To repay a 401(k) loan after leaving a job, request a payoff quote from your plan administrator and settle the balance before the deadline set in your plan’s rules, or ask whether the plan will let you keep making scheduled payments as a former employee. If neither option works, the plan will reduce your account by the unpaid balance (a loan offset), and you can avoid tax on that amount by depositing an equal sum from personal funds into an IRA or new employer plan by your tax filing deadline.
The Repayment Clock Starts at Separation
Plan sponsors decide what happens to an outstanding loan when you leave. The IRS permits, but does not require, a plan to demand full repayment on termination of employment.1Internal Revenue Service. Retirement Topics – Plan Loans The specifics live in your Summary Plan Description: some plans require the full balance within 60 to 90 days, some give longer, and some let former employees keep paying on the original schedule.
If you miss a payment, the plan may offer a cure period before treating the loan as in default. Under IRS regulations, that cure period can run through the last day of the calendar quarter following the quarter in which you missed the payment.2Internal Revenue Service. Issue Snapshot – Plan Loan Cure Period If you don’t catch up by the end of the cure period, the plan offsets your account balance by the unpaid amount and reports it to the IRS as a distribution.1Internal Revenue Service. Retirement Topics – Plan Loans
Paying the Plan Directly
The cleanest option is to pay the loan off before an offset happens. Contact the third-party administrator listed on your most recent statement or in your former employer’s benefits portal.
Request a Payoff Quote
Ask for a formal payoff quote good as of a specific date. Interest keeps accruing until the payment posts, so the quote tells you the exact amount to send. Paying anything less can leave a small balance that becomes taxable, so confirm the figure covers accrued interest through the pay date.
Send the Payment
Follow the administrator’s delivery instructions. Many accept certified checks or money orders mailed to a designated lockbox; some allow ACH transfers from a personal bank account. Include your plan account number, loan reference number, and separation date so the payment is applied correctly. Once it posts, request a letter of loan satisfaction and keep it with your tax records.
Ask About Continued Payments
Some plans let former employees keep making regular payments on the original schedule. Because the IRS gives plan sponsors flexibility on this point, it’s worth asking before you assume you must pay a lump sum.1Internal Revenue Service. Retirement Topics – Plan Loans If it’s an option, you can avoid pulling from savings or taking on new debt just to clear the balance.
If You Can’t Repay: How the Offset Works
An offset is not a cash withdrawal. The plan simply reduces your account balance on paper by the unpaid loan amount and reports that reduction as a distribution. Whether you can still avoid tax on it depends on which category the offset falls into.
Qualified Plan Loan Offset
A qualified plan loan offset (QPLO) happens when the offset is triggered solely by your separation from service or the plan’s termination, occurs within 12 months of that separation, and the loan was in good standing at the time.3Internal Revenue Service. Plan Loan Offsets Most offsets caused by leaving a job fit this description.
A QPLO gives you until your federal income tax filing deadline, including extensions, for the year the offset occurred to complete a rollover.4Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust For an offset in 2026, that’s April 15, 2027, or October 15, 2027 if you file for an extension.3Internal Revenue Service. Plan Loan Offsets
Standard Plan Loan Offset
Any offset that doesn’t meet the QPLO conditions falls into the standard category. That includes a loan already in default before you left, or an offset that happens more than 12 months after separation. The rollover window shrinks to 60 days from the date the distribution is treated as received.3Internal Revenue Service. Plan Loan Offsets Miss it and the full amount is taxable with no recovery.
Rolling Over the Offset
A rollover keeps the offset from being taxed, but it works differently from an ordinary rollover because no money moved when the offset happened.
The Cash Comes From You
Since the offset itself is a paper reduction, you need to produce the equivalent dollar amount from personal funds and deposit it into the receiving account by the deadline. If your $10,000 loan balance was offset, you deposit $10,000 of your own money into an IRA or new employer plan.3Internal Revenue Service. Plan Loan Offsets Any amount you don’t replace is treated as a taxable distribution.
Where It Can Go
You can roll the offset amount into a traditional IRA or into a new employer’s qualified plan. Not every employer plan accepts rollovers of loan offset amounts, so confirm with the new plan’s administrator before initiating the transfer. An IRA is usually more flexible because you open and control it directly.
Label the Deposit Correctly
Tell the receiving institution the deposit is a rollover contribution, not a regular contribution. A rollover doesn’t count against your annual contribution limits. The custodian reports the rollover on Form 5498, which the IRS matches against the distribution reported by your former plan.1Internal Revenue Service. Retirement Topics – Plan Loans
Partial Rollovers
You don’t have to replace the entire offset. If $15,000 was offset and you can only put together $10,000, roll over the $10,000 and only the remaining $5,000 becomes taxable. Any early withdrawal penalty likewise applies only to the portion you didn’t replace.
What It Costs If You Do Nothing
Without a rollover, the offset amount is added to your gross income for the year and taxed at your ordinary rate, which can push you into a higher bracket. When a distribution consists solely of a loan offset with no cash component, the plan isn’t required to withhold anything for federal taxes, so the entire bill lands on your return.3Internal Revenue Service. Plan Loan Offsets
If you’re under 59½ when the offset occurs, the IRS generally adds a 10 percent additional tax on top of the income tax.5Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions From Retirement Plans Other Than IRAs On a $20,000 offset, that’s another $2,000 before you even calculate the income tax.
The Age 55 Exception
If you separate from service during or after the calendar year you turn 55, the 10 percent penalty doesn’t apply to distributions from that employer’s qualified plan, and that includes a loan offset. The exception covers 401(k)s and similar qualified plans but not IRAs.6Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Even when it applies, you still owe regular income tax on the offset unless you roll it over.
Forms and Records
Your former plan administrator will issue a Form 1099-R for the year of the offset. For a QPLO, Box 7 shows distribution Code M, signaling that the extended rollover deadline applies.7Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025) Report the distribution on your Form 1040, and if you rolled over all or part of it, show the rollover amount so the IRS knows that portion isn’t taxable.
Keep the payoff confirmation (if you paid directly), the 1099-R, the deposit receipt from the receiving account, and any correspondence with the administrator. If the IRS ever questions the timing of your rollover, those records prove you made the deadline. If the 1099-R has errors, like a wrong amount or a missing Code M, ask the former administrator for a corrected form before you file.