My husband's plant is closing down. They are closing out the ESOP. They are automatically putting the cash into the employees 401K plan. My husband would like the cash so we could pay off our house. Is it illegal not to give him the choice? If it goes into the 401K then we would get a 10% penalty for using the money. (On top of the taxes) Jobs in our area are scarce and our thinking is that if it gets really ugly, at least our house is paid for.

A quick look in my CCH pension guide shows ESOPs are subject to the same general rules governing the taxation of distributions as 401(k)s and other qualified plans. The only exception is the 10% penalty does not apply to certain cash dividend distributions. What you're talking about would not qualify for that exception, so the 10% would apply even from the ESOP.

skv7: I believe your question is: Can the Company shut down the ESOP and put the employees' money in the 401k plan without giving them the option of actually receiving the money? The answer is "yes," for at least a couple of technical reasons I won't bother getting into here.

However, masteff points out, correctly, that you'd pay the same tax if your husband received the ESOP money directly as he would if he received the money from the 401k plan (assuming your husband is eligible to receive the money from the 401k plan under the terms of that plan). Whether he can actually withdraw any 401k plan money while he is still working for the Company is another question.

Thank you both for that information! Once it is in the 401K, can he withdraw some this year and some next? Or is the withdrawal after you leave the company a one time deal? I want it to hurt the least at tax time and just thought if I spread it out it might be better. We would end up paying $30,000 in interest on the house so if I keep the penalty around that I'm happy. We need $71,000 to pay it off. He'll have about 115,000 in the 401K.

That's subject to the rules of the plan. Need to ask the benefits department.