Does the 20% mandatory withholding for federal income tax apply to corrective distributions?

The correct choice states that the 20% mandatory withholding for federal income tax does not apply to corrective distributions. This is important to understand because corrective distributions are typically related to excess contributions or other adjustments that must be made to a retirement plan in order to comply with IRS regulations. Since these distributions are not considered taxable income in the same way that regular distributions would be, they do not trigger the mandatory withholding requirement.

When a corrective distribution is made, the purpose is to rectify an error in contributions to ensure that the retirement plan adheres to the limits set by law. Since they involve returning excess funds rather than generating new income for the recipient, these distributions are treated differently from regular distributions, which often do face the mandatory withholding. Thus, it is crucial to know that those handling these types of distributions need to process them without imposing this withholding requirement, ensuring compliance and accurate tax treatment.

Understanding this distinction helps in accurate tax planning and administration of 401(k) plans, ensuring that participants are not incorrectly penalized or burdened with unnecessary tax withholdings.