accrual of interest on loans and defaults

[Casey]

Can someone clarify the date on which to stop counting interest in the example below. Thanks.

Example: A takes a loan from a 401(k) plan on 1/1/96 and begins making weekly payments, but then stops on 8/1/96. A's grace period is over on 12/31/96 at which time his outstanding balance is $5000, but the administrator takes no action. On 8/1/98, administrator decides to issue a Form 1099 for the "deemed distribution". Should administrator issue a Form 1099 for the $5000 [amount which was in default on 12/31/97]OR should administrator accrue and add the amount interest from 12/31/97 to the date administrator issues the Form 1099?

If you think the answer is $5000, would your From 1099what year would it be [1998 or 1996].

All thoughts appreciated!