401K Loan - Not Deducted From Distribution to Spouse. What Next?

My husband passed away this year (March 2021).

We owed $13,587.66 in 401K loans prior to his death.

His 401K servicing company did NOT deduct the loan amount from the distribution into my Spousal Beneficiary IRA. (In fact, *I* was the one who discovered the error, but did not notify the company.)

If they send us a 1099R, will I have to pay income tax AND an early withdrawal penalty on it?

Thank you in advance for your help!

Kat

If done properly, you would get two 1099-Rs, one for the (non-taxable) rollover and one for the distribution of the loan amount.  The loan distribution would be taxable but not subject to the penalty since it is due to death.  If you have enough cash you can roll over the taxable amount into your spousal IRA by the due date of your tax return and thereby avoid the tax.

If you're saying that the total account value, including the loan, was, say, $30,000, and they incorrectly rolled over $30,000 in cash...well, anything is possible, but I have to be honest and say I doubt that actually happened.  Unless it was a very small plan with a pooled investment fund and an accountant handling things.  I wouldn't want to speculate on the 1099 reporting in that case.