The Pension Protection Act of 2006 changes the interest rates used to calculate lump sum distributions, also known as cashouts.
Many traditional defined benefit plans permit retirees to choose to take a single lump sum payment rather than a lifetime monthly annuity. If a lump sum is selected, the interest rate used to calculate the amount of the benefit is vital in determining the amount of the payment. The prior interest rate was based solely on the 30-year Treasury rate as determined in the month prior to the distribution.
The new interest rate will be a rate based on investment grade corporate bonds with different maturities depending upon when the participant’s annuity payments would begin. As a general rule this corporate bond rate is a higher interest rate which leads to smaller lump sum distributions. The law phases in the interest rate change starting for distributions in 2008 and taking full effect in 2012. For distributions in 2008-2011 the lump sum will be calculated by a weighted average of the current 30 year Treasury rate and the new corporate bond rate. In 2008 the weighting factor will be 80% of the old interest rate and 20% of the new interest rate. The chart below illustrates the phase in through 2011. Distributions in 2012 will be based entirely on the corporate bond rate.
|30 year Treasury rate||Corporate bond rate|
Read Section 302 of the Pension Protection Act of 2006 Public Law 109-280.< Back