401k Cares Act Covid Withdrawal and Repayment?

[fanfare]

@gb1 

It will appear on the form 5498 sent to you and the IRS in May.

[Sunshne078]

In 2020, I took COVID qualified withdrawals of $38,000 and also received a payout from a company ESOP program, which I rolled over to the same plan, in the amount of $40,000. I filed my 2020 taxes thinking the rollover would qualify as repayment, but have now received a CP2000 notice stating I owe tax on the distribution (and hefty penalties). Am I right with my thinking or do I need to amend my return and pay tax on the withdrawal? 

[Critter-3]

Did you report the roll over on the 2020 return ?   A 1099-R with a code G in box 7 it  still needed to be reported even if none of it will be taxable.  

So did you take out $38K  and also $40K but only rolled over the $40K ?  

[fanfare]

@Sunshne078 

"I filed my 2020 taxes thinking the rollover would qualify as repayment,"

Seriously wrong thinking.

After you pay the IRS bill, there is no reason to amend your tax return.

[fanfare]

if you received $40,000 and

• deposited $38,000 into an IRA or 401k and designated it as a "repayment of COVID-19 distribution"
• Filed Form 8915-E correctly,

Then you would be correct in your thinking and would not have an issue with the IRS.

[IslandWave]

I don't see anything in the IRS tax code that says pre-tax or post-tax (Roth) payroll deferral contributions to my 401K cannot count as repayment of a CARES withdrawal.  If I've missed something, can someone please point me to it?  Any money I put into the 401k account after the date of my CARES withdrawal is essentially me putting the money back in and should count towards repayment.  I realize there is an argument against doing this with pre-tax dollars because then you're reducing your taxable income twice, but I don't see anything in the tax code disallowing that.  

Thanks for any help/insights.  Just trying to navigate this thing...

[Critter-3]

Any money I put into the 401k account after the date of my CARES withdrawal is essentially me putting the money back in and should count towards repayment.    Regular contributions from your paycheck  does not count towards repayment.  Only funds outside of the payroll situation would count. 

[fanfare]

all this was addressed above in comments dated 4-17.

[dmertz]

"I realize there is an argument against doing this with pre-tax dollars because then you're reducing your taxable income twice"

That's an internet myth.  A repayment (be it a distribution or loan principal) is made by redepositing cash that you received.  Cash is fungible, so the fact that you substituted one pile of cash for another is irrelevant, it's still fundamentally the same cash that you received.  The whole concept of a repayment is that you are effectively putting back the same thing that you took out.  New compensation that you use to make an elective deferral is not the same as money already in your savings which no longer has the characteristic of being compensation.

[VolvoGirl]

You have to make the repayment with money from outside.  Then by putting in back in within the 60 days it will make the 1099R withdrawal not taxable in the first place.  After you enter the 1099R you say you rolled it over even if you put it back in the same account.  When did you take the distribution?  Was it in 2020?  Did you elect to spread the taxes over 3 years?  

[IslandWave]

Thanks for the replies.  I took the distribution in 2020 because I lost my job.  I chose to spread it out over the three years.  But I continued to defer money from my paycheck into the 401K thinking that was repayment of what I took out.  Regarding these replies:

"Regular contributions from your paycheck  does not count towards repayment.  Only funds outside of the payroll situation would count. "

"You have to make the repayment with money from outside."

Where in the tax code is this stated?  Why can I not use the convenance of my payroll deferral into my 401k to pay back the withdrawal.  It seems unnecessarily restrictive to disallow that and against the spirit of the CARES withdrawals/repayment.  If this is something that 401k plan admins are saying, then it makes me wonder if they are just trying to get the max money back for their own benefit.

[Critter-3]

It cannot be done as you want it to be ... it is not allowed because there is no way to properly report it and  the IRS will not see the situation and it will cause confusion you don't want.

You took a DISTRIBUTION from the retirement plan which is reported on a 1099-R that the IRS sees.  Then you made CONTRIBUTIONS to the 401K via payroll deductions PRE TAX which the IRS is also told about via the W-2.   If you want make a Covid repayment of a 1099-R distribution you must use funds from outside of the payroll situation  and tell the 401K administrator that this is a covid repayment  so that the repayment will be properly reported on a form 5498 which is sent to the IRS as well as you.  This is how the IRS tracks the distribution and repayment to confirm what you did.  They will not see the 401K contribution of new funds as a roll over from old distributed funds  so the IRS will send you a notice in a year or 2 for the unmatched repayment. 

[VolvoGirl]

This might help.  See IRS publication 575 starting on page 28

https://www.irs.gov/pub/irs-pdf/p575.pdf

[fanfare]

@VolvoGirl 

Whoa!

I opened to Page 28 and almost went into shock !

how exactly is that supposed to be helpful ??

[ShawnMc]

A related question - if I failed to include the CRD on my 2020 1040 but plan to repay it to my 401k within the 3-year period, what action if any would I take at this stage?  I originally thought I should amend my 2020 return (and pay all the taxes) but what's the point when I plan to repay the funds?