Repayment is putting back the money you took out. The money that you took out effectively went into your pocket, to the repayment must come from money that is in your pocket. In this case, since the original account is closed you can make the repayment to an IRA instead of back to the 401(k) account.
The tax withholding is also money that effectively went into your pocket that you then used to pay taxes, so to repay all of the distribution you will have to substitute other money from your pocket. The repayment is treated as a rollover. If you have paid too much money to taxes after factoring in the repayment, you get a refund and that refund goes back into your pocket to replace the substituted cash. Since the repayment results in a tax refund, the post-tax money goes back to being pre-tax.
In the end, if you repay all of the distribution, everything will essentially be back to where it would have been had you not taken the distribution in the first place. Your total balance in retirement accounts will be increased back to where it would have been and the cash in your pocket will be reduced back to where it would have been.
Think of this as having the same effect as a normal 60-day rollover of a retirement distribution except that you have up to 3 years to complete the rollover and your tax return is required to include Form 8915-E to handle it.
