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Can my husband's company cancel his health insurance and still keep him employed?
My husband hasn't worked for 8 months because of health issues. Two months ago he started drawing long term disability. After he had been off for 6 months, the company canceled his health insurance and told him that he still has a job for 2 years if he gets better. We want to close out his 401k because of finances but the 401k company told us that we can't as long as he is employed. We are so confused and really need the money. The long term insurance company told us that he could quit his job so he could get his money and that this will not effect his long term disability. I'm afraid for him to do this because I think it may be a way for them to stop the LTD. Do you have any suggestions for us? Does this sound typical?
1 Answer
- HeatherLv 71 decade agoFavorite Answer
Yes your husband's company can drop his health insurance and keep him employed. A 401k plan is a retirement plan. It is not a bank account that you can withdraw from whenever you need money. Quitting would not be a smart option. What is early withdrawal of 401k? Early withdrawal refers to if you withdraw the money before you turn 59½ years old. So if you withdraw the money before the aforementioned age, you will be liable to pay the penalty.
What is the penalty for early withdrawal of 401k? Well, there is a tax component and a penalty component. So if you're imagining that a $30,000 withdrawal from your 401k means that the whole sum will land on your lap, you're terribly mistaken. Let us see both the components which will bite a sizable chunk of the money you withdraw.
Penalty Component
The penalty component in the rule for 401k early withdrawal penalties means that out of the money you withdraw, you will have to pay 10% as a penalty. So taking the above mentioned example of a $30,000 withdrawal forward, it means that you will have to pay a penalty of 10% of the amount: $3,000
Tax Component
Now since you weren't charged the tax when the money went into the account, you will be charged when it comes out of it. The way the IRS sees things, the money which comes out of the 401k account amounts to being a 'source of income' and will be taxed accordingly. And by how much? It will be taxed according to which tax bracket you fall under for the year that you file taxes for. So if you fall under the 20% tax bracket, then the money you withdraw, $30,000 in the above case, will be taxed at 20% and you will be receiving $6,000 less. Secondly, if there are any state income taxes, you will have to pay those as well. So basically what with the penalties and the taxes you have to pay, you will end up having an amount in the region of $20,000, which to put things into perspective means that you have lost about 1/3rd of the amount you wanted to withdraw in the first place.
So clearly, one can say that if so much of the withdrawal amount is going to be shaved off, you'd rather not withdraw that money at all.
