As long as the loan is active, the entire balance will be earning or losing with the market. (invested) If you are on disability for a short period (less than 2 financial quarters) the loan will pick back up with payments once you return. If you are going on long term disability, or will not return to work, the amount you borrowed will be considered a distribution and subject to tax -- and penalty.. (since you most likely will not have a total disability award letter at that point most likely)-- it will not be deducted from the remainder... it already was in your example... if you borrowed 30k of 60 k.. you have 30 k left-- the tax and penalty will come out of your pocket at tax time the year after the distribution.. or off the balance if and when you close the 401k account.. if that occurs first. The loan will default and be taxable if there are two financial quarters in which you do not have a payment deducted from a regular payroll check...

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