People under 59½ will owe an additional 10% penalty assessed, on top of regular federal and state income taxes.
As with an early partial withdrawal or cash-out, a defaulted loan will trigger the receipt of a 1099R, which will increase taxable income.
The IRS will treat a defaulted loan the same as an early withdrawal, with the caveat that accrued loan interest will also be considered income for tax purposes.
Below is information about 401(k) distributions, which will often be similar to other employer-sponsored plans.
Please consult your plan documents about the specific kinds of distributions that are allowed in your plan.
And always consult your tax adviser before taking any action that could trigger a taxable event.
In the event that an employee separates from an employer, for any reason, there are several options the employee can consider in deciding what to do with a 401(k) account balance.