If you decide to not pay it back then the amount distributed will be fully taxable but you can still elect to spread the amount over 3 years.
You’ll have three years to decide if you want to pay back the funds you withdrew, without the amount impacting that year’s cap on contributions. If you pay back the amount within that time (can also be partial repayment), you’ll be able to claim a refund on those taxes paid when you file an amended tax return. Please see IRS Coronavirus-related relief for retirement plans and IRAs for more details.
Example from the IRS:
If 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.
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