I know that a 401(k) loan is not considered in default if payments are missed while the employee is on military leave, but I have a slightly different situation: an employee who is already out on military leave wants to take out a 401(k) loan. Is there any problem associated with giving a loan that you know will be in default immediately? (Actually, he offered to mail in his personal check each month, but the loan provisions say that payments must be made via payroll deduction.)

You answered part of you own question. If you can't make the loan fit with plan terms, the plan cannot make the loan. Loans from a plan to participants are permissible even if the participants are not employees or they are on leave, but plans are not usually designed this way because of the administrative difficulties. Don't forget that a loan should not be made without a reasonable expectation of payment. That is a tougher call when you don't have the assurance that payments will made by automatic payroll deduction.

Interest rates on loans during military service are subject to special rules.