1099-R Code 1M: Loan Offset Rollover and 10% Penalty

Code 1M on Form 1099-R means your 401(k) or similar employer plan treated an unpaid loan balance as a distribution because you left the job or the plan ended, and you were under 59½ when it happened. The “1” marks it as an early distribution with no exception applied by the plan. The “M” identifies it as a qualified plan loan offset, which carries a longer rollover window than an ordinary loan offset. Without action, you owe ordinary income tax on the amount in Box 1 plus a 10% early-distribution penalty.

What the Two Codes Say

Box 7 of Form 1099-R can hold up to two distribution codes, and each one does separate work.

Code 1 is “early distribution, no known exception.” The plan administrator uses it when you took a distribution before age 59½ and the plan did not verify whether a statutory exception to the 10% penalty applies.¹ It does not mean no exception exists. It means the burden of claiming one is on you.

Code M is “qualified plan loan offset.” The IRS defines this as a loan offset caused specifically by your separation from service or by termination of the plan.¹ That distinction matters because the rollover deadline is longer than for a standard loan offset.

Put together, 1M says: you had an outstanding plan loan, you lost your job or the plan shut down, the plan canceled the loan by reducing your account balance, and you were under 59½ when it happened.

What Triggers a Qualified Plan Loan Offset

Most 401(k), 403(b), and governmental 457(b) plans let participants borrow against their account. You repay through payroll deductions, and nothing taxable happens as long as you stay employed and current. The problem starts when you separate from the employer or the plan terminates while a balance is still outstanding.

At that point the plan typically demands repayment of the remaining balance within a short window. If you cannot repay, the plan offsets your account by the unpaid amount. That offset is a distribution for tax purposes even though no check ever lands in your hand. The plan reports the offset amount in Box 1 of Form 1099-R.¹

Job loss is the most common trigger. Plan termination is the other. A quieter variation shows up during corporate reorganizations: if a new plan does not accept the loan transfer, the old plan offsets the balance and codes it 1M.

What You Actually Owe

Two tax hits travel with Code 1M. The offset amount is ordinary income. On a $20,000 offset at a 22% marginal rate, that is $4,400 in federal income tax.

Because the distribution is early, the 10% additional tax under 26 U.S.C. § 72(t) also applies to the portion included in your gross income.² On that same $20,000, the penalty is $2,000. The combined bill can clear $6,000 on a distribution you never asked for.

Section 72(t)(2) lists exceptions to the 10% penalty, including distributions after separation from service in the year you reach age 55, certain medical expenses, and qualified domestic relations orders, among others.² If one of these fits your facts, you claim it on Form 5329 regardless of the “1” on the 1099-R.

The Rollover Window That Fixes the Problem

This is where the “M” earns its place. An ordinary plan loan offset gives you 60 days to roll the amount into an IRA or another eligible retirement plan. A qualified plan loan offset gives you much longer. Under the rule added by the Tax Cuts and Jobs Act of 2017, you have until the due date of your federal income tax return for the year of the offset, including extensions, to contribute the offset amount to an eligible retirement plan or IRA. For most people that is April 15 of the following year, or October 15 if you file an extension.

If you contribute the full offset amount by the deadline, the distribution is not taxable and the 10% penalty does not apply.

You do not need to use the same dollars. The money can come from savings, a bonus, a loan from a relative, anywhere. What counts is that the amount you deposit into the receiving plan or IRA equals the amount in Box 1. A partial rollover works too: only the portion you fail to roll over stays taxable.

The rollover contribution does not count against your annual IRA contribution limit, because it is treated as a rollover rather than a new contribution.³

If you cannot gather the funds by April 15, file Form 4868 for an automatic extension. The rollover deadline moves with the return deadline, giving you until October 15.

Reporting Code 1M on Your Return

Employer plan distributions go on Lines 5a and 5b of Form 1040. Line 5a is the gross distribution from Box 1. Line 5b is the taxable portion.⁴

If you rolled over the full offset amount within the deadline, enter the gross distribution on Line 5a and zero on Line 5b, and indicate the rollover. Starting with the 2025 tax year, Line 5c on Form 1040 provides dedicated checkboxes and entry spaces for the codes and explanations that used to be written in the margin.⁴

If you rolled over nothing, the full Box 1 amount goes on both Line 5a and Line 5b, and you address the 10% penalty on Form 5329.⁵

For a partial rollover, Line 5a still shows the full gross distribution. Line 5b shows only the portion you did not roll over. The 10% penalty applies to that taxable portion unless an exception covers it.

Claiming an Exception to the 10% Penalty

If the distribution is taxable but you qualify for a § 72(t) exception, Form 5329 is where you claim it. You enter the distribution amount, identify the applicable exception number from the form’s instructions, and subtract the excepted amount from the penalty calculation. The classic case: if you were 55 or older in the year you separated from service, the age-55 exception under § 72(t)(2)(A)(v) can eliminate the penalty entirely, even though the plan still coded the distribution with a “1.”²

If the Code on Your 1099-R Looks Wrong

A plan sometimes reports Code 1 without the M, which costs you the extended rollover window on paper, or picks the wrong distribution code entirely. Contact the plan administrator first and ask for a corrected form. If a corrected form has not arrived by the end of February, you can call the IRS at 800-829-1040, and the agency will contact the payer. If a deadline is pressing, the IRS can provide Form 4852 to use as a substitute while you wait.⁶

Code M Is Not an IRA Recharacterization Code

If you were researching Code M expecting it to involve an IRA contribution recharacterization, those use different codes entirely. A recharacterization of a prior-year contribution uses Code R; a same-year recharacterization uses Code N.¹ Roth conversion recharacterizations have been prohibited since 2018; only regular IRA contributions can still be recharacterized.⁷ Code M applies only to plan loan offsets.

1
Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
2
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
3
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026; IRA Limit Increases to $7,500
4
Internal Revenue Service. Instructions for Form 1040
5
Internal Revenue Service. 2025 Instructions for Form 5329
6
Internal Revenue Service. Topic No. 154, Form W-2 and Form 1099-R (What to Do if Incorrect or Not Received)
7
Internal Revenue Service. Retirement Plans FAQs Regarding IRAs