💸 What Happens to Your 401(k) Loan When You Leave Your Job?

Understanding Plan Loan Offsets (And How to Avoid a Tax Surprise)

So you took out a loan from your 401(k) plan while working. Maybe it helped cover a home purchase, emergency expense, or just made financial sense at the time.

But now you’ve left that job. Maybe it was your decision—or maybe not. Either way, there’s still a balance on that 401(k) loan. So what happens now?

The short answer: your loan might get “offset”—and that has tax consequences. But there are ways to avoid paying taxes on it right away, if you act in time.

Here’s what you need to know...

🤔 What’s a Plan Loan Offset?

A plan loan offset happens when you leave your job (or request a distribution from your retirement plan) and don’t repay your 401(k) loan.

Instead of chasing you for payments, the retirement plan may just subtract the loan amount from your 401(k) balance. This is called an "offset" because your account is being reduced (or "offset") to repay the loan.

Example: You have $10,000 in your 401(k). You owe $3,000 on a plan loan. You leave your job and don’t repay the loan.➡️ The plan offsets $3,000 from your account to repay the loan. You’re left with $7,000 in your account.

🧾 Is a Plan Loan Offset Taxable?

Yes, usually.

When the loan is offset, the IRS treats it like you took a $3,000 distribution from your 401(k). So unless you roll it over, you’ll owe income tax on that amount—and possibly a 10% early withdrawal penalty if you're under age 59½.

But here’s the good news…

⏳ Can You Roll It Over and Avoid the Tax?

Yes! A plan loan offset is considered an eligible rollover distribution. That means you can move it to another retirement account (like an IRA) to avoid taxes and penalties.

There are two types of offsets—and the deadline to roll over depends on which kind you have:

🧩 Regular Offset vs. QPLO (Qualified Plan Loan Offset)

1. Regular Plan Loan Offset

• Happens when you leave your job or request a distribution

• You usually have 60 days from the date of the offset to roll it over

  
  

2. Qualified Plan Loan Offset (QPLO)

This is a special kind of offset, with more time to roll it over.

To qualify:

• Your loan was in good standing before you left your job

• The offset happened within 12 months after you left

• The plan didn’t terminate (or if it did, it caused the loan offset)

  
  

✅ If you meet these rules, you can roll over the QPLO by the due date of your tax return (including extensions)—which could give you until October of the following year to roll it over.

📋 Real-World Example

Let’s say you leave your job in June 2025 with a $10,000 401(k), including a $3,000 loan.

You don’t repay the loan, and in September 2025, the plan offsets $3,000 to cover it. You get the remaining $7,000 as a cash distribution.

Here’s what happens:

• $3,000 is a QPLO because it happened within 12 months of you leaving

• You can roll over that $3,000 as late as October 15, 2026 (if you file a tax extension)

• The $7,000 must be rolled over within 60 days if you want to avoid taxes

• The plan withholds 20% ($2,000) for taxes from the $7,000, so you actually receive $5,000

• To roll over the full $7,000, you’d need to add back the $2,000 out of pocket

  
  

🧾 What About the 1099-R?

The plan will send you a Form 1099-R, which reports the distribution to the IRS. If you had a QPLO, box 7 will show Code M. Don’t ignore it—it’s how the IRS tracks whether or not you rolled over the distribution.

💡 Tips to Avoid Surprises

1. Check with your plan administrator when you leave a job—ask what happens to any outstanding loans.

   
   

2. Know the deadlines:

   • Regular offset: 60 days to roll over

   • QPLO: Tax filing deadline (plus extensions)

     
     

3. Consider using personal funds to roll over the offset amount (even though you didn’t receive cash) to avoid taxes.

   
   

4. Talk to a tax advisor—especially if the offset is large or you’re unsure about your rollover options.

   
   

🧭 Final Thoughts

Leaving a job with an unpaid 401(k) loan can lead to an unexpected tax bill—but it doesn't have to. The rules around plan loan offsets and QPLOs give you a chance to stay on track for retirement and avoid paying taxes early—as long as you act before the clock runs out.

If you’ve had a plan loan offset recently, don’t wait. Check your options and consider doing a rollover before the deadline passes.

The information provided in this blog post is intended for general informational purposes only and should not be construed as legal or tax advice. While every effort has been made to ensure the accuracy of the information, tax laws and regulations are subject to change, and individual circumstances may vary. For personalized advice and to ensure compliance with current tax laws, it is strongly recommended that you consult with a qualified tax professional, financial advisor, or legal counsel. The author and publisher of this blog assume no responsibility for any errors or omissions, or for any actions taken based on the information contained herein.