I left a company where I had an outstanding loan through my 401(k) and did not pay the loan back. How do I report this on my Form 1040?

You should receive a Form 1099-R reporting the outstanding loan as a distribution from the 401(k) plan. This income is reported as ordinary income on Form 1040. If you are under the age of 59 1/2, you are also subject to a 10 percent additional tax on early distributions from qualified retirement plans unless you qualify for an exception listed in Publication 575, Pension and Annuity Income. If you are subject to the 10 percent additional tax on early distributions from qualified retirement plans you may also need to file Form 5329 (PDF), Additional Taxes on Qualified Plans (including IRA's), and other tax-favored accounts. Refer to Form 5329 Instructions for more information.

References:

• Form 1040, U.S. Individual Income Tax Return
• Publication 575, Pension and Annuity Income
• Form 5329 (PDF), Additional Taxes on Qualified Plans (including IRA's), and other tax-favored accounts
• Form 5329 Instructions, Additional Taxes on Qualified Plans (including IRA's), and other tax-favored accounts
• Tax Topic 558, Tax on early distributions from retirement plans
• Tax Topic 412, Lump-sum distributions

My understanding is that if I am over age 55 and default on a loan through my 401(k) plan when leaving the company, the 10% penalty is forgiven. Can you confirm that for me?

If you default on a loan from your 401(k) plan, you are considered to have received a distribution from your 401(k) plan. Whether or not you will have to pay the 10 percent additional tax on early distributions from 401(k) plan depends on a number of factors, including your age.

In order to avoid the 10 percent additional tax on early distributions from qualified retirement plans, the following all must be true:

• you received the distribution after you left the company; and
• you left the company during or after the calendar year in which you reached age 55; and
• your departure from the company qualifies as a separation from service.

In addition, you may avoid the 10 percent additional tax if you meet one of the other exceptions shown in Publication 560, Retirement Plans for Small Business, and Publication 575, Pension and Annuity Income.

References:

• Publication 560, Retirement Plans for Small Business
• Publication 575, Pension and Annuity Income
• Tax Topic 558, Tax on Early Distributions From Retirement Plans