Is it allowed for a participant that is over age 70 1/2, has a loan that will be defaulted in 2004 to use that loan default to satisfy their 2004 required minimum distribution?

The answer depends on the type of plan and its provisions.

If a loan default is treated as a deemed distribution, it isn't an actual distribution and can't be counted toward the RMD. There's some very clear guidance at Reg. Sec. 1.401(a)(9)-5, Q&A 9.

An offset, however, is an actual distribution.

Since a loan offset is eligible for rollover, and a minimum distribution isn't, how would that work?

The portion of the loan offset that is satifying the RMD would not be eligible for rollover.

I think that the answer is found at I.R.C. Sec. 402©(4)(B).

In-service distributions can take many forms -- periodic payments, lump-sum distributions, offsets, hardship withdrawals, distributions made pursuant to QDROs, distributions upon plan termination, etc. Some types of distributions are eligible for rollover treatment, and some are ineligible. But, ANY amount representing a RMD, regardless of its form, can't be rolled over, and the first amounts distributed during any tax year are treated as paying the RMD for that year.