403(b) loan turned into distribution

[Sparky]

I cannot find anything specific but if an employee was under 59-1/2 when they took a loan on their 403(b), but now is 61 when she defaulted and it turned into a distribution, they 10% penalty would be waved. Right?

[BP.]

I've just run into the same situation on a 401K. The 1099R has just the code "L".

[kathyc2]

I believe the penalty will be determined by his age at the time of default.

"A-10: (a)Timing of deemed distribution. Failure to make any installment payment when due in accordance with the terms of the loan violates section 72(p)(2)(C) and, accordingly, results in a deemed distribution at the time of such failure."

https://www.law.cornell.edu/cfr/text/26/1.72(p)-1

[Nashville]

No penalty

Kathy yes, Burke no on this one. No attention whatsoever is given to the loan from the standpoint of a distribution. A default is deemed as a distribution and the event is date sensitive. The same thing can occur even if the debt is currently being paid and the employee is terminated.

[BP.]

Thank you so much, kathyc2 & Nashville!

[Burke]

Kathy yes, Burke no on this one. No attention whatsoever is given to the loan from the standpoint of a distribution. A default is deemed as a distribution and the event is date sensitive. The same thing can occur even if the debt is currently being paid and the employee is terminated.

That is what I meant -- distribution is a taxable event when it is considered a "deemed distribution." I did not mean when the loan was first taken out. Sorry, I wasn't clearer. I was wrong on the code number.