There's no law that stops a disabled worker from having a 401(k) account. If you're disabled and leave your job, you may be able to hang on to your old account. You can't put more money in, as contributions come out of your paycheck and your employer's no longer paying you. You can, however, withdraw from the account early without paying the usual 10 percent tax penalty.
If your 401(k) has more than $5,000 in it, the law says your employer has to let you hang on to the account after you leave. Under that amount, it's optional. If you're satisfied with how the account is growing, you can leave it to continue earning money until you turn 59 1/2, the age at which you can start withdrawing. The assets in the account and the interest they earn remain tax-free until you take them out.
You can take withdrawals from your 401(k) without penalty if you meet the IRS definition of total disability. To qualify, you can't engage in any substantial gainful activity because of your disability. Also, a doctor must confirm your disability will last at least a year. If you're only sidelined for a few months, but you have a major financial commitment -- college, a new house, high medical bills -- your employer may authorize a hardship withdrawal from your plan to cover the expense.
If you work while receiving Social Security disability benefits, the added income may reduce your benefits. That's not a problem if you withdraw from a retirement account -- you're not getting the money by working, so it doesn't affect benefits. Your 401(k) withdrawals may make some of your benefits taxable, though. If half your benefits, plus your adjusted gross income -- which includes withdrawals -- adds up to more than $25,000 for a single filer, benefits are partly taxable. For couples, the turning point is $32,000.
You don't have to keep your 401(k) if you don't think it's earning enough. When you leave your job, you have the right to roll the money from one account into another. You can transfer your 401(k) into an IRA, for instance, and manage the money yourself. There's no tax on the transfer. If you put the 401(k) assets in a Roth IRA, you pay tax on the rollover, but that frees you up to make withdrawals later without any tax.