In Pennsylvania, the Pennsylvania Unemployment Compensation Law establishes the eligibility rules for individuals applying for unemployment insurance benefits. The Office of Unemployment Compensation Tax Services collects unemployment taxes from the commonwealth's employers. The Bureau of Unemployment Compensation Benefits and Allowances administers the Pennsylvania Unemployment Insurance program pursuant to the Pennsylvania Unemployment Compensation Law and to federal law. Generally, all other income is deductible from a claimant's unemployment insurance benefits, including 401(k) benefits.
As required by the Pennsylvania Bureau of Unemployment Compensation Benefits, claimants report retirement income, pension benefits, annuities and 401(k) distributions. Under Pennsylvania law, pension and retirement benefits can affect a claimant's weekly benefit allowance. Deductible pension payments and 401(k) distributions can reduce a claimant's weekly benefits dollar-for-dollar. However, lump-sum 401(k) distributions are generally nondeductible unless retirement beneficiaries had the option to withdraw their benefits on a monthly basis.
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Beneficiaries who deduct lump-sum 401(k) funds are typically younger than the retirement age of 59 1/2. As such, beneficiaries generally do not have the option to receive monthly 401(k) benefits, and they will withdraw lump-sum benefits. Lump-sum distributions are not deductible from a claimant's weekly unemployment benefits. Furthermore, federal Railroad Retirement benefits and Social Security retirement benefits are not deductible, and the commonwealth will not reduce a claimant's weekly unemployment benefit allowance.
Lump-sum 401(k) or pension benefits that claimants roll over into alternate retirement plans or IRAs are not deductible income if they rolled them over within 60 days of receiving their retirement benefits. Thus, if claimants receive their pension or 401(k) benefits at termination and roll them over into new or existing alternate plans to avoid federal income taxes, the commonwealth will not reduce their unemployment benefits.
If the Pennsylvania Bureau of Unemployment Compensation Benefits determines that a claimant's 401(k) benefits are deductible, it will reduce his weekly unemployment benefits using the following reduction formulas. If a 401(k) beneficiary did not contribute to her 401(k) plan, and her benefits were completely borne by her employer, the bureau prorates her weekly pension benefits and deducts her weekly pension benefits from her weekly unemployment benefit allowance dollar-for-dollar. If the bureau finds that she also contributed to her pension plan, and her employer contributed to her plan, the bureau reduces her weekly unemployment benefit allowance by 50 percent.