RETIREMENT MEDICAL PLANS

The company has retirement medical plans that cover certain of its U.S. and non-U.S. employees, including certain employees of divested businesses, and provide for medical payments to eligible employees and dependents upon retirement. These plans are unfunded.

The company approved amendments to certain retiree medical plans in fiscal years 2002 and 2004. Certain of these plan amendments were challenged in lawsuits that were filed in the United States District Court for the Eastern District of Michigan ("District Court") alleging the changes breached the terms of various collective bargaining agreements entered into with the United Auto Workers (the "UAW lawsuit") at facilities that have either been closed or sold and alleging a companion claim under the Employee Retirement Income Security Act of 1974 ("ERISA").

On December 22, 2005, the District Court issued a preliminary injunction enjoining the company from implementing the changes to retiree health benefits and ordered the company to reinstate and resume paying the full cost of health benefits for the UAW retirees at the levels existing prior to the changes made in 2002 and 2004. On August 17, 2006, the District Court granted a motion by the UAW for summary judgment and granted the UAW’s request to make the terms of the preliminary injunction permanent (the "injunction"). The company accounted for the injunction as a rescission of the 2002 and 2004 plan amendments and began recording the impact of the injunction in March 2006. In addition, the injunction ordered the defendants to reimburse the plaintiffs for out-of-pocket expenses incurred since the date of the earlier benefit modifications. The company has recorded a $2 million reserve at September 30, 2015 and 2014, as the best estimate of its liability for these retroactive benefits. The company continues to believe it has meritorious defenses to these actions and has appealed the District Court’s order to the U.S. Court of Appeals for the Sixth Circuit. The ultimate outcome of the UAW lawsuit may result in future plan amendments. The impact of any future plan amendments cannot be currently estimated.

The mortality assumptions for participants in the company’s U.S. plans incorporates future mortality improvements from tables published by the Society of Actuaries ("SOA"). In October 2014, the SOA issued new mortality and mortality improvement tables that raised the life expectancies. The company reviewed the new SOA mortality and mortality improvement tables and utilized an actuary to conduct a study based on the company’s plan participants. The company determined that the best representation of the plans' mortality is to utilize the new SOA mortality and mortality improvement tables as the reference table for credibility-weighted mortality rates, blended with company specific mortality based on the study conducted by the actuary. The company incorporated the updated tables into the 2015 year-end measurement of the plans’ benefit obligations. As a result of this change in actuarial assumption, the company’s U.S. OPEB obligations decreased by $18 million in the fourth quarter of fiscal year 2015.

On September 26, 2014, Meritor amended its retiree medical and retiree life insurance plan in the United States to cease retiree medical coverage for salaried and non-union hourly employees under the age of 65 and eliminate retiree life insurance coverage with face amounts ranging from $3,750 to $15,000. The amendment triggered a curtailment in the fourth quarter of fiscal year 2014 which immediately reduced the retiree medical liability by $16 million (i.e., a curtailment gain) and reduced retiree medical expense by $15 million. The reduction in expense was primarily attributable to the required immediate recognition of negative prior service costs which were previously being amortized into net periodic expense over the active participants remaining average service life. The $16 million reduction to the retiree medical liability established a new negative prior service cost base, which was amortized into net period expense over the remaining average service life of approximately 8 years. Subsequent to the curtailment, the amortization of the prior service cost period commenced to be amortized over an average expected lifetime of inactive participants of approximately 10 years.

The company’s retiree medical obligations were measured as of September 30, 2015, 2014, and 2013. The following are the assumptions used in the measurement of the APBO and retiree medical expense:



	2015		2014		2013
Discount rate	4.20	%	4.20	%	4.80	%
Health care cost trend rate	7.00	%	7.40	%	7.00	%
Ultimate health care trend rate	5.00	%	5.00	%	5.00	%
Year ultimate rate is reached	2022		2022		2022

The assumptions noted above are used to calculate the APBO for each fiscal year end and retiree medical expense for the subsequent fiscal year.

The discount rate is used to calculate the present value of the APBO. This rate is determined based on high-quality fixed income investments that match the duration of expected retiree medical benefits. The company has used the corporate AA/Aa bond rate for this assumption. The health care cost trend rate represents the company’s expected annual rates of change in the cost of health care benefits. The company’s projection for fiscal year 2016 health care cost trend rate is 7.00 percent.

The APBO as of the September 30, 2015 and 2014 measurement dates are summarized as follows (in millions):



	2015		2014
Retirees	$	433	$	465
Employees eligible to retire	3		4
Employees not eligible to retire	—		8
Total	$	436	$	477

The following reconciles the change in APBO and the amounts included in the consolidated balance sheet for years ended September 30, 2015 and 2014, respectively (in millions):



	2015			2014
APBO — beginning of year	$	477		$	511
Service cost	—			—
Interest cost	19			23
Participant contributions	2			2
Actuarial gain	(19		)	(2		)
Foreign currency rate changes	(3		)	(1		)
Curtailment gain	—			(16		)
Benefit payments	(40		)	(40		)
APBO — end of year	436			477
Other ⁽¹⁾	2			2
Retiree medical liability	$	438		$	479


⁽¹⁾	The company recorded a $2 million reserve for retiree medical liabilities at September 30, 2015 and 2014 as its best estimate for retroactive benefits related to the previously mentioned injunction.

Actuarial losses/(gains) relate to changes in the discount rate and other actuarial assumptions. In accordance with FASB ASC Topic 715, “Compensation – Retirement Benefits”, a portion of the actuarial losses is not subject to amortization. The actuarial losses that are subject to amortization are generally amortized over the average lifetime of inactive participants of approximately 11 years.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 provides for a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit at least actuarially equivalent to the benefit established by the law. The company provides retiree medical benefits under certain plans that exceed the value of the benefits that are provided by the Medicare Part D plan. Therefore, management concluded that these plans are at least actuarially equivalent to the Medicare Part D plan and the company is eligible for the federal subsidy. The impact of the subsidy was a reduction in the fiscal year 2013 retiree medical expense of $9 million. In September 2011, in connection with the Health Care and Education Reconciliation Act of 2010, the company converted its current prescription drug program for certain retirees to a group-based, company-sponsored Medicare Part D program, or Employer Group Waiver Plan (EGWP). In September 2012, the company converted certain additional groups of retirees to EGWP and as a result, reduced its APBO by an additional amount of approximately $25 million. These reductions to APBO are being amortized over an average expected lifetime of inactive participants of approximately 11 years. In 2013, the company began using use the Part D subsidies delivered through EGWP to reduce its net retiree medical costs. As a result of this change in assumption, the company reduced its APBO by approximately $35 million.

The retiree medical liability is included in the consolidated balance sheet as follows (in millions):



	September 30,
	2015		2014
Current — included in compensation and benefits	$	33	$	33
Long-term — included in retirement benefits	405		446
Retiree medical liability	$	438	$	479

The following table summarizes the amounts included in Accumulated Other Comprehensive Loss net of tax related to retiree medical liabilities as of September 30, 2015 and 2014 and changes recognized in Other Comprehensive Income (Loss) net of tax for the years ended September 30, 2015 and 2014.



	Net Actuarial Loss			Prior Service Cost (Benefit)			Total
Balance at September 30, 2014	$	142		$	(13	)	$	129
Net actuarial gain for the year	(19		)	—			(19		)
Amortization for the year	(22		)	1			(21		)
Balance at September 30, 2015	$	101		$	(12	)	$	89

Balance at September 30, 2013	$	169		$	(19	)	$	150
Net actuarial gain for the year	(3		)	—			(3		)
Amortization for the year	(23		)	7			(16		)
Curtailment gain	—			(16		)	(16		)
Recognized prior service costs due to curtailment	—			15			15
Deferred tax impact	(1		)	—			(1		)
Balance at September 30, 2014	$	142		$	(13	)	$	129

The net actuarial loss and prior service benefit that are estimated to be amortized from accumulated other comprehensive loss into net periodic retiree medical expense in fiscal year 2016 are $14 million and $1 million, respectively.

The components of retiree medical expense for years ended September 30 are as follows (in millions):



	2015			2014			2013
Service cost	$	—		$	—		$	1
Interest cost	19			23			21
Amortization of:
Prior service benefit	(1		)	(7		)	(8		)
Actuarial losses	22			23			27
Recognized prior service costs due to curtailment	—			(15		)	—
Retiree medical expense	$	40		$	24		$	41

A one-percentage point change in the assumed health care cost trend rate for all years to, and including, the ultimate rate would have the following effects (in millions):



	2015			2014
Effect on total service and interest cost
1% Increase	$	2		$	2
1% Decrease	(1		)	(2		)
Effect on APBO
1% Increase	39			46
1% Decrease	(34		)	(40		)

The company expects future benefit payments as follows (in millions):



	Gross Benefit Payments		Gross Receipts ⁽¹⁾
Fiscal 2016	$	39	$	6
Fiscal 2017	39		6
Fiscal 2018	40		7
Fiscal 2019	40		7
Fiscal 2020	40		7
Fiscal 2021 – 2025	196		44

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⁽¹⁾	Consists of subsidies and rebates available under EGWP.