401(k) Loan
401(k) owner took out a loan several years ago. 401(k) owner had been paying on the loan through payroll deductions. Owner died with an existing loan balance on the 401(k). Custodian distributed 401(k) according to beneficiary designation to non-spouse beneficiary without paying off the loan first. Custodian issued 1099R in the name and SSN of the deceased owner 2 years after the owner died. The amount listed as gross distribution and taxable amount on the 1099R is the same amount of loan balance. Custodian is reporting this as a taxable distribution claiming that the loan was forgiven (i.e., written off). The code in box 7 is “M” which is a qualified plan loan offset. Owner’s estate has been closed. How should the executor handle the 1099R in the name and SSN of the deceased person since the deceased person’s estate has been closed, a final tax return was filed for the deceased last year, and there are no assets remaining in the estate?
Permalink Submitted by Alan - IRA critic on Tue, 2024-02-06 21:13
I assume the non spouse beneficiary did a direct rollover of the plan balance net of the loan offset. The offset amount should have been reported on a 1099R to the estate of the deceased participant (not to the participant) in January following the year of death. It’s not clear why the 1099R was so late and why it was not issued to the estate unless perhaps the plan was not able to determine the estate EIN. What is the year of the 1099R? The IRS may or may not pursue the late income tax from the decedent’s estate, since the executor was responsible for seeing that the decedent’s final tax return and the estate tax return (if necessary) was filed. The amount of the offset distribution will probably be considered by the IRS when determining whether to pursue reporting of this 1099R.
Permalink Submitted by Eddie Holland on Tue, 2024-02-06 22:34
Yes, the non spouse beneficiary did a direct rollover. However, I don’t think the custodian deducted any amount for the loan. The beneficiary was told that the custodian “wrote off” the loan presumably as uncollectible debt. The deceased died in 2022 and the 1099R is for the 2023 tax year (receivied in early 2024). The executor filed a final tax return for the deceased in 2023 (for the 2022 tax year) and no estate tax return was filed. The executor had no idea that there was an outstanding 401(k) until the 1099R was received several days ago. The executor is trying to determine if they need to file another “final” return to report this income or simply wait to see if the IRS sends a letter requesting the income be reported on the deceased’s return.