Special to the Legal
A question was recently posed to me asking whether a withdrawal from a 401(k) would cause one’s unemployment compensation benefits to be denied, be diminished or even cease if already in payment. The answer to this inquiry is not totally clear.
43 Pa.C.S.A. 804(d)(2)(i) states: “Periodic payment, under a plan maintained or contributed to by a base period or chargeable employer, the weekly benefit amount payable to such individual for such week shall be reduced, but not below zero, by the pro-rated weekly amount of the pension as determined under Subclause (ii)” and 43 Pa.C.S.A. 804(d)(2)(ii) states: “If the pension is entirely contributed to by the employer, then one hundred per centum of the pro-rated weekly amount of the pension shall be deducted. … [I]f the pension is contributed to by the individual, in any amount, then fifty per centum of the pro-rated weekly amount of the pension shall be deducted.”
The obvious questions that arise are, is a 401(k) a pension under the above statutes, and what if someone withdraws funds from their 401(k) before he is of retirement age as one would withdraw funds from a bank account? Answers to these questions are not readily forthcoming from the cases decided under the unemployment compensation law, but need to be parsed from cases dealing with other retirement vehicles (Wise v. Unemployment Compensation 707 A.2dc 627 (Pa.Cmwlth. 1997)).
After a review of the Wise case, it appears that if someone withdraws money from a 401(k) after he has reached an age of 59½, which enables the withdrawal to be made without a penalty, then the statutory guidelines laid out above apply and unemployment compensation benefits are reduced, possibly to zero. If someone is under the age of 59½ and rolls over the funds in his 401(k) into another retirement vehicle/investment in order to avoid the penalty for withdrawal, but does not withdraw any of the funds in it, then the above guidelines laid out do not apply and the unemployment compensation claimant can receive benefits without the statutory reduction in the same. Indeed, the Wise court opined that a roll over is not actual receipt of the funds and the claimant ought not be penalized with a reduction of unemployment benefits.
Unfortunately, courts generally have not directly addressed a situation in which someone who is under 59½ withdraws all of his funds from his 401(k), and pays the 10 percent penalty required for so. The court appears to imply that it does not believe it is just, or consistent with legislative intent, to make someone pay a penalty on the withdrawal and also be subject to a reduction of unemployment compensation benefits per the above statutory guidelines, as that would amount to a double penalty; however, the court did not rule on this scenario.
One question that the court does not appear to have addressed at all is if a claimant withdraws all funds from a 401(k) (with penalty) under the age of 59½, which could lead to a reduction of unemployment compensation benefits, does it matter if the contributions were made solely by the claimant, were made solely by the employer or the contributions came from both sources. If the 401(k) is comprised entirely of a claimant’s own contributions, would not those assets be his own as if he had contributed to a bank account, which would not affect benefits at all under normal circumstances? Are an employer’s contributions somehow different?
Per the Wise court’s dicta, one could reach the conclusion that one can withdraw all funds from a 401(k) under the age of 59½, pay the penalty for doing so, and still be eligible for the full unemployment compensation benefit amount. In saying that, however, due to government budget constraints and current economic conditions, the Department of Labor (and sometimes the courts) has been trending toward finding and justifying reasons to reduce or eliminate unemployment compensation benefits. Indeed, even if a claimant would be ultimately successful using the arguments laid out above, I would not at all be surprised if the Unemployment Compensation Board of Review, taking advantage of the ambiguity described above, would rule an under-59½ year old claimant ineligible due to withdrawing his entire 401(k) and make the claimant appeal the decision and make the above arguments at a referee’s hearing.
Ultimately, I think the odds are that the law will ultimately settle on specifically permitting full benefits to be paid to someone who withdraws all funds from a 401(k) with a penalty while under the age of 59½. I think this is likely because it is consistent with the case law described above and it avoids having to formulate a policy to address a claimant’s own contributions to a 401(k) as distinct from an employer’s contribution. For the practitioner, I think it would be prudent to inform his client of the risks described above, and even if the chances of success are high, to be prepared to have to engage in the hearing process to arrive there.