PowerShell folder permission error - Some or all identity references could not be translated.

The error is pretty self explanatory: Some or all identity references could not be translated.

This means the account couldn't be found. So what you have to do is verify your accounts. Since you're adding 4 ACE's, you'll need to identify which is invalid.

The easiest way to do this is to debug through, line by line using the ISE or PowerGUI.

I tried your code with "NT AUTHORITY\SYSTEM" and "BUILTIN\Administrators" and it works so the issue is with "O1OAK\$user" or "1OAK\$user". You likely have an invalid account in your text file.