I recently decided to stop putting into my 401k and withdraw the funds, so that I can start going to college. When I asked my employer about closing it out, I found out that it was an option for this specific purpose.

But then a few minutes later I got a phone call and the finances lady told me that our company had set up the 401k in such a way that I am only entitled to the funds if I quit or get fired. Neither are an option for me right now.

How can my employer do this, I didn't know it was possible.

Rather than making a withdrawl from your 401(k) you should consider taking a loan for the amount you need. There are some good advantages with this, not the least of which is you can avoid paying either income tax or early withdrawal penalty on the loan amount, which will save you lots of $$.

Depending on how your plan's rules are written, it may indeed restrict active employees from taking a withdrawal from their account, even for one of the "hardship" reasons. If this is the case, then indeed you would have to quit or be fired in order to take a withdrawal. But as already noted, the interest and penalties you would have to pay make this a less attratective option than taking a loan.

That seems to be the case. I was hoping to avoid this because time is more important right now than the money, I can afford the loss more easily than I can the payments. But I suppose this is my best answer, even if it's better in the long run. Guess I will be calling my grandma... lol