5329 exception

[Jan S]

A new client had an $11,000 loan from his 401k. The business was sold before he repaid the loan. The old 401k plan ceased to exist and he was not allowed to repay the money. He received a 1099R with a box 7 code =1. Is there a way for him to avoid the 10% penalty? Can he write a letter and request a waiver?

[taxmom34]

the 401k that my husband had would limit a member on how much he can take as a loan. it was a low percentage of what he actually had in the 401k, soo , my question is what happened to the monies he had in that account.? I don't think even with sale of a business that a 401k becomes non existant. there must be federal laws to protect the employee. maybe things have changed since this happened to us (it was about 18 years ago)

[New York Enrolled Agent]

A new client had an $11,000 loan from his 401k. The business was sold before he repaid the loan. The old 401k plan ceased to exist and he was not allowed to repay the money. He received a 1099R with a box 7 code =1. Is there a way for him to avoid the 10% penalty? Can he write a letter and request a waiver?

You apparently have a deemed distribution. I cannot speak to the particulars of your taxpayer and whether he had an opportunity to satisfy the loan but you should read the income tax regulations at §1.72(p)-1. Q&A 11 does indicate a deemed distribution falls under the provisions of §72(t) and the 10% penalty.