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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 2608
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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I was on medical leave due to a stroke from April 2014

Customer Question

I was on medical leave due to a stroke from April 2014 through March 2015
JA: The Accountant will know how to help. Please tell me more, so we can help you best.
Customer: I always carry a 401k loan, its steady re investment to my plan
JA: Is there anything else the Accountant should be aware of?
Customer: When I returned to work, my payments resumed with not changes.
JA: OK. Got it. I'm sending you to a secure page on JustAnswer so you can place the $5 fully-refundable deposit now. While you're filling out that form, I'll tell the Accountant about your situation and then connect you two.
Submitted: 1 year ago.
Category: Finance
Expert:  emc011075 replied 1 year ago.

Hi. My name is ***** ***** I will be happy to help you.

How can I help you? What's your question?

Customer: replied 1 year ago.
Hi Eva, I was sent a tax bill for 11,000 saying that I had defaulted my 401k loan upon returning to work.
Expert:  emc011075 replied 1 year ago.

Who sent you the bill? The IRS or your 401K plan administrator?

Customer: replied 1 year ago.
the IRS. I always carry a 401k loan to re invest at a rate greater than current CD's etc... When I returned to work, I did not receive any instructions otherwise and resumed paying off my 401k loan at the same rate as before my leave. The IRS is taxing me on $22,000 of the defaulted loan for the year 2014. I was on leave from april 13 2014 until march 27 2015 yet they are taxing me for 2014 alone
Customer: replied 1 year ago.
Adding to the issue is the fact that I paid off the loan in full February 2016.
Customer: replied 1 year ago.
My questions are: How can I be considered in default of a loan when I am actively paying it off? Why didn't alarms go off at JP Morgan when I paid back the "defaulted" loan in full? Why did they send a 1099 form to the IRS for the tax year 2014 when I hadn't even returned to work until march of 2015?
Expert:  emc011075 replied 1 year ago.

If you defaulted on your loan (you have 5 years to pay it off), the loan was treated as distribution. Your plan administrator issued you 1099R and sent a copy to IRS. That's the reason why you received the IRS notice with the balance due. You will have to contact JP Morgan to sort it out. Maybe there's still a balance outstanding.

Expert:  emc011075 replied 1 year ago.

IRS dislike loans from 401K and doesn't allow any special treatment. When you leave your employer for any reason or stop making payments for any reason, you usually have 60 days before the loan is treated as distribution and reported to IRS as income.

Customer: replied 1 year ago.
Nope, no balance, I paid it in full 2/2016
Customer: replied 1 year ago.
re-upped for a separate 401k loan shortly thereafter
Expert:  emc011075 replied 1 year ago.

You have to start with JP Morgan. If the loan was discharged as distribution in 2014 and than paid off in 2016, JP Morgan need to issue you corrected 1099R. If JP Morgan reported the loan as distribution, they need to correct the reporting. You will not be able to argue with the IRS if JP Morgan is reported is as distribution.

Expert:  emc011075 replied 1 year ago.

When you take a loan from your 401K, your statement will show outstanding balance until paid off, regardless if the loan as already reported as distribution or not.

You have couple of options here:

1. You can somehow convince the JP Morgan to issue you a corrected 1099R (which is not likely) OR

2. make sure that the repaid balance will not show up on your future 1099R as taxable.

Unless proving otherwise, the IRS will treat the loan as distribution and the repayment of the loan will not change it. The IRS has strict rules how 401K loans must be treated and will not allow any exceptions. JP Morgan is your best hope.

Expert:  emc011075 replied 1 year ago.

I see you read my respond. Do you have any questions? Is there anything else I can help you with today?