The cure period
A missed payment does not immediately trigger a default. The plan allows a cure period extending to the end of the calendar quarter following the quarter in which the missed payment was due. In practice, this gives you between three and six months to make up a missed payment before the loan is considered in default.
If the missed payment is made before the end of the cure period, no default occurs and the loan continues on its original terms.
What a deemed distribution means
Once the cure period expires without payment, the entire outstanding loan balance, including accrued interest, is treated as a distribution for tax purposes. The full amount is included in your gross income for the year the default occurs.
If you are under age 59½ at the time of default, the 10% early withdrawal penalty also applies to the deemed distribution amount.
A deemed distribution is not an actual withdrawal of funds from the plan - the funds have already left the plan when borrowed. The loan balance remains on the plan records as an outstanding obligation. The defaulted loan may not be repaid but keeping it on the plan's books reduces your future borrowing capacity by that amount.
Reporting
The deemed distribution is reported on Form 1099-R for the year in which the default occurs. As plan administrator, you are responsible for issuing this form and reporting the event accurately in the plan records.
Why this matters for plan compliance
Loan defaults that are not properly documented and reported create recordkeeping gaps that can complicate future audits or tax filings. As trustee and administrator of your Solo 401(k), maintaining a clean paper trail on all loan activity is part of your fiduciary responsibility. If a default occurs, document it promptly, issue the 1099-R, and note the event in the plan records.