diff --git a/packages/contracts/contracts/L1/AssetManager.sol b/packages/contracts/contracts/L1/AssetManager.sol
index 4d1575ca5..9b20836ab 100644
--- a/packages/contracts/contracts/L1/AssetManager.sol
+++ b/packages/contracts/contracts/L1/AssetManager.sol
@@ -730,15 +730,21 @@ contract AssetManager is ISemver, IERC721Receiver, IAssetManager {
      * @param baseReward      The base reward to distribute.
      * @param boostedReward   The boosted reward to distribute.
      * @param validatorReward The validator reward to distribute.
+     * @param challengeReward The challenge reward to distribute.
      */
     function increaseBalanceWithReward(
         address validator,
         uint128 baseReward,
         uint128 boostedReward,
-        uint128 validatorReward
+        uint128 validatorReward,
+        uint128 challengeReward
     ) external onlyValidatorManager {
         // Distribute the reward from a designated vault to the AssetManager contract.
-        ASSET_TOKEN.transferFrom(VALIDATOR_REWARD_VAULT, address(this), baseReward + boostedReward + validatorReward);
+        ASSET_TOKEN.transferFrom(
+            VALIDATOR_REWARD_VAULT,
+            address(this),
+            baseReward + boostedReward + validatorReward + challengeReward
+        );
 
         // If reward is distributed to SECURITY_COUNCIL, transfer it directly.
         if (validator == SECURITY_COUNCIL) {
diff --git a/packages/contracts/contracts/L1/ValidatorManager.sol b/packages/contracts/contracts/L1/ValidatorManager.sol
index 1ab565418..c6dbf789c 100644
--- a/packages/contracts/contracts/L1/ValidatorManager.sol
+++ b/packages/contracts/contracts/L1/ValidatorManager.sol
@@ -516,11 +516,14 @@ contract ValidatorManager is ISemver, IValidatorManager {
                     uint128 validatorReward
                 ) = _calculateReward(submitter);
 
+                uint128 challengeReward = _pendingChallengeReward[outputIndex];
+
                 ASSET_MANAGER.increaseBalanceWithReward(
                     submitter,
                     baseReward,
                     boostedReward,
-                    validatorReward
+                    validatorReward,
+                    challengeReward
                 );
 
                 emit RewardDistributed(
@@ -531,7 +534,6 @@ contract ValidatorManager is ISemver, IValidatorManager {
                     boostedReward
                 );
 
-                uint128 challengeReward = _pendingChallengeReward[outputIndex];
                 if (challengeReward > 0) {
                     ASSET_MANAGER.increaseBalanceWithChallenge(submitter, challengeReward);
                     delete _pendingChallengeReward[outputIndex];