What Is a De Minimis Distribution and How Does It Work?

A “de minimis” distribution refers to a very small amount of money or assets paid out from a financial account or plan. The term “de minimis” originates from a Latin phrase meaning “about minimal things.” In a financial context, this concept applies to distributions small enough to be subject to simplified rules compared to larger payouts.

What Defines a De Minimis Distribution

De minimis distribution rules streamline administrative processes for financial institutions and plan administrators. These regulations reduce administrative burdens and costs associated with managing numerous small accounts.

Thresholds for de minimis amounts are set by law, regulation, or financial plan documents. These are fixed dollar amounts, determining when a distribution qualifies as “de minimis.” These rules lead to automatic payouts or simplified handling procedures, avoiding extensive paperwork required for larger transactions.

De Minimis Distributions in Retirement Accounts

De minimis rules apply to retirement accounts like 401(k)s, 403(b)s, and IRAs, especially for former employees or participants with small balances. Retirement plans may include “involuntary cash-out” or “force-out” provisions, allowing them to automatically distribute small account balances without participant consent. This practice helps plan sponsors reduce administrative overhead by removing inactive, low-value accounts from their system.

Federal regulations govern these involuntary distributions. The mandatory cash-out limit for qualified retirement plans increased from $5,000 to $7,000 under the SECURE 2.0 Act. If a terminated employee’s vested account balance is $1,000 or less, the plan can pay out the amount directly to the participant in a lump sum. For balances between $1,000 and $7,000, the plan administrator must automatically roll over the funds into an individual retirement account (IRA) established in the participant’s name, unless the participant chooses another option.

Plan sponsors must notify participants about these automatic distribution options and provide an opportunity for them to elect a different course of action. This process helps plans manage their participant count, which can sometimes affect audit requirements and overall administrative costs.

Tax and Reporting Considerations

De minimis distributions from pre-tax retirement accounts are generally subject to ordinary income tax. The small size of the distribution does not exempt it from taxation. For individuals under age 59½, these distributions may also incur an additional 10% early withdrawal penalty, unless a specific exception applies. This penalty is applied just as it would be for any larger taxable distribution.

A significant practical implication of a de minimis distribution, especially if paid directly to the participant (e.g., balances under $1,000), is that it typically cannot be directly rolled over to another retirement account. If the funds are paid out as a check, the recipient usually has 60 days to deposit the money into an eligible retirement account to avoid current income taxes and penalties. However, if taxes were withheld from the distribution, the recipient would need to use other funds to make up the withheld amount to complete a full rollover.

All de minimis distributions from retirement plans are reported to the Internal Revenue Service (IRS) on Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.” This form details the gross distribution amount, the taxable amount, and any federal income tax withheld. Recipients receive a copy of this form, which they use when preparing their annual income tax returns.