An employee of an HVAC company which sponsors a 401(k)sop wants to start his own company and rollover his acccount balance (appx $70,000) to his own company's plan. He will be the onnly employee and wishes to have a loan provision in the plan, obtain a $10,000 loan to assist with start up costs and effectively repay the loan back. I'm thinking this may be a prohibited transaction and that he could do a partial distribution of say $15,000, pay the taxes, use the net towards the start up costs and roll over the balance of appx $55,000.
thoughts?

Assuming its a valid loan (i.e., loan documents signed, payments made at least quarterly, etc.), why do you think this would be a PT? One person plans are subject to the same PT exemption as other plans with regard to participant loans. He can take the loan.

I can't think of a reason why he could not take a loan from his company's 401a plan; what he does with the loan proceeds is not relevant. What do you mean by "effectively" repay the loan?

Lori, I can't think of why this would be a prohibited transaction.

Employer creates a plan; employee rolls over balances from another plan; employee takes allowed loan. What the employee does with the proceeds is immaterial.