dmertz
Level 15

Retirement tax questions

A deemed distribution makes the *entire* outstanding loan balance taxable.  There is no actual distribution of the balance of the 401(k) to the credit of the employee because the 401(k) still holds the loan and no part of the outstanding loan balance is satisfied by the deemed distribution.  Only an offset distribution satisfies the outstanding loan balance and an offset distribution cannot occur until the employee separates from service with the company.