The "plan document" states that a "defaulted Loan" is a Distributible event, but it also states that there are no distributions prior to the participant's serparation of service.

A loan has defaulted and a 1099R has been issued.

Can this loan be off set from the participant's account?

A defaulted loan is a "deemed distribution" under the Regs, not an actual distribution. A deemed distribution is a taxable event only--not an actual distribution. No offset can be made unless there is a true distributable event (termination of employment, attainment of retirement age, inservice distribution, etc.) allowing distribution of amounts from the participant accounts.