I have a interesting problem. My company was bought out last January and changed our 401K sponsor. Instead of rolling my money over to the new company's 401k I decided to open my own IRA. What I did not take into account for however was the fact that I had a $9,000 loan balance on the old 401k that I was paying directly out of my paycheck every week. When I rolled that money over the loan did not go with it and now I am left with a hefty loan that I will not only have to claim as earned income next year but from what I understand I will also have to pay the 10% penalty for the early withdraw of the loan. My old 401k sponsor tells me that I am basically screwed and that I will have to pay this at the end of the year as I am not allowed to take out a loan from a IRA and I don't have enough money in my new company 401k to take out another loan from them to cover the old loan. What do I do? How can I get this loan out of limbo and start making payments on it again. And if it is true and I can't how much money will I owe the IRS next year so I can start to save up to pay them off now.

Sorry, but your plan admin is telling you the truth. When you take a distribution from a 401K any outstanding loan balance is considered an inservice withdrawal, subject to penalties and taxation. A 401K loan is generally payable only by payroll deductions. Since the plan admin was changed, you won't be able to pay via deduction.

So you will owe $900 in penalites next April. In addition the $9K will be added to your taxable income for the year and taxed accordingly. Without knowing your tax bracket we can't say how much. If you used tax software, you can play some what if games to see how it might affect you. If you used a preparer, ask them if they can do a projection for you.

Does it matter that I took this money out to for the closing costs of my house 4 years ago?

That makes NO DIFFERENCE whatsoever.

The IRS waives the 10% Early Withdrawal Penalty if the distribution is used for purchase of a first-time house, but ONLY IF the distribution is from an IRA, NOT a 401K.

Do I still have to pay the 10% penalty on the loan even if technically I was fired, then re-hired by the new company that bought the old one?

Yes. The fact that you even changed jobs has no bearing. What you would have had to do is take a short term loan to pay off the balance, then roll the value of the account into the new company's 401K. Then you could have taken a new loan and paid off the short term loan. I've done that on two occasions. But once you took a distribution, even though you rolled it over, you didn't rollover the outstanding loan balance. So that makes it an inservice withdrawal, which has a penalty attached.