45 year old client worked for kodak, and as he stated they declared bankruptcy in 2012. He was paying back, thru payroll deductions, a 401k loan. When bankruptcy was declared, they called the 401k loan due. Client owed $23k which he was unable to pay back. He was issued a 1099r for the $23k, with the distribution code 1, which calls for the 10% penalty. Due to the bankruptcy of the company, could there be any relief from the 10% penalty ? Thanks,
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I think he's cooked.
I think your client is cooked. They have declared the unpaid amount of loan as income because there is nothing left in the account to defer. (Or even if there is, it is only "above and beyond" the amount of unpaid loan).
If you have any influence over clients, tell them they should NEVER borrow against a retirement account - for more reasons than one. -
Hmmm ... sounds fishy to me. 401(k) funds are held in trust by an independent trustee, aren't they? Even with Kodak's Chapter 11 bankruptcy status, I don't see how the 401(k) trustee could call your client's loan. Do you think he is telling you the whole truth? I suspect he is not. Have you actually seen the 1099-R form? Does Box 7 just have Code 1 in it, or is it Codes 1, L? Even if the Kodak 401(k) trustee was terminated, all the funds should have been transferred to another trustee, and any outstanding participant loans should have retained their status quo.
If the facts are really as you say, then there might be some relief available. But he would certainly have to resume making payments, including catch-up payments, within a reasonable time.
Btw, unless the $23k can somehow be reversed out in whole or in part, then it is not only subject to the 10% penalty but to regular income taxation as well.Roland Slugg
"I do what I can."Comment
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Yes, I saw the 1099R and it states distribution code 1. Looks legit. I agree, no question it is subject to ordinary tax.Comment
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