How does a 401(k) loan affect my husband’s unemployment benefits?


Q. My husband was out of work for four months and didn’t receive any unemployment benefits. He had to borrow a couple of thousand from his 401(k) plan to pay some bills. Now unemployment just started yesterday and they say they have to deduct money that he borrowed from his 401(k) and take it out of his benefits. How can that be right?
— Worried

A. There are a couple of issues here.

Under the CARES Act, you can take a funds from your 401(k) of up to $100,000 or 100% of your vested account balance, whichever is less, without incurring the 10% early withdrawal penalty, said Jody D’Agostini, a certified financial planner with Equitable Advisors/The Falcon Financial Group in Morristown.

She said you have the option to pay it back within three years in order to avoid paying ordinary income taxes on the amount.

With your husband being out of work, you’ve experienced adverse financial consequences because of the virus and are therefore entitled to take advantage of this option.

But something’s not right with what you’re reporting. You’re talking about a loan and not an early withdrawal.

“I would circle back to the administrator of the 401(k) plan to be sure that this was considered a loan,” she said.

How the plan considered the loan or withdrawal is important to clarify. If your husband had a loan but then lost his job permanently, it’s possible he was required to pay back the loan to his 401(k) in a certain time period otherwise it would be considered a withdrawal, but it should still receive the favorable treatment under the CARES Act.

“Is it possible that on the unemployment application that you incorrectly listed the 401(k) withdrawal as income for the year?” she said. “If not, any loan or distribution from your 401(k) should have no impact on unemployment eligibility.”

If that’s the case, she recommends you file an appeal with the Department of Labor.

Email your questions to .

This story was originally published on Dec. 14, 2020. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.