Before you roll overWhat a retirement account costs, and what it forbids

What happens to an unpaid 401(k) loan when I leave my job?

By Kaz · Published 28 September 2026 · How this site checks figures

Summary

If you can't pay it off, it comes out of your balance. "Plan sponsors may require an employee to repay the full outstanding balance of a loan if he or she terminates employment," and whatever is left unpaid is subtracted in what the IRS calls a plan loan offset. That offset counts as a taxable distribution unless you put the same amount into an IRA or another plan from your own pocket, and when the offset happens because you left, you have until your tax-return due date, extensions included, to do it.

The IRS example, step by step

The IRS gives a worked case. Employee A, age 60, has $10,000 in a plan, "of which $3,000 is invested in a plan loan." A leaves the job on June 15, 2020. The plan accelerates the loan and gives A 90 days to pay it off.

A doesn't. On September 18, 2020, the plan pays "$7,000 ($10,000 reduced by the $3,000 plan loan offset)" directly to another retirement plan. No withholding is required on the $3,000 offset. That $3,000 is now a distribution, and A can roll it over by putting $3,000 of other money into a retirement account by the due date of A's 2020 return, including extensions.

When the rest comes out as cash

Change one fact: A takes the $7,000 as a check. Now the plan withholds "$2,000 (20 percent of $10,000)," so the check is for $5,000. The withholding is figured on the full $10,000, loan included, even though A only saw $7,000 of it. To keep the whole thing untaxed, A has to deposit:

  1. the $5,000 check, within 60 days;
  2. another $2,000 from other money, to cover the withholding, within 60 days;
  3. another $3,000 from other money, for the loan, by the 2020 return due date including extensions.

What qualifies for the longer deadline

The longer deadline applies only to a "qualified plan loan offset." The offset has to come from the plan ending or from missing loan payments "because of the severance from employment," the loan has to have been a valid plan loan until then, and an offset for missed payments has to happen within 12 months of leaving. Filing for an extension on your return typically moves the deadline from April 15 to October 15; in the IRS's short example, a $10,000 QPLO on June 1, 2020 could be rolled over "as late as October 15, 2021." An offset that doesn't qualify can still be rolled over, but within the ordinary 60 days.

Missing payments while you still work there is different

If you stay employed and stop paying, the loan becomes a "deemed distribution": the IRS treats "the entire outstanding balance of the loan" as taxable, and "a deemed distribution is not eligible to be rolled over into an eligible retirement plan." A plan can allow a grace period to the end of the quarter after the missed payment. Form 1099-R keeps the two apart with distribution codes: L for a deemed distribution, M for a qualified plan loan offset. On the 2026 form the code goes in box 7a; the IRS renumbered the old box 7 to 7a in its 2026 instructions.

Sources

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