Do 401(k) Withdrawals Affect Unemployment Benefits in Massachusetts?

Massachusetts will cut unemployment benefits if you take a 401(k) withdrawal.

Massachusetts will cut unemployment benefits if you take a 401(k) withdrawal.

If you've lost your job in Massachusetts, the state provides an important safety net through its unemployment insurance program. You must qualify for the program by meeting eligibility rules, and continue searching for work. Only your earned income is counted by the state. Money from 401(k) accounts does not figure in the eligibility rules, but can affect the amount of your ongoing benefits.

Applying For Benefits

Massachusetts pays unemployment benefits without taking into account the status of your 401(k) account. The benefit amount is a percentage of the wages you earned during the base year, not including your own contributions to the account. If your previous employer set up a 401(k), you can continue making contributions to the account even after losing your job. If you close the account, it won't affect your eligibility for Massachusetts unemployment benefits.

Offsetting 401(k) Withdrawals

If you're unemployed, you may be able to take withdrawals under the Internal Revenue Service rules from your 401(k) account to help pay for living expenses. If you withdraw money from your 401(k) while on unemployment, however, Massachusetts will deduct 50 percent of the withdrawal from your benefit. If you're taking regular monthly withdrawals, the state divides that amount by 4.3 to arrive at a weekly amount you're receiving, and then deducts 50 percent from the weekly unemployment benefit.

Lump-Sum Distributions

If you close the 401(k) account and take a lump-sum distribution, Massachusetts will subtract a pro-rated amount (again, at 50 percent of the total withdrawal) through the remaining period of your unemployment eligibility. If you have 10 weeks of unemployment remaining, for example, the state applies the offset to 10 percent of the distribution amount. If you find a job before all of the lump-sum distribution has been offset, the state may claim an overpayment. You will have to reimburse the balance, either all at once or through an installment agreement.

Eligibility

There are several requirements you have to meet before getting unemployment in Massachusetts. You must have been fired or laid off; if you lost your job for cause, or just quit, you can't draw unemployment. You must be capable of working, and agree to look for a new job. There's an earning requirement as well. You must have earned at least $3,500, or 30 times your weekly unemployment benefit, during a "base year," which runs prior to the date you file for unemployment.

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