Upon receiving a corrective distribution, how is it likely to affect HCEs’ reported income for the year it occurs?

When highly compensated employees (HCEs) receive a corrective distribution from a qualified 401(k) plan, it typically results in an increase in their reported income for the year in which the distribution occurs. This increase happens because corrective distributions, which are made to address excess contributions that exceed the limits set forth by the Internal Revenue Service (IRS), are considered taxable income to the employees.

For HCEs, these distributions are added to their taxable income for the year, which can lead to a higher tax liability as the additional income may place them in a higher tax bracket or result in additional taxes owed due to the increase in total income. Therefore, the correct choice reflects this understanding of how corrective distributions are treated under tax law, emphasizing the impact on HCEs’ reported income.