It seems unusual that this sort of distribution would be nontaxable. Did you previously default on the loan and paid taxes on this loan as the result of a deemed distribution (code L in box 7 of the corresponding Form 1099-R)? [Edit] (Apparently not, since defaulting on the loan would make the offset distribution a nonqualified plan loan offset distribution that does not qualify for the rollover deadline being extended to the due date of your tax return and would not have been reported with code M.)
Even though it's nontaxable, you can still complete the rollover. Since it's nontaxable, it would make sense to roll it over to a Roth IRA.
