Ok, I went through something similar after a layoff back in May. Since I didn’t know where my next rent check would come from, I cashed out my 401K(all of $1700, 0% vested). When I took the cash out, a portion was taken out for taxes. I don’t remember quite how much I walked away with at that point in time-maybe around $1000. I am still waiting for my 1099 form that I will file with my taxes, declaring that income. I will probably have to pay additional taxes on it.
*Markxxx, your co-worker should receive a 1099. She needs to include this with her taxes. This should also detain how much tax was withheld from her cash out. If it wasn’t enough, then she’s going to have to pay in, or get less of a refund, whichever is the case.
(Now, it turned out that I got a new job relatively quickly, and didn’t have to worry about where rent was coming from. Not knowing that at the time, I chose the option that seemed best.)