Participant defaulted on his loan and received a 1099R at the end of 2001. In 2002 he terminates employment. Is his loan balance included as part of the distribution and taxed? Would this be a loan offset eventhough he already received a 1099R for the loan balance in 2001?
Any guidance and perhaps an example would be helpful.

The loan is distributed by offset but is not included in taxable income. The interest accrued since the deemed distribution is not included either.

Thanks.

Since a transfer of cash will be made, the portion of the loan balance is subject to withholding, right?

My two cents says no because the participant already reported and payed taxes on the amount when he/she filed for 2001. If you are defaulting the loan with a distribution payout (in other words, together) and the participant has enough cash balance to withhold the mandatory 20%, then you figure the withholding on the entire balance. But again, that's when it is happening at the same time.