Plan loan offset, rollover of net funds, repayment of plan loan

I am in an employer 401(k) plan and borrowed money from the plan. I had $250,000 in plan, took a $25,000 loan and later prior to making any payments I changed jobs. I did not repay the loan and it was offset against the plan assets, the net amount of $225,000 was rolled into a new employers 401(k). I received a Form 1099 showing the net rollover amount which was coded 'G'. I also received a Form 1099 for $25,000 as both the distribution amount and the taxable amount, meaning the loan is now taxable to me in 2019. I understand that I have until the due date of my 2019 Form 1040, including extensions to come up with $25,000 and put it into the new plan or into an IRA so in effect the entire $250,000 would be deemed rolled over and no taxable income would result since all of the plan had been rolled over.

My broker said I could take another loan from the new 401(k) plan(which received the net amount of $225,000)for $25,000 and put that $25,000 into another 'Rollover IRA' and that would qualify as a repayment of the loan or would be considered as part of the original rollover preventing tax due on the plan loan.

This does not seem correct as the original plan loan was not repaid, the plan was not put back into it's original position of $250,000, the 2nd $25,000 was borrowed from the net rollover and the net rollover is pretax income which I read cannot be used to repay a plan loan.

May I hear from those who have any thoughts on this situation, if it will be considered as a complete rollover, even if the $25,000 came form the pre-tax net rollover funds?

Thanks for your help.

Jay

You never made loan repayments, but it wasn’t in default prior to termination, correct?  The other loan from the new 401(k) plan needs to be repaid, so I’m not sure there is an issue.  Maybe it’s the late hour and I’m missing something.  I would make sure the Form 1099-R has a Code M - qualified loan offset the ensure extra time to put the $25,000 into an IRA to avoid becoming a taxable distribution.  

Thank you Madison 71 - yes the 1099 has a Code M2 for Loan offset with no penalty - the loan was not in default. My issue is that now the value of the 2nd 401(k) account is $225,000 instead of the original $250,000. The value of the original account was $250,000 before the loan, but the loan was not repaid prior to rollover and only $225,00 was rolled into the 2nd 401(k). Then the broker said to take another $25,000 loan from the 2nd 401(k) further reducing the account to $200,000 and using that 2nd loan to put into another rollover IRA as part of the original loan offset rollover. So the actual value of the new account is now $200,000 plus the loan value of $25,000 for a total value of $225,000 which is $25,000 less than the original 401(K) - isn't this difference going to be taxable? Seems like the end result after all rollovers and loans would a total 401(k) including the loan in the total amount of $250,000. Also it is my understanding that the loan if it was repaid or deemed rolled over by putting $25,000 into a rollover IRA or into the 2nd plan, the money had to come from another after tax source. In this case the money is coming out of the rolled over funds of $225,000 which is pre-tax money which I read could not be used to payoff or used as an eligible rollover amount to satisfy the loan offset amount. Sorry for using bold print but I want to emphasize the after tax and pre-tax issue)

Seems that the broker method only redistributed the net rollover of $225,000 into 2 different accounts still equal to $225.000 without any outside cash to reinstate the true value of $250,000?

My broker says this is ok, my accountant(s) say there is a taxable income of $25,000 due to the pre-tax money from the 2nd 401(k) used as part of the rollover, I don't at this time know who is correct.

Thanks

The numbers add up; see below.  Once money is borrowed from a 401(k) it is just money; I don't see why it couldn't be used to create a rollover IRA unless I'm missing something in the regs, which I did not review for this discussion.  If your accountant has a cite for why this can't be done he should share it.

401k value before distribution:

$225K invested

$25K loan

$250K total

401k and IRA values after distribution and new loan:

$200K invested in 401k

$25K 401k loan

$25K IRA

$250K total

I agree with Bird - it should be fine unless I am missing something as well

I'll join the chorus. This seems totally fine. As long as your new plan allows for loans.

Thanks Bird and Madison71 and Lou S - Bird says 'Once money is borrowed from a 401(k) it is just money', implying it is no longer pre-tax money - the CPA is saying the $25,000 loan from the rolled over amount is using 'pre-tax' money which cannot be used to repay the loan or used as part of the rollover, I read this same explanation when researching repayment of a plan loan which has to be repaid using after tax money, such as a payroll deduction of the payments after tax has been calculated on the earned income from salary. It seems to boil down to the interpretation of what is pre-tax money and does the character of money change when it is borrowed. 

If borrowed money regardless of the source is 'just money' then I agree with Birds(and others) conclusion.

Thanks

The loan from the second plan is a loan, not a taxable distribution. The participant can use loan proceeds for whatever he/she wants (unless the plan restricts purposes).  The loan has to be repaid while you are employed by your second/new employer, or it becomes taxable.  You would not be able to get a loan from an IRA. 

As long as you make the "rollover" , in total, equal to the total amount distributed (including the loan) from Plan #1, as reported on the two 1099R's you received (and file the correct tax documents in the correct time frame) it is permissible. This is an enhancement available as a result of the 2017 Tax Cuts and Jobs Act.  

Follow-up question on this scenario (facing one myself) -- is loan offset amount rolled over into an IRA considered a deductible or non-deductible IRA contribution?  Goes back to the bolded language by the initial poster that the loan offset rolled into the IRA would be done so with after-tax money, if there's no second loan from the second 401k as in his situation and the loan offset is funded with cash.  

I can see reasoning for both -- the loan offset being rolled over into IRA is paid for with after-tax money, but at the same time the initial 401k contribution that allowed for the loan was pre-tax.  Which takes precedence? 

If you are talking about a loan offset where the participant (you?) rolled an equivalent amount of money to an IRA, it is just that - a rollover.  It is pre-tax money once it is in the IRA.

Bird, yes, I'm talking a loan offset where the participant rolled an equivalent amount of money to an IRA. My uncertainty was because the "equivalent amount" (loan offset) was funded with (after-tax) cash. But I get your point that it's still a rollover. Thanks for clarifying.