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CARES Act distribution repayment - source?


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I am having trouble finding guidance on this and hoping someone can point me in the right direction.

Participant took a $100,000 CARES Act distribution in 2020. Proceeds came from:

  • Roth deferral = $50,000
  • Pretax deferral = $25,000
  • Match = $25,000

Participant makes a repayment of $100,000 in 2023. In to what sources are the funds deposited at the time of repayment? Roth = $50,000, Pretax = $25,000, Match = $25,000? Or Roth Rollover $50,000, Pretax Rollover $50,000? Some other method?

Thank you

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That's an excellent question and one I'm not fully sure the IRS guidance contemplated at the time.

Since the effect of the rollover back in is to essentially retroactively recoup the taxes paid, I would think you would have a related rollover (if rolled back to the Plan) to the same sources that the distribution came from and you would be restoring any ROTH basis.

If the participant rolled it to an IRA instead of back to the Plan in the 3 year window which was also allowed, I would assume they would need to roll $50K back to a ROTH-IRA and the remaining 50K to a traditional IRA.

I believe the intent of the 3 year repayment window was to put participants in the same situation they would have been in had they not taken the COVID withdrawal (with the exception of a 0.0% rate of return on the funds while out of the Plan/IRA). Essentially you could view it as up to a 3 year interest free loan from the Plan that became fully taxable if not repaid but did not carry the other negative consequences of a participant loan default if not repaid.

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You may find Q&A 7 helpful in this IRS Q&A  https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

As I read it, you repay the amount to the plan and then file amended tax returns for each year in which you received a payment to claim a refund of taxes you paid on the distribution in each year.  In effect, you are reversing the payments out of each year's tax return.  It would make sense to have the repayment flow back to it's original source.

Of course there is no mention of what to do about state taxes.

FYI, Q&A 7 in particular reads:

Q7. May I repay a coronavirus-related distribution?

A7. In general, yes, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that you complete the repayment within three years after the date that the distribution was received. If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.

If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022. See sections 4.D, 4.E, and 4.F of Notice 2005-92 for additional examples.

 

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