MMC Benefits Handbook
Consequences of Loan Default
If you default on your loan and do not make up the missed payments within 90 days, your outstanding loan balance will be a deemed distribution, your vested account balance will be reduced by the amount of the outstanding loan as soon as permitted under the tax laws, and you will owe Federal income taxes on the unpaid balance of your loan (including interest) plus an additional 10% Federal early withdrawal tax if you are under age 59-1/2 and no IRS exception applies to you.
In addition, the outstanding loan balance will be treated as a distribution and continue to be taken into account when determining the number of loans you have outstanding and the amount available for a new loan. This can restrict your ability to take another loan in the future.