California Unemployment & Cashing a 401(k)

The California Employment Development Department administers the state's unemployment program pursuant to the California Unemployment Code and California Code of Regulations. Unemployed and partially unemployed workers can receive up to 26 weeks of regular unemployment benefits in addition to extended benefits. Under California law, pensions, including 401(k) benefits, count as income and may reduce an applicant's weekly unemployment benefits. Furthermore, applicants who attain retirement age, cash out their 401(k) or other pension plans and terminate employment to retire may be ineligible to receive benefits.

The California Pension Law or Section 1255.3 of the California Unemployment Code states that retirement income reduces an unemployed claimant's benefits dollar-for-dollar. In other words, if an employee is entitled to $400 in weekly benefits, and she receives $100 in pension benefits, the California Employment Development Department will reduce her unemployment benefits by $100, and she will receive a $300 weekly benefit allowance. However, the California Pension Law further states that an employee's pension pay does not reduce her unemployment benefits if she contributed to her pension plan or retirement account.

401(k) cash-outs will not affect employees who contribute to their plans. If, however, an employee does not contribute to his plan, and his contributions are entirely employer-funded, the pension or 401(k) cash payments will reduce his unemployment benefits. The California Pension Law limits the deductibility rule to employees who contribute to pension plans maintained by an employer used to calculate the base period of employment. In other words, if an employee's unemployment benefit eligibility depends on Toy Company's wages, and the employee receives 401(k) benefits accrued while working for Toy Company, he may receive his full unemployment benefits if he also contributed to Toy Company's 401(k) plan.

According to Title 22, Section 1256 of the California Unemployment Insurance Code, an employee who quits or terminates employment to retire may not be able to collect unemployment benefits. In limited situations, retirement is tantamount to voluntarily terminating employment. Under California law, employees who voluntarily terminate employment without good cause do not qualify for unemployment benefits. A good cause reason for terminating employment includes quitting because of an employer's mandatory retirement policy. As a side note, mandatory retirement policies may violate federal and state equal employment laws.

Good cause termination does not include voluntarily quitting and retiring in order to take advantage of a 401(k) cash-out. Under the California Unemployment Insurance Code, an employee must have a compelling and justifiable reason for terminating employment to qualify for unemployment benefits. Merely qualifying for a full cash-out without penalties does not qualify as justifiable cause for quitting.

Title 22, Section 1256 further states that the California Employment Development Department must consider all of the facts and circumstances of an employee's voluntary retirement termination before denying unemployment benefits. Factors which may justify early or optional retirement include an employee's age, pressure from his employer to quit, the chances of the employer going out of business, his health and his wages.