For the sake of corrective distributions, how is the taxable portion treated for the HCE's gross income?

When dealing with corrective distributions in the context of a Highly Compensated Employee's (HCE) gross income, the taxable portion of the distribution is indeed included in their gross income. This means that any amount that represents income or gains distributed as a corrective action must be reported for tax purposes during the tax year in which the distribution occurs.

This inclusion is essential because the IRS mandates that all taxable income must be accounted for within the year it is received. As such, when a corrective distribution is made to an HCE to rectify excess contributions or similar issues, the proceeds that represent gains or earnings must be declared as taxable income for that individual. This aligns with tax regulations that ensure all income is fully disclosed and taxed appropriately in the year it is earned or realized.

Understanding this concept is crucial for accurate tax reporting and compliance for both the HCE and the plan sponsor. Hence, choosing the option that states the taxable portion is included in the gross income reflects the accurate treatment under IRS rules.