Code 1L means that you received a deemed distribution for defaulting on the loan. A deemed distribution is not eligible for rollover, is taxable, and the code 1 indicates that it is subject to a 10% early-distribution penalty unless you have an exception that applies. The taxable amount of the distribution shown in box 2a of the Form 1099-R will be included on Form 1040 line 16b and the 10% early distribution penalty will appear on Form 1040 line 59.
A deemed distribution simply makes the loan amount taxable. It does not satisfy the loan, so you were still required to pay back the loan. Loan repayments made after the deemed distribution become after-tax basis in your qualified retirement plan. When you eventually receive distributions from the plan, a portion of each distribution will be a nontaxable distribution of your after-tax basis and the remainder of each distribution will be taxable (and potentially subject to an early-distribution penalty). This means that you won't pay taxes on the same money twice.
