1099-R 401k Loan Offset - After Termination

[Veneia Michelle]

Hello Community,

My client provided my with a 1099-R and an EFT Statement (2 pages) from Prudential Tax Services that shows a breakdown of a payout to her after she terminated from her employer and drew down her remaining 401k but had a loan offset amount due that the reduced the gross disbursement by.  Now her gross payment less the loan offset amount less federal taxes withheld gave her the Federal Taxable Portion of the Disbursement according to the Prudential EFT statement.  Now the 1099R the provided to her has the 401k loan offset amount in Box 1 and Box 2a.  The code in Box 7 is M2 and there is no amount in Box 4 (Federal Income Tax Withheld). This caused her to be in a liability situation and she swore based on the statement she gave me a copy of, which does indicate federal taxes withheld off of her distribution, but the 1099R only shows the 401k offset amount.  When my client contacted Prudential Tax Services, they told her I am to take the federal tax amount withheld per the EFT statement into account when doing her return.  I have never been faced with anything like this before, as I always go by the 1099R.  What should I do?  Thanks for any insight you can provide.

[qbteachmt]

Well, I found that all a bit hard to follow, but this part: "that the reduced the gross disbursement by." seems wrong. Terminating without repaying a loan is the same as being given that amount as distribution now, then turning around and using it to repay the loan. So, it reduces Net, not Gross.

Perhaps there are two 1099-R for this person: the loan offset (with appropriate codes and amounts) and then their Lump Sum Distribution?

"This caused her to be in a liability situation" Well, no one can withhold on a repayment amount. She already got the payout when she took it as a loan. They would not gross up the loan repayment to account for withholding, and then take withholding. Is that what you tried to describe?

You should have something along the lines of:

Gross distribution would be Everything, according to this storyline.

Subtract loan offset

= amount to be withheld against if she took possession of the funds, subtract from Gross = net to her hand.

Try finding the details and put them in order.

[Veneia Michelle]

Thanks, I've asked my client if she was sent another 1099-R reflecting her federally taxable portion of the disbursement and the federal tax withholding indicated on the statement Prudential provided.  Maybe she just didn't realize there were two when she logged in to print off what she provided to me.

Thanks again.