When you take out a 401(k) loan, you agree to a repayment schedule and timeline. If you fail to meet those terms — or if certain plan events happen — your loan may be “deemed distributed” or “offset.” Both have tax consequences, but they work differently. This article explains how each situation works, what happens to your taxes, and your options for repayment or rollover.
A loan is deemed distributed when it no longer meets the requirements set by the plan or by the Internal Revenue Service (IRS) and Department of Labor. The most common reasons this happens:
You miss payments and do not catch up within the cure period — 90 days for Gusto 401(k) plans
The full loan balance is not repaid by the end of the maximum repayment period
When a loan is deemed distributed, the remaining balance is treated as a 401(k) distribution for tax purposes. This means:
You owe income taxes on any pre-tax balance in the year the deemed distribution happens
If you do not qualify for an exemption, you may also owe a 10% early withdrawal penalty on the full remaining balance
You will get a Form 1099-R for that tax year
You cannot roll over this amount to an individual retirement account (IRA) or eligible retirement plan
No federal or state tax withholding can be applied, since no additional cash is distributed to you
Important: A deemed distribution is a distribution for tax purposes only — not for other plan purposes. You are still required to repay the loan in full. There is no maximum time limit for how long a deemed distributed loan can remain outstanding.
Gusto 401(k) plans only allow one outstanding loan at a time, and deemed distributed loans are still considered outstanding. You cannot request a new loan until one of these happens:
You repay the full deemed distribution amount
The loan is offset
A loan offset happens when the remaining loan balance is permanently distributed from the plan because you become eligible to take a distribution. Unlike a deemed distribution, a loan offset is a distribution for all plan purposes. This means you can no longer repay the loan, and it is no longer considered outstanding.
A loan offset can happen in 2 main scenarios:
You leave the employer sponsoring the Gusto 401(k) plan, for any reason
Your employer terminates the Gusto 401(k) plan
In these cases, you typically have 90 days from the termination date to repay the loan in full before it is offset.
The tax treatment of an offset depends on whether a deemed distribution has already happened.
If the loan is in good standing (no deemed distribution):
The offset is a taxable event, and a 1099-R will be issued
The amount may be eligible for rollover to an IRA or a qualified retirement plan
Because no cash is actually distributed, you would need to contribute the offset amount out of pocket to finish a rollover
You cannot roll over the loan itself and continue making payments
If the loan was previously deemed distributed:
The offset is not a taxable event, and no additional 1099-R will be issued
The amount is not eligible for rollover
You cannot repay the loan
The offset simply clears the remaining balance from the books
A qualified plan loan offset (QPLO) happens when:
Your loan is in good standing — no deemed distribution has happened
The loan is offset because you left the employer sponsoring the plan, or the plan was terminated
The offset happens within one year of the termination date
When an offset qualifies as a QPLO, you get more time to finish an indirect rollover. Instead of the standard 60-day deadline, you have until your tax return due date — plus any extensions you request — to roll over the offset amount to an IRA or eligible retirement plan.
Note: You must pay the rollover amount out of pocket. You cannot roll over the loan itself and continue making payments after an offset.
These examples show how the rules work in different situations.
Graham is 65 years old with an outstanding loan balance of $10,000. He has not made payments for more than 90 days, so his loan is deemed distributed, and a 1099-R is issued.
Because Graham’s plan allows in-service distributions at age 59½, he is eligible to take a distribution, so the loan is immediately offset. Graham can no longer repay the loan, and it is no longer considered outstanding. Because a deemed distribution already happened, the offset amount is not eligible for rollover. Only one 1099-R is issued — the offset following a deemed distribution is not a separately reportable event.
Yasmin is 56 years old with an outstanding loan balance of $10,000. She has not made payments for more than 90 days, so her loan is deemed distributed, and a 1099-R is issued.
Because her plan does not allow in-service distributions until age 59½, Yasmin is not yet eligible to take a distribution. The loan remains outstanding, and she can still repay it. When she turns 59½, the loan is offset. This offset is not a taxable event, no additional 1099-R is issued, and the amount is not eligible for rollover. At that point, Yasmin can no longer repay the loan, and it is no longer considered outstanding.
Ryan is 28 years old with an outstanding loan balance of $10,000 in good standing when he leaves his employer. He does not repay the loan within 90 days, so the loan is offset, and a 1099-R is issued.
Because the offset is due to leaving his employer and happens within one year of his termination date, this is a QPLO. Ryan has until his tax return due date — plus any extensions — to finish a rollover of up to $10,000. Because no money is actually distributed from the plan, Ryan would need to contribute the $10,000 out of pocket to avoid taxation on the offset amount.
Sara is 52 years old and defaulted on a $10,000 loan 3 years ago. The loan was deemed distributed at that time, and a 1099-R was issued. Because Sara was not yet eligible to take a distribution, the loan remained open.
Sara’s employer now terminates the Gusto 401(k) plan. Sara is now eligible to take a distribution, so the previously deemed distributed loan is immediately offset. Because the offset follows a deemed distribution, the amount is not eligible for rollover, no additional 1099-R is issued, and this is not a QPLO.
Gusto Retirement does not provide tax or legal advice. Consider speaking with a tax advisor for guidance on your specific situation.