AnmarieA
Level 4

My client who is a school teacher took a loan in the amount of $23K from their 403b plan in June 2022 and then left the company before the loan payments commenced via payroll deduction. The plan administrator issued the taxpayer 2 1099-Rs for this loan default in 2022, one for the amount of the withdrawn/loan from the taxpayer's 403b account for $23K which had the same amount in Box 1 and 2 on the 1099 with a distribution code of 1 (early distribution) and the second1099-R was for $23K in Box 1 and a lessor amount of $14K in Box 2 and the 1099-R had a distribution code of L (Loan default). My client is 30 years old and worked for this employer since 2016 and all his contributions were pre-tax and fully vested. No payments were ever made on the loan hence 100% of the distribution should be taxable. The plan administrator indicated that this was a special loan and that is why 2 1099-Rs were received and the $14K above the loan represented the "adjusted tax basis" which does not make sense as it relates to a 403b account. I have been corresponding with the plan administrator and they believe that the amounts are correct and will not correct the 1099-R for solely the defaulted loan amount. 

My question is why would more than 100% of the loan amount be taxable? The balance in the 403b account was transferred in 2024 to the client's new plan administrator and it did not indicate that a portion of the balance ($14K) be a non taxable future withdrawal. 

I contacted the IRS and they never heard of such a thing where a taxpayer would receive 2 1099-Rs from the same account for an amount over and above the defaulted loan amount. They indicated that the only way to fix this issue is having the plan administrator correct the 1099-R which they refuse to do. 

Can someone help shed some light on this matter or provide explanation as to why there should be an adjusted tax basis on a 403b account and in what circumstance would someone be taxed for an amount greater than the distribution from the deferred plan?

Thanks for any assistance you can provide.