I currently hold about $20,000 in my 401k plan through my employer. My question is, if I were to talk that money out as a early withdrawal, does this money get added to my total income for the year as additional income. I spoke to a plan supervisor and they went over that I will be required to pay 20% fee plus possible 10% penalized. Please advise.

Yes, ANY time you withdraw from your 401(k), that amount is added to your taxable income for the year. Generally the plan admin will withhold 20% toward your federal tax liability. And you most likely will be required to pay the 10% penalty.

To add to what ScottGem said - they will NOT automatically withhold the10% penalty, so if you do this withdrawal be sure to save at least 10% so you can pay the penalty with your taxes next April. They will also not withhold any income tax for your state/locality, so if you live where there are state/local income taxes you will have to pay that out of the proceeds as well. Finally, while they will withhold 20% for federal income tax purposes, the actual amount you will owe to the feds is dependent on your particular tax bracket - so be sure to calculate whether 20% will be enough, and if not be aware that you may have to make an estimated tax payment to avoid having an interest penalty for underpayment of taxes next April.