If you can't repay the loan, it is considered defaulted, and you will be taxed on the outstanding balance, including an early withdrawal penalty if you are not at least age 59 ½.
There are certain exceptions to this additional 10% tax. The following exceptions apply to distributions from any qualified retirement plan:
- Distributions made to your beneficiary or estate on or after your death.
- Distributions made because you're totally and permanently disabled.
- Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply. [emphasis added]
- Distributions to the extent you have deductible medical expenses that exceed 7.5% of your adjusted gross income whether or not you itemize your deductions for the year. For more information on medical expenses, refer to Topic No. 502.
- Distributions made due to an IRS levy of the plan under section 6331.
- Distributions that are qualified reservist distributions. Generally, these are distributions made to individuals called to active duty for at least 180 days after September 11, 2001.
- Distributions that are excepted from the additional income tax by federal legislation relating to certain emergencies and disasters. See the Instructions for Form 5329 for more information.
- Distributions up to $5,000 made to you from a defined contribution plan or an IRA if the distribution is a qualified birth or adoption distribution. See the Instructions for Form 5329 for more information.
Source: Topic No. 558 Additional Tax on Early Distributions from Retirement Plans Other than IRAs
It doesn't appear, from the information you've given that any of the exceptions apply.
@hbchadley
