Well, I found that all a bit hard to follow, but this part: "that the reduced the gross disbursement by." seems wrong. Terminating without repaying a loan is the same as being given that amount as distribution now, then turning around and using it to repay the loan. So, it reduces Net, not Gross.

Perhaps there are two 1099-R for this person: the loan offset (with appropriate codes and amounts) and then their Lump Sum Distribution?

"This caused her to be in a liability situation" Well, no one can withhold on a repayment amount. She already got the payout when she took it as a loan. They would not gross up the loan repayment to account for withholding, and then take withholding. Is that what you tried to describe?

You should have something along the lines of:

Gross distribution would be Everything, according to this storyline.

Subtract loan offset

= amount to be withheld against if she took possession of the funds, subtract from Gross = net to her hand.

Try finding the details and put them in order.