SECURE 2.0 updates the 457(b) de minimis distribution amount

Written by Emily Oglesby

The update the SECURE 2.0 Act of 2022 (“SECURE 2.0”) made to the mandatory small balance cash-out (“Mandatory Cash-outs”) threshold has been widely covered — the maximum amount was increased from $5,000 to $7,000, effective January 1, 2024. However, one lesser-known ramification of that statutory update was an increase in the maximum amount of 457(b) de minimis distributions.

Background

457(b) Governmental Plan de minimus distribution distinguished from Mandatory Cash-outs

A de minimis distribution is unique to 457(b) plans. If permitted under the plan’s document, an employer can allow a participant to make a voluntary, one-time small balance distribution while employed, if certain conditions are satisfied:  

• The participant or employer has not deferred amounts into the plan for a period of two years prior to distribution; and,
• The participant has not received a de minimis distribution from the employer sponsoring the plan.

The calculation of the maximum dollar threshold can be made including or excluding rollovers, which should be detailed in the plan document. The employer can elect to set the threshold to an amount less than $7,000. 

Changes made by SECURE 2.0

SECURE 2.0 increased the statutory limit from $5,000 to $7,000 for small balance Mandatory Cash-outs — but it is important to note the Internal Revenue Code (“IRC”) section that was changed and its impact on 457(b) Governmental Plan de minimis distributions. Specifically, since rules pertaining to 457(b) Governmental Plan de minimis distributions cross-references the IRC section updated by SECURE 2.0, the maximum amount for de minimis distributions from a 457(b) plan was also raised by SECURE 2.0 to $7,000, effective January 1, 2024. 

Plan Sponsor Considerations

There are some commonalities in a plan sponsor’s considerations for adding or increasing the amount of a de minimis distribution and increasing the mandatory small balance cash-out amount — namely, the possibility of reducing a plan’s expenses balanced against retirement leakage and long-term participant outcomes. A sponsor should consider if increasing the threshold amount dovetails with the plan’s goals and objectives.

Sponsors with de minimis distribution provisions in their plan should consult with their retirement plan recordkeeper to determine how they will be proceeding regarding the increase — will the recordkeeper apply the increase to all plans with de minimis distributions already, or will they solicit confirmation of the sponsor’s intent regarding the increased maximum amount? 

In addition, governmental sponsors should determine if state or local laws dictate specific de minimis distribution provisions. 

Best Practices

An employer with a 457(b) plan interested in administering or increasing a de minimis distribution should review their plan document: 

• If the plan provides for de minimis distributions, review the provisions and amend the 457(b) plan document to reflect the updated de minimis amount, if required. Under current Internal Revenue Service guidance, a governmental employer must amend its 457(b) plan document for SECURE 2.0 no later than the end of the 2029 calendar year.
• If the plan does not yet allow for de minimis distributions and an employer wishes to provide for one, a discretionary amendment adding the proper provisions should be adopted by the end of the plan year in which the de minimis distribution takes effect.

 

Learn More: When to Amend a 457(b) Governmental Plan

 

 

The employer should work with their retirement plan provider to ensure that the de minimis provisions reflect any updates, if they are not being automatically implemented.