A deemed distribution causes the distribution to become taxable but does not satisfy the loan and does not reduce the balance to the credit of the employee. The loan remains as one of the investments within the 403(b) account.
Because taxes have already been paid on the amount of the deemed distribution, subsequent repayment of the outstanding loan balance become after-tax basis in the 403(b) and will not be taxed again when later distributed from the 403(b). This just means that the taxes on this money are paid now rather than later. Because the balance to your wife's credit in the 403(b) was never reduced, nothing was ever paid out that could be rolled over.
