What happens if a 401(k) loan is not repaid?

• A. The loan is forgiven without tax consequences.
• B. The unpaid loan balance is automatically repaid from the participant's paycheck.
• C. The unpaid loan balance is treated as a taxable distribution, possibly subject to penalties.
• D. The loan is rolled into an annuity to future distributions.

Answer: (C)

When you borrow from a 401(k), you’re taking a loan from your own retirement funds with a plan-required repayment. If you don’t repay the loan, the unpaid balance is treated as a distribution from the plan. That means it’s included in your taxable income for the year, and you’ll owe ordinary income tax on that amount. If you’re under age 59½, you’ll also typically face a 10% early withdrawal penalty, unless an exception applies. The plan administrator will usually issue a Form 1099-R reflecting this distribution. In short, an unpaid 401(k) loan becomes a taxable distribution with potential penalties, rather than simply being forgiven or repaid automatically.