chagrinboy, in your example (where the loan never becomes a deemed distribution) the $10,000 that you are using to pay off the balance of the loan is $10,000 of the pre-tax money you received as the loan, not after-tax money.
If an offset distribution is used to pay off the $10,000, it's effectively a taxable distribution from the 401(k) that is used to replace $10,000 of the pre-tax loan that you spent on something else, which is pre-tax money that is turned around to repay the loan. If you can come up with the $10,000 from some other source to do so you have until the due date of your tax return plus extensions to roll the offset distribution over to an IRA to continue to defer the taxes.
In the case where you default on the loan but do not separate from service, the outstanding loan balance becomes a taxable "deemed distribution" but the loan is not satisfied. Subsequent repayments of the loan principal (but not the interest) then do become after-tax basis in the plan and that after-tax basis becomes basis in nondeductible traditional IRA contributions if the plan balance is later rolled over to a traditional IRA.
