What Happens If You Default on a 401(k) Loan?

By Staff WriterLast Updated Mar 26, 2020 1:05:43 PM ET

When borrowers default on 401(K) loans, they must pay regular income tax on the amount defaulted, and they are subject to a 10 percent federal tax penalty unless they qualify for an exemption, according to Zacks. Borrowers in some states must also pay state income tax on the amount defaulted.