IS DISTRIBUTION CODE 1-M NOT SUBJECT TOTHE 10% PENALTY

1M is actually two codes. 1 triggers the penalty and M just explains the reason for the distribution, i.e. termination of employment.

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Plan loan offsets. If a participant's accrued benefit is reduced (offset) to repay a loan, the amount of the account balance that is offset against the loan is an actual distribution. Report it as you would any other actual distribution. Do not enter Code L in box 7.
A qualified plan loan offset amount is the amount that a participant's account balance is reduced to repay the outstanding amount of a plan loan. In order to be a qualified plan loan offset, the loan, at the time of the offset, must be a loan in good standing and the offset must be solely by reason of (1) the termination of the qualified employer plan or (2) the failure to meet the repayment terms because the employee had a severance from employment. Report a qualified plan loan offset as you would any other actual distribution. In addition, enter Code M in box 7.

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From the instructions for 1099-R