The age where there is no penalty for early withdrawals from a 401(k) is 59 1/2, not 55. So you are still liable for a penalty of 10%. You have 5 years to pay off the loan before it is considered an early distribution, though.

If she was terminated.. and over 55 there will be no penalty... the loan -- they are right payments can only be done through payroll.or payment in full... and it will default usually after 2 quarters with no payments.... If you close before it defaults.. it should be considered part of the distribution, and included on the same 1099r next year... all with the same code... the taxes will be based on the amount she received as well as the amount of the loan... (they will take that out before they send the check to her if the distribution is from a 401 k) -- so when you file next year you should be all set...

Very informative and fits are situation

Yes, the amount you didn't pay back will become a distribution and is subject to the penalty.