Having received the check, the employee is in constructive receipt of the distribution. A hardship distribution is not eligible for rollover, so there is nothing the employee can do but cash the check, include the entire amount in income and pay the tax and 10% early-distribution penalty. Since the employee has excess funds, the employee could potentially increase 401(k) deferrals for some time, but there is little time left in 2023 to do that to reduce taxable income on their W-2. If their modified AGI for the purpose permits, the employee could also potentially make a deductible traditional IRA contribution to reduce 2023 taxable income. Neither of these would avoid including the hardship distribution in 2023 income and paying the 10% early-distribution penalty.
