I will be laid off effective 12-31-2008. I have a current 401K loan that I took out for personal bill repayment. I will owe roughly $10,000 when I am let go from my company. If I can not get the money repaid before the 90 days elapses, what options do I have for the payment of the 10% fee and 20% taxes that I will suffer?

The 10% penalty will be paid with your 2008 taxes. The 20% you refer to doesn't apply here. In a 401K distribution 20% is generally withheld towards your ultimate tax liability. When a outstanding loan defaults, the balance of the loan is considered a withdrawal, but since the money has already been paid out, there is nothing to withhold from. So you won't know your tax liability until you complete your 2008 taxes.

If you do not roll over within 60 days, you will pay 10% early withdrawal penalty and entire withdrawal must be reported as ordinary income on your tax return.
For more information, read Your U.S. Tax Return: Elective Deferrals 401(k) Plans

Actually, if your layoff is not effective until the end of Calendar Year 2008, more than likely, the 401K loan will not converted to a distribution until NEXT year in 2009.

Further, because the money has already been distributed, NO withholding will be done, which means your tax bill come April 2010 will be rather large.

I wondered about that (whether the effective date of the layoff would affect the year taxes would be due), I think ATE is probably right on that.

On the flip side, if you don't get another job, then your tax bite might not be so bad. Of course that will engender other problems.

If you do get another job and it allows you to rollover the rest of your 401K I would take a short term loan to pay off the loan, rollover the 401K into your new plan and then take a new 401k loan to pay off the short term loan. I've done this at least twice with previous job changes.

Good points, Scott!

Hope LewieTheFin can get a job that quickly.

Thank yoy ScottGem and AtlantaTaxExpert, you both have been very helpful.
One more question if you don't mind:
If I understand correctly, my 2008 taxes that I file in Apr '09 won't reflect the early withdrawl that I can't pay off, but will show up on my 2009 taxes that I file in 2010 making me owe a bunch of money in back taxes. Is this correct?
Again, thank you both for your help!!

Not quite back taxes. It really depends on your plan admins and how they process this. It is possible, they will process this for 2008 but much more likely it will be 2009. In any case, you will receive a 1099 listing the taxable amount for whatever year.

You then file the 1099 for the applicable year and list the income from the 1099 on your return. You would also need to add the 10% penalty.

If you have a job lined up that allows you to transfer the 401K assets AND will allow you to borrow from those transfer assets, it will make sense to implement Scott's short-term loan plan.

The taxes, which will be due on 15 April 2010, could represent up to 50% of the loan amount. It will be AT LEAST 25%. That MORE than justifies the costs of the short-term loan.