How does 401k loan default after you left your job?

Question

I'm trying to find some basic answers here but having a very hard time. I have a job currently and I'm about to lose it. I have pulled out a 401k loan and paying it back through the payroll deduction.
What I'm trying to find out is what happens once I quit my job? Let's say I have a 38,000 loan and I have about 97,000 in the plan total.
Let's say I quit my job, I call Vanguard tell them I just lost my job, can you treat the 38,000 as a withdraw? So it would be 97000 - 38000 = 59,000? Can I then with draw the remaining balance, and use the entire amount towards taxes?
I looked at my Vanguard plan information, and it does not have anything regarding this question. Even calling them doesn't seem to ease my question since they're giving me multiple answers. A couple of times they said I could call after leaving my job, tell them to treat the 38000 as a withdraw then use the remaining balance to pay the taxes and penalties.
Is that true?
I know this isn't the smartest option but I just need to know.

Michael A · Answer

I can't speak to your exact situation and your exact 401(k) plan but in general, if you take out a 401(k) loan and are then laid off, this is the sequence of events.

You take out the loan and have to pay it back within a certain time frame.
You get laid off.
Before the CARES Act, you would have until tax day the following year to either pay the loan back into your 401(k) or put the distribution (the loan amount) into a qualifying retirement account. A rollover, essentially. If you do owe taxes on it and the distribution is coronavirus-related, the CARES Act allows you to spread the income tax payments over three years.
If you don't pay it back or put it into another qualifying retirement account, and are below the age of 55 when you were laid off, you'll pay taxes on the income (if it's a taxable distribution) and a 10% withdrawal penalty.

The CARES Act did make some changes, including waiving early withdrawal penalties for individuals who were laid off directly because of the COVID-19 pandemic and increasing the fraction of your 401(k) balance you could take out as a loan. It doesn't sound like those changes apply to you however, since they apply to job losses and loans in 2020.
I don't know about using the remaining 401(k) balance to pay the taxes, but if Vanguard themselves gave you that information it's certainly plausible.

How does 401k loan default after you left your job?

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