My clients company has merged with another company in a 53/47% ownership split. His existing 401k plan is being closed down and he is now eligible to participate in the new company’s 401k. He has a loan against his current plan of $38,000. He would like to rollover of his existing 401k into a IRA rollover. First off, is he eligible to do the rollover? Secondly, what are his options with regard to the loan? I see the possible options as follows:

1. Pay off loan
2. Default on loan and it will taxed as income in 2014 and be subject to a 10% early withdrawal penalty
3. Transfer loan to new 401k?

Any clarification would be appreciated.

Ted