Sure sounds like your client is going to be paying a penalty with that code.

WHEN I ENTER CODE 1M  THE PROGRAM DOES NOT AD IN THE 10% PENALTY, IS THIS CORRECT

This whole code M thing started last year, I still dont quite understand it. 

M - Qualified Loan Offset, does the M mean theyre still paying on the loan ? 

If they defaulted on the loan then I would expect it to be a Code L

1M is actually two codes. 1 triggers the penalty and M just explains the reason for the distribution, i.e. termination of employment.

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Plan loan offsets. If a participant's accrued benefit is reduced (offset) to repay a loan, the amount of the account balance that is offset against the loan is an actual distribution. Report it as you would any other actual distribution. Do not enter Code L in box 7.
A qualified plan loan offset amount is the amount that a participant's account balance is reduced to repay the outstanding amount of a plan loan. In order to be a qualified plan loan offset, the loan, at the time of the offset, must be a loan in good standing and the offset must be solely by reason of (1) the termination of the qualified employer plan or (2) the failure to meet the repayment terms because the employee had a severance from employment. Report a qualified plan loan offset as you would any other actual distribution. In addition, enter Code M in box 7.

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From the instructions for 1099-R

So its the same thing as an L?

THE CONFUSION IS THAT WHEN I INDICATE CODE 1-M MY PROGRAM DOES NOT AD ON

THE 10% PENALTY

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@mickrhonda wrote:

THE CONFUSION IS THAT WHEN I INDICATE CODE 1-M MY PROGRAM DOES NOT AD ON

THE 10% PENALTY

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Is the person over 59 ½ years old?

My understanding is the L = violated the Loan terms, but M = plan/account discontinued or employment discontinued, so you have a rollover window for that Gross, to avoid it being a reportable taxable distribution.