Client had an outstanding 401(k) loan when they terminated employment in December 2022.  The plan allowed them to continue to make payments on the loan until fall 2023.  At that point, the former employer transitioned their 401(k) plan to a new brokerage firm.  Client received notification (that she says she never saw) via email in fall 2023 that she would no longer be allowed to make payments on the loan and she needed to pay the full outstanding loan balance back within 60 days or it would go into default.  She did not pay the loan back because she didn’t see the notification of this.  She received a 2023 Form 1099-R reporting the full amount of the unpaid loan as taxable income with Box 7 marked with code 1 and code M.  We prepared her 2023 tax return for extension and I was not aware of the full back story at that point (about the loan going into default).  I just saw the code M on the 1099-R and thought she may be able to pay back the loan via a rollover by the extended due date of her 2023 tax return.   She talked with the 401(k) company and they basically said she’s out of luck since she technically defaulted on the loan and she doesn’t have the option to pay it back at this point.

I guess it’s besides the point but if they are saying she defaulted on the loan – shouldn’t the 1099-R she received be marked as a code L deemed distribution rather than a code M qualified loan plan offset?  Also, she feels that she wasn’t properly notified when her employer transferred the plan to the new brokerage which started the clock for her needing to pay back the loan.  I’m looking at the 60-day waiver rules but I’m guessing she’s not going to qualify for that.  Is there anything else she can do at this point to either pay back some or all of the 401(k) loan and/or minimize the consequences of this?