The assets of Sold Company were sold to Purchasing Company. Most of Sold Company's employees were hired by Purchasing Company. Purchasing Company insisted that the Sold Profit-Sharing Plan be terminated. The participants could then elect to rollover their balance to Purchasing Company's qualified plan.

One participant had an outstanding loan. Purchasing Company continued to do the loan repayments through payroll and transmit them to the Sold Comany Plan. Purchasing Company and the plan trustee both ageed to accept the loan balance as part of the rollover once the Sold Plan was termianted.

The Payor for Sold Plan cut a check in the amount of the net account balance (Balance - Loan).

Purchasing Company then remitted the repayments to the Purchasing Plan.

It is now 1099-R time and the payor has issued 2 1099-Rs, one for the amount of the check with a code G and one for the amount of the loan with a code L.

The payor is insisting that the loan balance cannot be included as part of the rollover on the 1099-R. It must either be paid off or defaulted.

It seems to me that what we have here is an "In-kind" distribution and I can see no reason why it can't be included as part of the rollover 1099-R, but so far I have been unable to find anything in writing that says this is OK, probably because it is either (1) so obvious that no one has needed to address it or (2) so unusual that no one has though to address it.

Can anyone help?

Just my 2 cents worth -
The loan was rolled to the Purchasing Company's plan, loan payments continue to be made, etc. Ask the payor what basis they have for saying the loan was not part of the rollover and should be treated as a deemed distribution. Based on the information provided, you are right and they are wrong........ Although, if the plan document has language in it that says that termination of employment or plan termination triggers a loan default, then there may be a basis for what they are doing. Perhaps in their opinion the fact of the rollover cannot override that language in the document requiring the loan to go into default, although I would say this is certainly debatable, depending on the language.
Short of such language in the document, however, I say they are wrong and should reissue the 1099-Rs.

The loan should absolutely NOT be coded with an L. Code L is only used for deemed distributions, which are not eligible for rollover.

I do not think the loan should be reported at all. The 1099 instructions, R-3, Transfers, states



How would you report other direct trustee transfers?

I think there is a difference between a trust to trust to transfer, such as when plans are merged and a loan that part of a transaction which would otherwise be a Rollover.

The Payor is not the Trustee, just a directed Payor and they don't have a copy of the Plan, so that isn't an issue

I think I am just going to pull rank and tell them to change the L to an G.

Thanks for your help!

However, I would still be interested in any additional comments anyone may have.