Termination and 401K

[Guest gman26]

If an employee is no longer employed, whether he is terminated, quits or is offerred a severance package, he can request a full disbursement, correct?

What tax and penalties apply? 20% tax?

What happens to outstanding loans?

State of California.

[david rigby]

In general, the plan will define when a distribution is permissible. Tax laws and regulations will define how (and when) it is taxed.

See IRS Publications 575 http://www.irs.gov/pub/irs-pdf/p575.pdf

and 590 http://www.irs.gov/pub/irs-pdf/p590.pdf

Before making a distribution, the employer is (probably) required to provide a special notice that gives an overview of how it will be taxed. You can get a headstart by ordering the above publications (1-800-tax-form).

[Guest Boilerburm]

The thing to remember is that this is a Retirement Plan. The employer generally does not have to allow any distributions prior to Retirement age, whether still employed or not!

Of course, the plans typically do allow for distribution upon termination, but even then, it might not be for a year, or even five years.

As pax indicated, this is spelled out in the plan document, and the employer should answer any questions regarding distributions.

[jquazza]

Gman,

as the others said above, a plan will generally allow participants to take a distribution upon severance of employment (though they don't have to.)

Speaking in generalities again, in most cases, the participant receiving the distribution will have to pay regular (fed & state) income taxes on the full amount of distribution plus a 10% excise tax if the participant is under 59 1/2 (which you probably are, I have never seen a sexagenarian calling himself Gman.) In some cases you don't have to pay taxes on the full amount, but let's not get too technical. One way to avoid paying any taxes is to roll over the amount to an IRA or another qualified plan. The 20% tax you mention is just a withholding amount, meaning the payor will send that money to the IRS unless you elect to do a direct rollover. That doesn't mean that's all the tax you'll have to pay. Depending on your tax bracket, deduction and age, you might not have to pay any taxes at all and will get the money back when you file your 1040.

As far as the loan is concerned, your plan loan policy should spell out for you what happens to the loan when you quit. In most cases, the loan becomes payable immediately and will be distributed to you within few months of your termination of employment, whether you like it or not. That means you'll get a tax bill but no money.