't be coded with a "4" because that portion is not a death benefit but rather a loan offset under the decedent.

Any thoughts appreciated!

[Lou S.]

I would assume the loan would be coded 4 as it is an offset and not a default.

If it is treated as a default after death does the form allow for code 4L?

I think it is pretty clear under any reasonable interpertation of the rules that the 10% penalty does not apply in this case.

[QDROphile]

Why not section 72(t)(2)(A)(ii)?

[pmacduff]

Thank you both. After a reread of that code section I see also that the spouse would not pay the 10% penalty on his portion even if he takes the cash instead of rolling it over. That will be most helpful to him at this difficult time.

[Appleby]

If it is treated as a default after death does the form allow for code 4L?

Yes