My understanding on defaulted loans and using the Code L on the 1099R is as follows:

If a person is still employed and has defaulted on a loan, a 1099R will be issued for the outstanding loan balance + accrued interest as a code 1L

If a person has terminated employment, wants to rollover his money to an IRA and has an outstanding loan, two 1099r's will be issued. One for the amount being rolled over Code G, One for the outstanding loan code 1L.

The L is to let the IRS know why taxes are not taken out of this distribution.

Am I correct?

1. It is not necessarily code 1; could be a 2 or a 7
2. Code L is only used for a deemed distribution. For your second example, where the person has terminated, the 1099-R Instructions state: "If a participant’s accrued benefit is reduced (offset) to repay a loan, the amount of the account balance that is offset against the loan is an actual distribution. Report it as you would any other actual distribution. Do not enter Code L in box 7."