Is it a Prohibited Transaction for the owner of a company to make a loan with proceeds from his participant directed account (401(k)) to an employee who happens to be an officer of the company and an HCE?

Are you asking if the "Plan" can make a loan to the individual or if the "participant" can take a loan himself, and then re-loan that money to the individual?

There is a big difference.

whether the owner/trustee can make a loan of assets in his capacity as a participant of his participant directed account balance to another participant who happens to also be an officer. this would be different then the typical participant loan.

I think you would probably have a PT-- look at ERISA 408(B)(1).

I suppose that if 1) the employee wanting the loan is also a participant in the plan 2) The owner is willing to make similar amounts availabe from his account to other participants in a like amount and 3) the loan bears an adequate rate of interest and is adequately secured and 3)the plan provides for such loans, then you may be able to meet the technical requirements of 408(B)(1).

However, I haven't looked at 2550.408(B)(1) which has some pretty detailed requirements on when a loan will meet the statutory PT exemption.