10/18/07
The IRS recently released Notice 2007-81, which provides guidance regarding new interest rates for the calculation of lump sum distributions under the Pension Protection Act of 2006 (PPA). The Notice provides the new monthly rates and the method for calculating the rates in the future. The IRS also stated that it will continue publishing the new rates for each month.
The PPA changed the interest rates to be used in the calculation of lump sum distributions from defined benefit pension plans. There is a transition rule that requires plans to blend the old rates with the new rates. The new blended rate must be used to calculate all lump sum distributions made during plan years that begin in 2008 and thereafter. The new blended rates will likely be higher than those previously in effect. Participants' lump sum distributions will therefore be lower than they have been in the past, especially for highly compensated participants with many years of service and for participants who receive a distribution at a young age.
Plan sponsors should review their current method for calculating lump sum distributions in order to comply with the new guidance
