If you default your investment company will not be able to take a distribution from the account to cover the defaulted amount until you have met a triggering event.
The IRS considers the loan a distribution at the time it is taken and as such it is a taxable event, but the IRS waives taxation on the proceeds as long as these repayment conditions are met. If the loan is defaulted you are subject to income tax and possible early withdrawal penalties on the amount of proceeds outstanding at the time of the default.
In addition you will again be subject to income tax on any amount recovered by the investment company when they are able to recoup the defaulted amount at the time of a triggering event, such as reaching 59 ½ for a 403(b) or severance from employment.
If you pay back your loan you are not subject to taxation on the proceeds of the loan.
If you have a previous default and wish to take a second loan, any repayment must be made by salary deductions only. If your employer does not support loan payments through payroll deductions, then the second loan after a default will not be allowed. In addition, your investment provider may also limit your ability to take a loan after a previous default.
