I have been struggling to pay my mortgage this past year and keep my home for me and my family. My income is based largely on commissions with a small base salary. I work two jobs but the other job is not in demand in this economy. Recenly my father died and I asked my compnay for some funds from my 401K. They sent me a check for the entire amount. I used some of the funds to fly my family and myself to Hawaii, where my father lived and died. When I returned with my family, my company said they made a mistake in giving me the funds and wants me to return it. I am confused because I still need the funds just to survive and keep my house. Without this help, I would be without a home for my family. I have only used part of the funds to date but it will be sometime until business improves where I can take care of my mortgage with my income. My questions are: a. Can I deduct the cost of travel and participating in my father's funeral? Can I continue to use these funds to protect my house from foreclosure? Am I obligated to pay back to the company some of these funds?

Hello veyne. The rules for when an employee is allowed to make a withdrawal vary from plan to plan, but in the majority of cases 401(k) plans only allow active employes to take a withdrawal if the money is to be used for one of the defined "hardship" purposes. These hardship purposes (as defined by the IRS) are:
1. Expenses for medical care previously incurred by the employee, the employee's spouse, or any dependents of the employee or necessary for these persons to obtain medical care;
2. Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);
3. Payment of tuition, related educational fees, and room and board expenses, for the next 12 months of postsecondary education for the employee, or the employee's spouse, children, or dependents;
4. Payments necessary to prevent the eviction of the employee from the employee's principal residence or foreclosure on the mortgage on that residence;
5. Funeral expenses; or
6. Certain expenses relating to the repair of damage to the employee's principal residence.

Note that needing the funds to "survive" is not considered a valid hardship. So it seems that they mistakenly sent you a check thinking that either you are not an active employee, or your circumstance fit one of these hardship cases. So that was the mistake. Now they're trying to set it right, which means you have to return the entire amount. The problem is that if they don't fix this, they would face fines from the IRS. Sorry I can't give you a more positive answer, but I do believe that you are obligated to return the funds.

Question - when they sent the check did they withhold 20% for income taxes, like they should have? If so, are they saying that you need to refund that as well?

An option to explore is the possibility of taking a loan from your account - there are many advantages to taking a loan over a withdrawal - for example, loans ar not subject to income tax, nor the early-withdrawal 10% penalty, like a withdrawal would be. The interest and principal that you pay for that loan goes into your own account, so you are essentially paying yourself. So ask your plan manager if they can convert the distribution to a loan.