"Participant in her 40's terminated in 2017 with an outstanding loan in an ongoing 401(k) pPlan. She continued to make loan payments and was current with repayments when she elected to receive a distribution from the plan in the form of rollover to her traditional IRA in October 2020. The total amount of her distribution, i.e., her total account balance, was offset by the outstanding loan balance, and the remaining amount was rolled over to her IRA.

Two 2020 Forms 1099-R were issued in January 2021. The rolled over amount was reported on one 1099-R with $0 taxable in Box 2 and distribution code G in Box 7. The other 1099-R reported the loan offset amount as taxable in Box 2 and used distribution code 1L in Box 7.

The participant is now asking for the plan sponsor to issue a corrected 1099-R for the loan offset using distribution code 1M to indicate that the offset was a Qualified Plan Loan Offset (QPLO). She wants to avoid the early distribution penalty on her tax return. No withholding was deposited for either the loan offset amount or the rollover amount.

Side note: the 401(k) plan did not allow for Coronavirus Related Distributions (CRD) or Coronavirus Related Loans (CRL) in 2020.

I read up on QPLO requirements, but have not seen an example similar to this situation. Yes, the participant was current with the terms of the loan, but the offset occurred well after 12 months from her severance from employment date. Did this loan offset qualify to be a QPLO and reported using the 1M distribution code?"