I have cashed in my 401K and know I have 60 days to reinvest to avoid penalties. However, I now need surgery and was wondering if I could use some of my 401K money to pay for the surgery and not suffer penalties... is that possible?

You can avoid the penalties if the 401K money is used to pay for medical expenses IN EXCESS of the 7.5% AGI floor.

In other words, you take your AGI of say $50,000. 7.5% of that is $3,750. Your surgery costs $20,000. You pay $5,000 out of pocket, then use $15,000 of 401K money to pay the rest. Since the $15K was exceeded 7.5% of your AGI, no 10% penalty will be due.