We borrowed money from my wife's 403B ...20K and the agent told us that it had to be paid back in 5 years. He also stated that the monies would be with drawn from her monthly pay check automatically. She still works for the same employer but the money was never taken out. We have paid back more than half on the orginal (within the 5 years) but since the money was not taken out, we recieved a 1099 for all 20K . Now we are getting hit with a huge penalty, just when we were getting ready to pay off the last half. Again before the five years are up. Is there anyway to get the IRS to reverse this to a loan instead of an early distribution. The company is continuing to charge us interest and maintainance fees like it is a loan.

“We borrowed money from my wife's 403B ...20K and the agent told us that it had to be paid back in 5 years. He also stated that the monies would be with drawn from her monthly pay check automatically. She still works for the same employer but the money was never taken out. We have paid back more than half on the orginal (within the 5 years) but since the money was not taken out, we recieved a 1099 for all 20K . Now we are getting hit with a huge penalty, just when we were getting ready to pay off the last half.”--->The Tax-Deferred 403(b) Plan Loan Program provides you with access to your 403(b) Plan money before retirement. And because the money is borrowed rather than withdrawn, it isn’t subject to income taxes or early distribution penalties. The balance generally has to be repaid within 5 years and will be subject to a 10% penalty if left unpaid. if she’s layed off, then she MUST pay the loan in full or it’s considered default and taxed.; you took out a loan from your 403b and your employer messed up and havn’t deducted the payments from your check and you may have 3 options you can take:Lump sum re-payment of all missed payments; re-amortization of outstanding balance; default, 1099-R is sent to you.As you you received 1099R, the loan is NOT s considered to be outstanding. I guess you need to contact your agent.
“Again before the five years are up. Is there anyway to get the IRS to reverse this to a loan instead of an early distribution.”---> If a 403b participant defaults on payment of a 5 year loan and a 1099 is issued at the end of that tax year, the loan is NOT s considered to be outstanding. The plan may handle this as either a deemed distribution (1099R coded with an "L") or an offset distribution. Either way, the defaulted loan is taxable and subject to early withdrawal, but there will be no option to actually repay the loan.In general, amounts received by an employee as a distribution from a 403(b) account are taxable as ordinary income to the employee. If the distribution occurs when the employee is under age 59.5, the amount is subject to a 10% early-distribution penalty, unless the employee qualifies for an exception.
“The company is continuing to charge us interest and maintainance fees like it is a loan.”-->As said above; so you need to contact your agent or the company. The bottomline: if you take out a loan from your 403(b), then you’ll have to repay it within 5 years. If you default on the loan payments, the unpaid balance will be treated as an early distribution from your 403(b) and you'll be liable for paying 10% penalty.