You don't report an offset 401(k) loan payoff on your tax return. The 401(k) withdrawal that you took to pay off a 401 (k) loan is a distribution. Since you are under the age of 59 1/2 you will incur the 10% penalty.
Refer to the IRS Topic Considering a loan from your 401(k) plan? and the TurboTax article What happens if I have a 401(k) loan but later lose or quit my job?
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