If I upgrade the agent to MP3, does the machine stay protected until a reboot or do I have to reboot immediately for the IPS to become active again?
You will still be protected until the next reboot. IPS leverages a kernel mode driver, which can only be loaded and unloaded via a reboot. However, any newer IPS features will not be available to you until the next reboot.
IPS to have you need to reboot.
Note, this only applies to a upgrade, where you had previously had IPS enabled. If this is a new install, then you will not get any IPS protection untill a reboot.