COVID Distribution - Partial Pay Back in 2020

A participant takes a $100,000 COVID distribution. 

The participant is rehired in July and is able to repay $75,000 of the $100,000 by the end of 2020.  Assume he does not make any additional repayments in 2021 or 2022.

Is his $100,000 still divided by 3, for a taxable distribution amount of $33,333 in 2020, 2021, and 2022, and uses the $75,000 to reduce each year's liability, (so $0 in 2020, 0 in 2021, and $25,000 in 2022)?

Or is the entire $100,000 reduced to $25,000 in 2020 and he pays $8,333 in 2020, 2021, and 2022?

The first way does not seem to make much sense unless you consider that if it is handled in that manner than if he does make additional payments in 2021 he would not need to amend his 2020 tax return since he would not have paid any taxes on the distribution in that year, whereas in the second method he would need to amend his 2020 return to recoup the taxes paid on the $8,333.

I hope this is not a ridiculous question.

Thanks.

19 minutes ago, Gilmore said:

A participant takes a $100,000 COVID distribution. 

The participant is rehired in July and is able to repay $75,000 of the $100,000 by the end of 2020.  Assume he does not make any additional repayments in 2021 or 2022.

Is his $100,000 still divided by 3, for a taxable distribution amount of $33,333 in 2020, 2021, and 2022, and uses the $75,000 to reduce each year's liability, (so $0 in 2020, 0 in 2021, and $25,000 in 2022)?

Or is the entire $100,000 reduced to $25,000 in 2020 and he pays $8,333 in 2020, 2021, and 2022?

The first way does not seem to make much sense unless you consider that if it is handled in that manner than if he does make additional payments in 2021 he would not need to amend his 2020 tax return since he would not have paid any taxes on the distribution in that year, whereas in the second method he would need to amend his 2020 return to recoup the taxes paid on the $8,333.

I hope this is not a ridiculous question.

Thanks.

It's a reasonable question, and until we have guidance, we won't know if the IRS adopts a reasonable position.  But I vote for the first method because of how the payback is being treated.

Since the taxable distribution amount is going to be reported as $100,000 (the 1099R for the first year) and the payback is considered a rollover not a reduction on the payout, I'm guessing he reports $100k as the distribution, includes 1/3 in income, and then reduces his income by the amount of the payback that year (and future years if it is not all used up).  But this is just my guess.  So, he reports $33k, reduces that to taxable amount of $0 in each of the first two years, and reduces the third year amount by the balance for a $25k taxable amount.  If he can come up with the extra $25k in year three, he would be able to reduce his income by that $25k so that his taxable distribution over the 3 years is now zero.

1 hour ago, Gilmore said:

Is his $100,000 still divided by 3, for a taxable distribution amount of $33,333 in 2020, 2021, and 2022, and uses the $75,000 to reduce each year's liability, (so $0 in 2020, 0 in 2021, and $25,000 in 2022)?

42 minutes ago, Larry Starr said:

It's a reasonable question, and until we have guidance, we won't know if the IRS adopts a reasonable position.  But I vote for the first method because of how the payback is being treated.

I agree.  The reasonable assumption seems to be that CARES distributions and repayments will be reported on Form 8915 like prior qualified disaster distributions and repayments.

going by the Form 8915 instructions, the 2020 payment (repaid before the due date of the 2020 return) of $75,000 would first reduce the part of the distribution included in income for 2020.  The excess would then carry forward to 2021, reducing the 2021 distribution included in income.  The remaining excess of $8,334 carries forward to 2022, leaving $25,000 to be included in income for 2022.

If we had paid 50,000 after the due date of the 2020 return, it would first reduce the part of the distribution to be included in income for 2021, and the excess could be carried back to 2020 (amended return for 2020), or carried forward to 2022.

I don't see any reason for the IRS to reinvent distributions and repayments when all they need to do is modify the instructions to include CARES.

From the 2019 Form 8915-B instructions:

Quote

If you choose, you can generally repay to an eligible retirement plan any portion of a qualified 2017 disaster distribution that is eligible for tax-free rollover treatment. Also, you can repay a qualified 2017 disaster distribution from a retirement plan made on account of hardship. However, see Exceptions below for qualified 2017 disaster distributions you can’t repay.

You have 3 years from the day after the date you received the distribution to make a repayment. The amount of your repayment cannot be more than the amount of the original distribution. Amounts that are repaid are treated as a trustee-to-trustee transfer and are not included in income. Also, for purposes of the one-rollover-per-year limitation for IRAs, a repayment to an IRA is not considered a rollover.

Include on 2019 Form 8915-B any repayments you make before filing your 2019 return. Any repayments you make will reduce the amount of qualified 2017 disaster distributions reported on your return for 2019. Do not include on your 2019 Form 8915-B any repayments you make later than the due date (including extensions) for filing your 2019 return.

. If you make a repayment in 2020 after you file your 2019 return, the repayment will reduce the amount of your qualified 2017 disaster distributions included in income on your 2020 return (if any), unless you are eligible to amend your 2017, 2018, or 2019 return. See Amending Form 8915-B, later. Also, any excess repayments you make for 2019 will be carried forward to your 2020 return (if you are repaying a distribution reported on your 2018 Form 8915B, Part I) or back to your 2017 or 2018 return.

Thank you very much.