I remember franky1 going on a disinformation rampage about "Bitcoins in Lightning are IOUs because milli-sats", but I never researched how Lightning actually make milli-sats possible. Can anyone ELI5?
Yes, I'm ashamed.
They are accounted until it reaches 1sat (and rounded down to sat for transactions), at which point they are added to the fees. Once the amount of sats is enough to create an output (
above the dust limit [1]), an HTLC output is created instead of adding the amount to the fees.
[1] The dust limit here isn't the "real" one (which can vary), it's a fixed limit agreed at channel creation by the peers.