You won't have to payoff the loan per say. You would have a loan offset (default). Right now your retirement benfit amount includes the loan account (cash plus loan). At the time of your distribution, your full retirement benefit will become taxable to you, but you will only recieve the cash portion of what you currently have in your account.

Example: Your account balance in cash is $20,000 and your loan security account is $5,000, for a total account balance of $25,000. At the time of your distribution you will be subject to a 20% withholding. This means that $5,000 ($25,000 * 20%) will be taken from your distribution as taxes. You will receive a check for $15,000 ($25,000 minus the loan minus the taxes). The Form 1099-R you recieve in January of the following year will reflect a total distribution of $25,000 (cash plus loan).

The 10% penality you would pay if you are under age of 59 1/2 would not apply until you file your taxes (you may be eligible for an exception if you are age 55 at the time of seperation of service)

The unpaid balance of the loan will be considered income to you, so in essence you will pay tax and penalty on the money.

leaving the country doesn't effect the 401k....taking a distribution does. Once you take the distribution the loan is used to offset the distribution. Like this...80k in mutual funds and 20k in loans. Total account balance is 100k. Cash Distribution is taken. Taxes will be 20k (20% of 100) and amount paid to you would be 60k. (80k - 20k). Voila...loan is now paid off...

If you're over age 59 1/2 then you don't have to worry about the 10% penalty. If you aren't...then the 10% applies to entire 100k.

One thing to consider..if you have a Canadian address when you take the distribution they are to withhold 30% and not 20%. So time any distributions carefully.