The CARES act does not apply in 2022. However, the SECURE act means that if you default on a 401(k) loan during 2022, you have until the tax deadline (April 15, 2023) to make a contribution back to the same 401(k), or to a private IRA and have it considered a non-taxable rollover. For example, if the defaulted loan balance is $25,000, and you manage to make a $10,000 rollover contribution before April 15, then you would only have a deemed distribution of $15,000. The deemed distribution is subject to regular income tax plus a 10% penalty.
What this means is that you should carefully consider your investment and retirement options if you get a new job before April 15, 2023. Suppose you have the option of contributing to a 401(k) and your new job gives you sufficient financial resources to do that. If you make contributions to your new 401(k), you will get the tax deduction but you will pay income tax and the penalty on the default loan balance. However, if you took the money that you would have contributed to the 401(k) and put it in an IRA instead as a rollover contribution, you would not get a tax deduction, but you would avoid the income tax and the penalty on the deemed distribution. (If you do this, make sure you tell the IRA custodian that this is a rollover contribution due to a defaulted 401(k) and not a regular contribution.)
As the April 15 deadline approaches, you might also consider the idea of taking a short term bank loan to make the rollover contribution, because the interest on the loan would probably be a lot less than the tax and penalty on the deemed distribution, especially if your financial situation in 2023 would allow you to repay the loan easily.
So as far as your tax and withholding situation for 2022 are concerned, if you don’t think that you will be able to make a rollover contribution by April 15, 2023, you should plan to pay income tax and the penalty on the defaulted loan balance. However, if you can make rollover contributions to an IRA, that could significantly reduce the tax you owe.
Also note that the 401(k) administrator will probably not accept a rollover repayment if it is after 60 days. That’s OK because you can make the rollover contribution to a private IRA instead.
