Rising Interest Rates May Create Problems for DB Plan Sponsors.  

Many defined benefit plans offer a lump sum payment option to participants. The value of those lump sum payments fluctuates with interest rates. With lower interest rates, the participant will receive a larger lump sum payment. With higher rates, the value of the payment decreases. Plans are required to update the interest rate on a monthly, quarterly or annual basis. Now that interest rates are rising (and are expected to continue rising), many participants may elect to take a lump sum now, before interest rates rise further (and may elect to leave employment sooner than expected to take advantage of today's rates). That may increase the plan's liquidity needs and also decrease the plan's funding status. A significant decrease in funding status could subject the plan to IRC Section 436's prohibition or limitations on paying lump sums at all. It's important for plan sponsors to start planning now--and for advisors to expect these plans to start offering additional non-lump sum options, including in-service distributions for clients who satisfy certain age and service requirements. For more information on the lump sum distribution option, visit Tax Facts Online. : Q 3971. Note: Q is updated.