Indiana unemployment compensation laws may penalize you by reducing your unemployment benefit if you take retirement distributions or early distributions from a 401k plan, or any other type of employer-sponsored pension or retirement savings program, while you are collecting unemployment. But the penalties against you will depend on how much you collect from the 401k, and the circumstances under which you take a 401k distribution.

General Rule

As a general rule, Indiana treats 401k distributions from a plan sponsored by any of your former employers as though they were wages being paid to you by that employer. This means your weekly benefit will be reduced dollar for dollar by the amount of your 401k distribution. Each month’s distribution will be divided by four weeks and subtracted from each week’s unemployment benefit. Lump sum distributions will be divided by your weekly benefit amount.

How It Works

If you were collecting the maximum $390 per week in unemployment benefits for 26 weeks, you would be getting $1,560 per month. If in the same month you also received a 401k distribution equaling or exceeding $1,560 from your former employer’s 401k plan, that sum would be subtracted from your unemployment benefit, leaving you with no unemployment benefit for that month. If you received, say, $750 monthly as a distribution from the 401k plan, each week’s unemployment benefit would be reduced by $188, leaving you with a net weekly unemployment benefit of $202. Social Security, Railroad Retirement and disability benefits are not counted against your unemployment benefit.

Delayed Distributions

If you waited to start taking 401k distributions until after you had started collecting unemployment benefits, penalty deductions from your benefits will only apply to the unemployment benefit payments made after the date you started taking the 401k distributions. Benefit payments made before that date won’t be affected. For instance, if you delayed taking 401k distributions until you had collected 12 weeks of unemployment, the 401k distributions would be deducted from your remaining 14 weeks of benefits. There would be no retroactive deduction from the 12 weeks of benefits you already received.

Hardship Rule

A state law that took effect July 1, 2011 amended Indiana’s unemployment compensation statute to allow for an exemption from penalties if you took 401k distributions because of an unforeseen and severe financial hardship caused by events beyond your control. You will bear the burden of proving that you qualify for the hardship exemption. Decisions will be made on a case-by-case basis. If the state finds you qualify for the hardship exemption, you will receive your full unemployment benefit in addition to your 401k hardship distribution.