Deceased Participant With Outstanding Loan

[bzorc]

Participant in a 401(k) plan dies with an outstanding participant loan. Beneficiaries are the two children. Is the outstanding participant loan taxable to the two beneficiaries, or to the participant's estate?

I haven't had this situation arise before, so any comments would be appreciated.

[RTK]

What does the plan document/loan policy and/or the loan documents say about repayment upon death? If states that loan is accelerated (or defaulted) at death, it seems to me then that repayment would be due from the estate. In such case, if the loan is not repaid by estate (and the loan secured by account balance), an offset distribution would be made and taxed to the estate.