Participant Took Coronavirus-Related Distribution in 2020, Tax Spread over 3 Years; Can Repayment of Amount Otherwise Taxed Be Deducted?

Participant A was a participant in the C 401(k) Plan until she terminated employment in 2020. A takes a Coronavirus-related distribution during 2020 and elects to have the tax spread out over 3 years. During late 2021, A starts a business as a sole proprietor and sets up a solo 401(k) plan. If A repays the full amount of the one-third of the 2020 distribution that would otherwise be taxable to her in 2021, and contributes that amount to the solo 401(k) plan, can A deduct the amount of the 2021 repayment on her 2021 tax return? Assume that the total amount contributed to the solo 401(k) plan, including the amount repaid of the repaid Coronavirus-related distribution, does not exceed the 402(g) limit on elective deferrals or the deduction limit under Code Section 404(a).

I looked into this further and found the answer to my question. The answer is that the repayment cannot be taken as a deduction. According to IRS Notice 2020-50, 1.D, ""recontribution will be treated as having been made in a trustee-to-trustee transfer to that eligible retirement plan." Because of this treatment, it cannot be treated as an elective deferral to a 401(k) plan nor as an employer nonelective contribution to such plan.

Repayment of a coronavirus-related distribution would generally be treated as a rollover to the receiving plan - is is not subject to limits under 402(g) or 415(c), nor is it deductible under section 404. It would, however, reduce the individual's taxable income for the year of the repayment, or for the prior year if the repayment is made prior to the individual's tax filing deadline for the prior year. 

Your client (and their tax advisor) should carefully read the instructions to Form 8915-F to understand how to properly account for the repayment of the distribution when preparing their tax return.