MMC Benefits Handbook
When you take a loan from the Plan, it is not taxed. However, if your loan goes into Default and you do not make up the 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 owe Federal income taxes on the unpaid balance of your loan (including interest). Plus, you may owe an additional 10% Federal early withdrawal tax if you are under age 59-1/2 and no IRS exceptions apply to you.
Loan Repayment on an After-tax Basis
You can only repay your loan on a traditional after-tax basis. The amount of the loan and interest that you pay on your loan (and that is credited to your account) may not be tax-deductible and will be taxable to you when it is later distributed from the Plan, except to the extent the distribution includes your after-tax contributions. (You may want to consult with a tax professional.)