The loans wouldn't be "paid" by your employer, it's your loan, not the employer's responsibility. Any balance due on the loan would be treated as an early distribution, as you did already get the money, and you'd owe the 10% early distribution penalty, along with any state and federal income tax.

It would be better for you to pay the balance in full before your termination date if that is possible to avoid the penalty and tax hit. You won't be able to continue to make repayments to avoid those taxes and penalty.

If you want to cash out what's still in there, you may want to see what your tax situation is to take it this year instead of waiting for 2012 to reduce your tax liabilities by having the loan balance counted as income in 2011 and the remaining in 2012.

A 401(k) loan may be repayable for a limited time when you quit work. Or it may not -- depends on the plan paperwork. Either way, an unpaid balance is considered to be a distribution to you, since you got the money.

Closing out the 401(k) is also a distribution to you. If you are normally eligible for some the credits on a tax return, you might want to check with a tax advisor about how much income you can add before losing those credits. And if you do choose to close the 401(k), make sure that you have tax withheld. It probably won't be enough to cover your entire tax bill (depends on your age and other tax information), but it would be a start.

They won't pay the loans for you but they may facilitate a payment to the record keeper from your paycheck or even from your personal check before you leave employment. The only way to know if they would submit the loan payment for you is to ask them since they would not have this obligation after you terminate employment.

Either way, the money used to pay the outstanding loan balance would be your money or would be withheld from your paycheck, not your companies money.

As others noted, if you don't pay back the loan before you terminate one of three things will happen.

If you rollover your account to your new employer they may be able to rollover the loans so you can keep paying them there. This would be very uncommon though so don't count on it.

If you are terminated you may be able to submit loan payments to the existing record keeper and leave your money there. This is also rare but you could ask.

If you are taking a distribution you are going to pay taxes and penalties on this money regardless of whether you pay it back, so it is not that imperative what you do. In other words, you could pay the loan back, take the distribution, and pay taxes and a penalty on the distribution which would include the loan money. Or, you could not pay the loan back, take a distribution, and pay taxes penalties on the distribution which would not include the loan money - but then you would pay taxes and penalties on the loan money separately when you file your taxes.

I hope this helps.