401K loan pay-back

[angie.jackson@bmhcc.org]

I had 2 loans from my 401K plan.  My department was contracted out to another employer.  I had to repay my loans, with my 401K money before they rolled over my money into another 401K (different company).  I entered all the information correctly from the 1099R on my 2015 taxes, now the IRS has come back and states that I owe them money.  They are stating "early distribution".  Please help!

 

Angie

[RatherBeGolfing]

15 hours ago, angie.jackson@bmhcc.org said:

I had 2 loans from my 401K plan.  My department was contracted out to another employer.  I had to repay my loans, with my 401K money before they rolled over my money into another 401K (different company).  I entered all the information correctly from the 1099R on my 2015 taxes, now the IRS has come back and states that I owe them money.  They are stating "early distribution".  Please help!

Angie

Hi Angie,

It sounds like what happened here is what is known as a  loan offset.  The loan has been repaid by a reduction of your vested account balance.  This offset is treated like an actual distribution from your account, which means that it is included in your gross income.  If you take a distribution prior to attaining age 59 1/2, a 10% penalty may apply for an "early distribution".

Since the offset is treated as a distribution, and you are not yet 59 1/2 (my assumption based on the original post), you owe a 10% penalty on the offset amount.  

I hope that helps.

 

[Bird]

Quote

It sounds like what happened here is what is known as a  loan offset. 

Likely correct, but let's not ignore the possibility of a screw-up/bad reporting.

You say "I had to repay my loans" - did you actually write a check and pay them off, or did they just reduce your rollover by the amount of the outstanding loans?  If you wrote a check, then something is wrong with the reporting...I'm not sure how someone could mess that up but you never know.  If they just wiped out the loans then yes, they are treated as an effective taxable distribution (remember that you did get cash when you took out the loans) and would be subject to the penalty if you are under age 59 1/2.

[401king]

16 hours ago, angie.jackson@bmhcc.org said:

I had to repay my loans, with my 401K money

Maybe you can elaborate on this. Did you take money out of your 401(k) to pay the loans back? 

[RatherBeGolfing]

2 minutes ago, 401king said:

Maybe you can elaborate on this. Did you take money out of your 401(k) to pay the loans back? 

The end result would be the same as an offset.  Both taxable and subject to the 10% penalty

[QDROphile]

One thing can be determined for sure.  You got screwed by your former employer and your new employer.  You should have been allowed to roll over the loans and maintain them in accordance with the original expectations .  It was not a legal right, but it could have been provided for by your employers who did not give you much consideration.  They just did not want the bother.  Spread the word among the transferred employees.  Anyone with a loan got the shaft the same way you did.

[Belgarath]

LOTS of employers don't allow a loan to be rolled into their plan. I don't think this counts as "screwing" someone. But we can agree to disagree...

[RatherBeGolfing]

21 minutes ago, Belgarath said:

LOTS of employers don't allow a loan to be rolled into their plan. I don't think this counts as "screwing" someone. But we can agree to disagree...

Yea I see more plans (and platforms FWIW) that will not allow loans to be rolled over than plans that will accept loans.  It probably would have been nice to at least get the opportunity to pay it off with with outside money rather than trigger a taxable event and a 10% penalty though... 

[QDROphile]

The original employee benefit provided for loans and the employees relied on it for life planning. The loans could have been preserved and operated as intended after the corporate transaction, but the employers did not think enough of the affected employees to go out of the way to avoid the adverse effects of pulling the rug out.  Just because a lot of employers do the wrong thing does not make it any less insulting.  Both the former and current employers  are at fault., and the affected employees ought to know where they stand in the eyes of the new employer.  Mostly they are ignorant and do not realize the the new employer made a choice that affected them adversely and "LOTS of employers" rely on the ignorance to duck the criticism they richly deserve.  And we can agree to disagree, but it would be best to take positions based on full knowledge by all involved.

[Belgarath]

You take the high road, and I'll take the low road.

[RatherBeGolfing]

I'll take the road where many of my plans do not include ANY loans.

[QDROphile]

Class warrior; can't be helped.  I am not always successful in getting the optimal result, but I have had the privilege of working mostly with enlightened and caring clients.

I also recommend against plan loans, but I get the proposition that people will be more likely to save if they think the funds do not become totally inaccessible in the short run.

[RatherBeGolfing]

2 minutes ago, QDROphile said:

Class warrior; can't be helped.  I am not always successful in getting the optimal result, but I have had the privilege of working mostly with enlightened and caring clients.

I also recommend against plan loans, but I get the proposition that people will be more likely to save if they think the funds do not become totally inaccessible in the short run.

Agree to disagree.  Some of my most enlightened and caring clients realize that their plan is probably the only savings their employees will have in addition to SS, so they limit withdrawals to death, disability, and termination of employment.