The IRS Form 1099-R for 1997 includes a new distribution code for reporting certain taxable amounts relating to plan loans. This new code comes into play in case of a "deemed distribution" that results when a participant defaults on a plan loan or the loan fails to meet the Internal Revenue Code section 72(p) requirements for a nontaxable plan loan. When a deemed distribution occurs, usually as a result of an employee's failure to make timely loan payments, the principal balance and accrued-but-unpaid interest become taxable and must be reported on a 1099-R, separately from any other reportable amounts.
The new code, which should be reported in Box 7, is the capital letter "L." This code should only be used for a deemed distribution, which is a taxable event that occurs before the plan participant may receive a distribution of his or her entire plan benefit. The new code should not be used for an "offset distribution" that results when a loan becomes a taxable distribution upon termination of employment.