My wife wants to cash in her 401K. Her employer said they have a policy that if you are still employed with them you cannot.

It probably is legal. 401(k) plans typically cannot be cashed out before a certain age, while the participant is still an employee. Some plans have exceptions for hardships, etc. but many do not. Even if your plan does have hardship provisions, the term "hardship" is narrowly defined.

It's impossible to answer the question based only on the facts given, but it is very possible that the employer is acting within the law by refusing your wife's request to cash out her 401(k) while she is still employed (in fact, the employer probably has no choice but to refuse the request, under the law, so don't hold it against the employer).

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