If the loan is satisfied with an offset distribution upon separation, there is no default. There would simply be repayment of the loan using a distribution from the 401(k). (401(k) distributions are permitted after separation from service.) However, it seems that in this case the loan was allowed to remain outstanding after separation from service and subsequently the loan was treated as defaulted.
If the 2015 Form 1099-R included code L in box 7, the distribution was processed as a deemed distribution due to defaulting. It seems rather unusual that a plan would allow a defaulted loan to remain outstanding after separation from service instead of simply processing an offset distribution and being done with the loan.
