Why Did I Receive a Check From Empower Retirement?

Receiving an unexpected check from Empower Retirement can be puzzling, especially if you’re unsure why it arrived. These checks often relate to specific financial transactions within your retirement plan that require attention or correction.

Residual or Forced Distributions

Residual or forced distributions occur due to regulatory requirements or plan provisions mandating fund disbursement under certain conditions. This typically happens when a participant’s account balance falls below a threshold, often $5,000, as specified by the Employee Retirement Income Security Act (ERISA). Plan administrators like Empower Retirement distribute the remaining balance to comply with these guidelines.

The aim is to reduce administrative burdens on retirement plan providers and close small, inactive accounts. This is particularly relevant for individuals who have left their employer and haven’t rolled over their retirement savings into another qualified plan or individual retirement account (IRA). In such cases, the plan may automatically issue a check to the participant, effectively closing the account.

These distributions may have tax consequences. If not rolled over into another qualified retirement account within 60 days, they may be subject to income tax and, if the recipient is under 59½, an additional 10% penalty under the Internal Revenue Code Section 72(t). Exploring rollover options can help recipients manage these tax implications.

Return of Excess Contributions

A check from Empower Retirement may result from excess contributions made to a retirement plan. This occurs when contributions exceed IRS limits. For 2024, the maximum contribution limit for 401(k) plans is $23,000 for individuals under 50, with an additional catch-up contribution of $7,500 for those aged 50 and older. Exceeding these thresholds triggers a return of excess contributions to ensure compliance with federal guidelines.

Excess contributions are not eligible for tax-deferred growth and must be returned to avoid penalties. Any earnings associated with these contributions are taxable in the year they are received, potentially creating an unexpected tax liability. Monitoring contribution levels and coordinating with plan administrators can help avoid exceeding IRS limits.

Understanding the implications of excess contributions is crucial for effective retirement planning. Employers and participants should work together to ensure contributions are accurately tracked and adjusted as needed to prevent these issues.

Corrective Payment for Plan Errors

Checks from Empower Retirement may also result from corrective payments due to plan errors. These errors can stem from administrative oversights or miscalculations related to contributions, allocations, or distributions. For example, incorrect participant data, such as salary figures or deferral percentages, may lead to misallocated funds, requiring corrective action to align the account with plan provisions and IRS regulations.

The IRS’s Employee Plans Compliance Resolution System (EPCRS) provides a framework for addressing such errors, allowing plan sponsors to correct them without jeopardizing the plan’s tax-favored status. Methods like the Self-Correction Program (SCP) and the Voluntary Correction Program (VCP) enable administrators to proactively resolve issues. For instance, if a plan error results in excess allocations, a corrective distribution might be issued to restore compliance.

Corrective distributions are often treated as taxable income in the year received. Recipients should anticipate potential tax liabilities and consult a tax advisor to understand the financial implications. To minimize future errors, plan sponsors are encouraged to implement strong internal controls and conduct regular audits.

Outstanding Loan Adjustments

An unexpected check from Empower Retirement could indicate adjustments related to an outstanding loan tied to your retirement plan. Many retirement plans allow participants to borrow against their account balance, offering short-term liquidity without immediate tax consequences. However, managing these loans requires adherence to plan rules and IRS guidelines.

Loan adjustments may occur due to discrepancies between the loan agreement terms and actual payments made. These issues can arise from missed payments, changes in employment status, or administrative errors in recording repayments. When identified, plan administrators may issue corrective payments to reconcile the account balance with loan terms, ensuring compliance with maximum loan amounts and repayment periods outlined in IRS regulations.

Withholding and Tax Implications

When receiving a check from Empower Retirement, understanding the tax and withholding implications is critical. Payments—whether due to residual balances, excess contributions, or corrective actions—are often treated as taxable income under the Internal Revenue Code. The specific tax treatment depends on the nature of the payment and individual circumstances.

Empower Retirement typically withholds a portion of the payment for federal income taxes, with a standard withholding rate of 20% for distributions not rolled over into another qualified account. State tax withholding requirements vary; for example, California mandates state tax withholding on retirement distributions, while Texas does not impose state income taxes. Additionally, early distributions received before age 59½ may incur a 10% penalty under the Internal Revenue Code, unless an exception applies.

To avoid immediate taxation and penalties, recipients should consider rolling over the payment into another eligible retirement account, such as an IRA or another employer-sponsored plan. A direct rollover preserves the tax-deferred status of the funds. If a rollover isn’t feasible, recipients should prepare for tax obligations and consult a tax professional to determine how to report the distribution and whether estimated tax payments are necessary.