A 401(k) loan feels, while you're employed, like borrowing from yourself: no credit check, no third-party lender, interest that flows back into your own account. That framing quietly stops being true the moment you lose your job. Separation from employment, whether through a layoff, a resignation, or a firing, triggers a repayment clock that most people don't know exists until they're already living through a layoff and have to find it.
Here's what the rule actually requires, what happens if you can't meet it, and how the numbers work if the loan goes unpaid.
The current repayment deadline
Outstanding 401(k) loan balances used to come due within 60 to 90 days of leaving a job, whatever the specific plan required, a window that caught a lot of people off guard right when they had the least spare cash to work with. The Tax Cuts and Jobs Act, effective for plan loan offsets occurring after December 31, 2017, extended that window substantially: you now have until your federal tax filing deadline for the year you separated, including any extensions you file for, to either repay the outstanding balance in full or roll the offset amount into an IRA or a new employer's retirement plan.
For someone laid off in 2026, that means the deadline is April 15, 2027, or October 15, 2027, if an extension is filed, not 60 or 90 days after the layoff itself. That's a meaningfully longer runway than the old rule, and it's worth confirming with your specific plan administrator that this is the rule being applied, since plan documents vary in how they describe the process even though the extended federal deadline applies broadly.
What happens if you don't repay in time
If the balance isn't repaid or rolled over by the deadline, the plan treats the unpaid amount as what the IRS calls a loan offset, which functions as a distribution from the plan for tax purposes. Two consequences follow:
It's taxed as ordinary income in the year of the offset. The unpaid loan balance gets added to your taxable income for that tax year, at your regular marginal rate, the same as if the plan had simply paid you that amount in cash.
A 10% early withdrawal penalty applies if you're under 59½. This is the standard early-distribution penalty that applies to most 401(k) withdrawals taken before retirement age, and an unpaid loan offset isn't exempt from it just because the money was originally a loan rather than a straight withdrawal. The usual exceptions to the 10% penalty, including the Rule of 55 (separating from service in or after the year you turn 55), can apply here the same way they'd apply to any other distribution from that plan.
Neither consequence is avoidable once the deadline passes without repayment. There's no partial credit for having made payments for years before the layoff; the entire unpaid balance at the time of separation becomes taxable.
A worked example
Daniel, 42, has a $15,000 outstanding balance on his 401(k) loan when he's laid off in March 2026. He's in the 22% federal tax bracket.
If he repays the full $15,000 by April 15, 2027 (his tax filing deadline for 2026, assuming no extension), there's no tax consequence at all. The loan simply closes out, the same as if he'd kept working and kept making payments.
If he can't repay it and doesn't roll it over, the $15,000 becomes a deemed distribution reported as income for 2026. At his 22% marginal rate, that's $3,300 in additional federal income tax. Because he's under 59½ and doesn't qualify for an exception, he also owes the 10% early withdrawal penalty on the full $15,000, an additional $1,500. Total cost of the unpaid loan: $4,800 in tax and penalty, on top of losing the $15,000 of retirement savings itself. State income tax, where applicable, adds another layer on top of the federal numbers.
The rollover alternative most people don't consider
If you can't repay the cash directly but have other funds available, such as savings, the loan offset can be rolled over to an IRA or a new employer's plan the same way any other distribution can, by contributing an equivalent amount from your own funds within the same deadline. This preserves the tax-deferred status of the money even though you're effectively replacing borrowed retirement funds with cash from elsewhere. It only works if you have the cash on hand to make the rollover contribution; it doesn't extend or reduce the amount you need to come up with, it just changes where that cash ends up (back into a retirement account rather than to the IRS as tax and penalty).
Why this compounds a layoff's other pressures
A 401(k) loan repayment deadline lands at exactly the wrong time relative to the rest of a layoff's financial pressure. Severance, unemployment insurance, and COBRA premiums are already stretching a household's cash in the months right after a job loss, and a several-thousand-dollar loan repayment competing for the same dollars, with a tax and penalty bill waiting on the other side of a missed deadline, is not something most people are planning for when the layoff happens.
If you have an outstanding 401(k) loan and see a layoff coming, or have just gone through one, the repayment deadline should move to the top of your list of dates to track, well ahead of April. Waiting until tax season to discover the balance became taxable income removes any chance of finding the cash to repay or roll it over in time.
How to avoid the situation going forward
Know your outstanding 401(k) loan balance before you need to. Most plan providers show this on the same dashboard as your account balance, but it's easy to stop checking once payroll deduction is quietly handling the payments.
Prioritize paying down an existing 401(k) loan faster if a layoff looks possible. Unlike most debt-payoff decisions, this one has a hard deadline attached to a specific, unpredictable event, which changes the math compared to a normal loan you're paying off on a fixed schedule.
Build a specific cash reserve for this scenario if you're carrying a 401(k) loan balance, separate from your general emergency fund, sized to the outstanding loan balance. The tax filing deadline gives you time, but only if you actually have the cash to use that time productively.
Confirm your specific plan's process with the administrator, not just the general rule. Some plans handle the rollover logistics differently, and getting the mechanics wrong, even within the correct deadline, can create avoidable friction.
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Create your free dashboardFrequently asked questions
Does this extended deadline apply to all 401(k) plans?
The Tax Cuts and Jobs Act's extension to the tax filing deadline (including extensions) applies to loan offsets from qualified plans generally, replacing the shorter 60-to-90-day windows that used to be standard. Confirm with your specific plan administrator how they describe and process this, since some plan documents still use older language, but the extended federal deadline is the operative rule for loan offsets occurring after 2017.
What if I'm laid off and immediately roll my whole 401(k) into an IRA?
Rolling over the rest of your 401(k) doesn't automatically resolve an outstanding loan balance. The loan offset is treated separately: you still need to either repay it in cash or make an equivalent rollover contribution from other funds by the tax filing deadline, even if the remainder of the account has already moved to an IRA.
Is the 10% early withdrawal penalty avoidable if I'm laid off after 55?
Yes, if you separate from service in or after the calendar year you turn 55, the Rule of 55 exception to the 10% early withdrawal penalty can apply to a defaulted 401(k) loan offset the same way it applies to other distributions from that specific employer's plan. You'd still owe ordinary income tax on the unpaid balance, just not the additional 10% penalty.
Can I take a new 401(k) loan from a new employer's plan to pay off the old one?
Not directly. A loan from a new employer's plan is a separate transaction subject to that plan's own rules and limits, and it can't be structured as a direct payoff of a loan from a former employer's plan. If a new plan allows loans and you have the flexibility, you could take a loan there and use the cash to repay the old loan yourself, but that's a new borrowing decision with its own repayment terms and risk, not a rollover.