Employee Benefits

Pension, Post-Retirement and Other Post-Employment Benefits

We sponsor various defined benefit pension plans (qualified and non-qualified) which, in the aggregate, cover a substantial portion of our employees including legacy CenturyLink, legacy Qwest Communications International, Inc. ("Qwest") and legacy Embarq employees. On December 31, 2015, we merged our existing qualified pension plans, which included merging the Qwest Pension Plan and Embarq Retirement Pension Plan into the CenturyLink Retirement Plan. The CenturyLink Retirement Plan was renamed the CenturyLink Combined Pension Plan ("Combined Plan"). Pension benefits for participants of the new Combined Plan who are represented by a collective bargaining agreement are based on negotiated schedules. All other participants' pension benefits are based on each individual participant's years of service and compensation. We also maintain non-qualified pension plans for certain current and former highly compensated employees. We maintain post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees. We also provide other post-employment benefits for certain eligible former employees. We use a December 31 measurement date for all our plans.

Pension Benefits

In connection with the acquisition of Level 3 Communications, Inc. on November 1, 2017, we assumed defined benefit pension plans sponsored by various Level 3 companies for their employees. Based on a valuation analysis, we recognized a $20 million liability on November 1, 2017 for the unfunded status of the Level 3 pension plans, reflecting projected benefit obligations of 167 million, in excess of the $147 million fair value of plan assets.

Current funding laws require a company with a pension shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Our funding policy for our Combined Plan is to make contributions with the objective of accumulating sufficient assets to pay all qualified pension benefits when due under the terms of the plan. The accounting unfunded status of our qualified pension plan was $2.004 billion and $2.352 billion as of December 31, 2017 and 2016, respectively.

We made a voluntary cash contribution to our qualified pension plan of $100 million in both 2017 and 2016, and paid $5 million and $7 million of benefits directly to participants of our non-qualified pension plans in 2017 and 2016, respectively. Based on current laws and circumstances, we are not required to make any contributions to our qualified pension plan in 2018, but we currently expect to make a voluntary contribution of $100 million to the trust for our qualified pension plan in 2018. We estimate that in 2018 we will pay $5 million of benefits directly to participants of our non-qualified pension plans.

As mentioned above, we assumed in the Level 3 acquisition certain contributory and non-contributory employee pension plans, both qualified and non-qualified plans (the “Level 3 Pensions”). At December 31, 2017, the fair value of the Level 3 Pensions’ plan assets was $147 million, and the associated benefit obligation was $167 million. We recognized the unfunded status of Level 3's pension plans of $20 million on our consolidated balance sheet as of December 31, 2017, and the net periodic benefit expense of less than $1 million for the period November 1, 2017 to December 31, 2017, in our consolidated income statement for the year ended December 31, 2017. Due to the insignificant amount of these pension plans, we have predominantly excluded them from the remaining employee benefit disclosures in this Note.

Post-Retirement Benefits

In connection with our acquisition of Level 3 Communications, Inc. on November 1, 2017, we assumed post-retirement benefit plans sponsored by Level 3 Communications, L.L.C. and Continental Level 3, Inc. for certain of its current and former employees. Based on a valuation analysis, we recognized less than $1 million in liability for the unfunded status of Level 3’s post-retirement benefit plans.

Our post-retirement benefit plans provide post-retirement benefits to qualified retirees and allow (i) eligible employees retiring before certain dates to receive benefits at no or reduced cost and (ii) eligible employees retiring after certain dates to receive benefits on a shared cost basis. The post-retirement benefits not paid by the trusts are funded by us and we expect to continue funding these post-retirement obligations as benefits are paid. The accounting unfunded status of our qualified post-retirement benefit plan was $3.352 billion and $3.360 billion as of December 31, 2017 and 2016, respectively.

Assets in the post-retirement trusts have been substantially depleted as of December 31, 2016; however we will continue to pay certain post-retirement benefits through the trusts. No contributions were made to the post-retirement trusts in 2017 and 2016. Benefits not paid from the trusts are expected to be paid directly by us with available cash. In 2017, we paid $237 million of post-retirement benefits, net of participant contributions and direct subsidies. In 2018, we expect to pay $283 million of post-retirement benefits, net of participant contributions and direct subsidies. The increase in anticipated post-retirement benefit payments is the result of increased utilization coupled with a continued rise in the cost of care.

We expect our health care cost trend rate to range from 5.0% to 6.5% in 2018, 5.0% to 7.0% in 2019, 5.0% to 6.5% in 2020 and grading to 4.50% by 2025. Our post-retirement benefit cost, for certain eligible legacy Qwest retirees and certain eligible legacy CenturyLink retirees, is capped at a set dollar amount. Therefore, those health care benefit obligations are not subject to increasing health care trends after the effective date of the caps.

As mentioned above, we assumed in the Level 3 acquisition certain post-retirement plans. Though largely unfunded, these post-retirement plans, in the aggregate, are immaterial to our consolidated financial statements. Due to the insignificant amount of these post-retirement plans, we have predominantly excluded them from the remaining employee benefit disclosures in this Note.

A change of 100 basis points in the assumed initial health care cost trend rate would have had the following effects in 2017:



	100 Basis Points Change
	Increase		(Decrease)
	(Dollars in millions)
Effect on the aggregate of the service and interest cost components of net periodic post-retirement benefit expense (consolidated statement of operations)	$	2	(2	)
Effect on benefit obligation (consolidated balance sheet)	60		(57	)

Expected Cash Flows

The qualified pension, non-qualified pension and post-retirement health care benefit payments and premiums and life insurance premium payments are paid by us or distributed from plan assets. The estimated benefit payments provided below are based on actuarial assumptions using the demographics of the employee and retiree populations and have been reduced by estimated participant contributions.



	Pension Plans		Post-Retirement Benefit Plans	Medicare Part D Subsidy Receipts
	(Dollars in millions)
Estimated future benefit payments:
2018	$	1,031	293	(7	)
2019	973		280	(7	)
2020	951		271	(7	)
2021	929		262	(7	)
2022	908		253	(7	)
2023 - 2027	4,170		1,122	(31	)

Net Periodic Benefit Expense

In 2016, we changed the method we use to estimate the service and interest components of net periodic benefit expense for pension and other postretirement benefit obligations. This change resulted in a decrease in the service and interest components in 2017 and 2016. Beginning in 2016, we utilized a full yield curve approach in connection with estimating these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows, as opposed to the single weighted-average discount rate derived from the yield curve that we have used in the past. We believe this change more precisely measures service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change did not affect the measurement of our total benefit obligations but lowered our annual net periodic benefit cost by $122 million and $149 million in 2017 and 2016, respectively, when compared to pre-2016 methodology. This change was treated as a change in accounting estimate and accordingly, we did not adjust the amounts recorded in 2015.

The actuarial assumptions used to compute the net periodic benefit expense for our qualified pension, non-qualified pension and post-retirement benefit plans are based upon information available as of the beginning of the year, as presented in the following table.



	Pension Plans						Post-Retirement Benefit Plans
	2017		2016		2015		2017		2016		2015
Actuarial assumptions at beginning of year:
Discount rate	3.50% - 4.10%		3.50% - 4.50%		3.50% - 4.10%		3.90	%	4.15	%	3.80	%
Rate of compensation increase	3.25	%	3.25	%	3.25	%	N/A		N/A		N/A
Expected long-term rate of return on plan assets	6.50	%	7.00	%	7.50	%	5.00	%	7.00	%	7.50	%
Initial health care cost trend rate	N/A		N/A		N/A		7.00% / 5.00%		5.00% / 5.25%		6.00% / 6.50%
Ultimate health care cost trend rate	N/A		N/A		N/A		4.50	%	4.50	%	4.50	%
Year ultimate trend rate is reached	N/A		N/A		N/A		2025		2025		2025

_______________________________________________________________________________

N/A-Not applicable

Net periodic benefit expense (income) for our qualified and non-qualified pension plans includes the following components:



	Pension Plans Years Ended December 31,
	2017			2016		2015
	(Dollars in millions)
Service cost	$	63		64		83
Interest cost	411			427		568
Expected return on plan assets	(666		)	(732	)	(898	)
Special termination benefits charge	—			13		—
Recognition of prior service (credit) cost	(8		)	(8	)	5
Recognition of actuarial loss	205			175		161
Net periodic pension benefit expense (income)	$	5		(61	)	(81	)

Net periodic benefit expense for our post-retirement benefit plans includes the following components:



	Post-Retirement Plans Years Ended December 31,
	2017			2016		2015
	(Dollars in millions)
Service cost	$	18		19		24
Interest cost	100			111		140
Expected return on plan assets	(2		)	(7	)	(21	)
Special termination benefits charge	—			3		—
Recognition of prior service cost	20			20		19
Net periodic post-retirement benefit expense	$	136		146		162

We report service costs for our qualified pension, non-qualified pension and post-retirement benefit plans in cost of services and products and selling, general and administrative expenses in our consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015. Additionally, a portion of the service cost is also allocated to certain assets under construction, which are capitalized and reflected as part of property, plant and equipment in our consolidated balance sheets. The remaining components of net periodic benefit expense (income) are reported in other income (expense), net in our consolidated statements of operations. In 2016, we announced plans to reduce our workforce, initially through voluntary severance packages and the balance through involuntary reductions, as a result we recognized a one-time charge of $16 million for special termination benefit enhancements paid to certain eligible employees upon voluntary retirement.

Benefit Obligations

The actuarial assumptions used to compute the funded status for the plans are based upon information available as of December 31, 2017 and 2016 and are as follows:



	Pension Plans				Post-Retirement Benefit Plans
	December 31,				December 31,
	2017		2016		2017		2016
Actuarial assumptions at end of year:
Discount rate	3.44% - 3.70%		3.50% - 4.10%		3.53	%	3.90	%
Rate of compensation increase	3.25	%	3.25	%	N/A		N/A
Initial health care cost trend rate	N/A		N/A		7.00% / 5.00%		5.00% / 5.50%
Ultimate health care cost trend rate	N/A		N/A		4.50	%	4.50	%
Year ultimate trend rate is reached	N/A		N/A		2025		2025

_______________________________________________________________________________

N/A-Not applicable

In 2017, 2016 and 2015, we adopted the revised mortality tables and projection scales released by the Society of Actuaries ("SOA"), which decreased the projected benefit obligation of our benefit plans by $113 million, $268 million and $379 million, respectively. The change in the projected benefit obligation of our benefit plans was recognized as part of the net actuarial loss and is included in accumulated other comprehensive loss, a portion of which is subject to amortization over the remaining estimated life of plan participants, which was approximately 9 to 10 years as of December 31, 2017.

The following tables summarize the change in the benefit obligations for the pension and post-retirement benefit plans:



	Pension Plans Years Ended December 31,
	2017			2016		2015
	(Dollars in millions)
Change in benefit obligation
Benefit obligation at beginning of year	$	13,301		13,349		15,042
Service cost	63			64		83
Interest cost	411			427		568
Plan amendments	—			2		(100	)
Special termination benefits charge	—			13		—
Actuarial loss (gain)	590			487		(800	)
Benefits paid by company	(5		)	(7	)	(6	)
Benefits paid from plan assets	(1,238		)	(1,034	)	(1,438	)
Benefit obligation at end of year	$	13,122		13,301		13,349



	Post-Retirement Benefit Plans Years Ended December 31,
	2017			2016		2015
	(Dollars in millions)
Change in benefit obligation
Benefit obligation at beginning of year	$	3,413		3,567		3,830
Service cost	18			19		24
Interest cost	100			111		140
Participant contributions	54			57		57
Direct subsidy receipts	7			5		8
Special termination benefits charge	—			3		—
Actuarial loss (gain)	112			(13	)	(148	)
Benefits paid by company	(298		)	(191	)	(181	)
Benefits paid from plan assets	(31		)	(145	)	(163	)
Benefit obligation at end of year	$	3,375		3,413		3,567

Our aggregate benefit obligation as of December 31, 2017, 2016 and 2015 was $16.497 billion, $16.714 billion and $16.916 billion, respectively.

Plan Assets

We maintain plan assets for our qualified pension plan and certain post-retirement benefit plans. The qualified pension plan's assets are used for the payment of pension benefits and certain eligible plan expenses. The post-retirement benefit plan's assets are used to pay health care benefits and premiums on behalf of eligible retirees and to pay certain eligible plan expenses. As discussed further above, the liquid plan assets in our post-retirement trust have been substantially depleted as of December 31, 2017. The expected rate of return on plan assets is the long-term rate of return we expect to earn on the plans' assets, net of administrative expenses paid from plan assets. The rate of return is determined by the strategic allocation of plan assets and the long-term risk and return forecast for each asset class. The forecasts for each asset class are generated primarily from an analysis of the long-term expectations of various third party investment management organizations. The expected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment strategy.

The following tables summarize the change in the fair value of plan assets for the pension and post-retirement benefit plans:



	Pension Plans Years Ended December 31,
	2017			2016		2015
	(Dollars in millions)
Change in plan assets
Fair value of plan assets at beginning of year	$	10,892		11,072		12,571
Return on plan assets	1,306			754		(161	)
Employer contributions	100			100		100
Benefits paid from plan assets	(1,238		)	(1,034	)	(1,438	)
Fair value of plan assets at end of year	$	11,060		10,892		11,072



	Post-Retirement Benefit Plans Years Ended December 31,
	2017			2016		2015
	(Dollars in millions)
Change in plan assets
Fair value of plan assets at beginning of year	$	53		193		353
Return on plan assets	1			5		3
Benefits paid from plan assets	(31		)	(145	)	(163	)
Fair value of plan assets at end of year	$	23		53		193

Pension Plans: Our investment objective for the qualified pension plan assets is to achieve an attractive risk-adjusted return over time that will provide for the payment of benefits and minimize the risk of large losses. Our pension plan investment strategy is designed to meet this objective by broadly diversifying plan assets across numerous strategies with differing expected returns, volatilities and correlations. The pension plan assets have target allocations of 45% to interest rate sensitive investments and 55% to investments designed to provide higher expected returns than the interest rate sensitive investments. Interest rate sensitive investments include 30% of plan assets targeted primarily to long-duration investment grade bonds, 10% targeted to high yield and emerging market bonds and 5% targeted to diversified strategies, which primarily have exposures to global bonds, as well as some exposures to global stocks and commodities. Assets expected to provide higher returns than the interest rate sensitive assets include broadly diversified equity investments with targets of approximately 15% to U.S. equity markets and 15% to non-U.S. developed and emerging markets. Approximately 7% is targeted to broadly diversified multi-asset class strategies that have the flexibility to adjust exposures to different asset classes. Approximately 10% is allocated to private markets investments including funds primarily invested in private equity, private debt and hedge funds. Real estate investments are targeted at 8% of plan assets. At the beginning of 2018, our expected annual long-term rate of return on pension assets before consideration of administrative expenses is assumed to be 7.0%. However, projected increases in PBGC (Pension Benefit Guaranty Corporation) premium rates have now become large enough to reduce the annual long-term expected return net of administrative expenses to 6.5%.

Our non-qualified pension plans are not funded. We pay benefits directly to the participants of these plans.

Post-Retirement Benefit Plans: Our investment objective for the post-retirement benefit plans' assets is to achieve an attractive risk-adjusted return and minimize the risk of large losses over the expected life of the assets. At the beginning of 2018, our expected annual long-term rate of return on post-retirement benefit plan assets is assumed to be 4.0%.

Permitted investments: Plan assets are managed consistent with the restrictions set forth by the Employee Retirement Income Security Act of 1974, as amended, which requires diversification of assets and also generally prohibits defined benefit and welfare plans from investing more than 10% of their assets in securities issued by the sponsor company. At December 31, 2017 and 2016, the post-retirement benefit plans did not directly own any shares of our common stock or debt instruments. At December 31, 2017, the pension benefit plan directly held approximately $4 million of our equity securities and approximately $2 million of CenturyLink, Inc. debt securities. At December 31, 2016 the pension benefit plan held approximately $1 million of our debt securities.

Derivative instruments: Derivative instruments are used to reduce risk as well as provide return. The pension plan uses exchange traded futures and swaps to gain exposure to equity and interest rate markets consistent with target asset allocations and to reduce risk relative to measurement of the benefit obligation, which is sensitive to interest rate changes. Foreign exchange forward contracts are used to manage currency exposures. Credit default swaps are used to manage credit risk exposures in a cost effective and targeted manner relative to transacting with physical corporate fixed income securities. Options are currently used to manage interest rate exposure taking into account the implied volatility and current pricing of the specific underlying market instrument. Some derivative instruments subject the plans to counterparty risk. The external investment managers, along with Plan Management, monitor counterparty exposure and mitigate this risk by diversifying the exposure among multiple high credit quality counterparties, requiring collateral and limiting exposure by periodically settling contracts.

The gross notional exposure of the derivative instruments directly held by the pension benefit plan is shown below. The notional amount of the derivatives corresponds to market exposure but does not represent an actual cash investment. Our post-retirement plans were not invested in derivative instruments for the years ended December 31, 2017 or 2016.



	Gross Notional Exposure
	Pension Plan
	Years Ended December 31,
	2017		2016
	(Dollars in millions)
Derivative instruments:
Exchange-traded U.S. equity futures	$	256	104
Exchange-traded Treasury and other interest rate futures	1,830		1,813
Interest rate swaps	137		260
Credit default swaps	100		240
Equity index swaps	1		—
Foreign exchange forwards	293		778
Options	259		206

Fair Value Measurements: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB. For additional information on the fair value hierarchy, see Note 12—Fair Value Disclosure.

At December 31, 2017, we used the following valuation techniques to measure fair value for assets. There were no changes to these methodologies during 2017:


•	Level 1—Assets were valued using the closing price reported in the active market in which the individual security was traded.


•	Level 2—Assets were valued using quoted prices in markets that are not active, broker dealer quotations, net asset value of shares held by the plans and other methods by which all significant inputs were observable at the measurement date.


•	Level 3—Assets were valued using unobservable inputs in which little or no market data exists as reported by the respective institutions at the measurement date.

The tables below present the fair value of plan assets by category and the input levels used to determine those fair values at December 31, 2017. It is important to note that the asset allocations do not include market exposures that are gained with derivatives. Investments include dividend and interest receivables, pending trades and accrued expenses.



	Fair Value of Pension Plan Assets at December 31, 2017
	Level 1		Level 2	Level 3	Total
	(Dollars in millions)
Investment grade bonds (a)	$	432	1,315	—	$	1,747
High yield bonds (b)	—		575	7	582
Emerging market bonds (c)	217		219	1	437
U.S. stocks (e)	1,030		2	3	1,035
Non-U.S. stocks (f)	706		—	—	706
Private debt (i)	—		—	15	15
Multi-asset strategies (l)	440		—	—	440
Derivatives (m)	2		—	—	2
Cash equivalents and short-term investments (n)	—		476	1	477
Total investments, excluding investments valued at NAV	$	2,827	2,587	27	5,441
Investments valued at NAV					5,619
Total pension plan assets					$	11,060



	Fair Value of Post-Retirement Plan Assets at December 31, 2017
	Level 1		Level 2	Level 3	Total
	(Dollars in millions)
Investment grade bonds (a)	$	—	—	—	$	—
High yield bonds (b)	—		—	—	—
U.S. stocks (e)	1		—	—	1
Non-U.S. stocks (f)	—		—	—	—
Cash equivalents and short-term investments (n)	—		—	—	—
Total investments, excluding investments valued at NAV	$	1	—	—	1
Investments valued at NAV					22
Total post-retirement plan assets					$	23

The tables below present the fair value of plan assets by category and the input levels used to determine those fair values at December 31, 2016. It is important to note that the asset allocations do not include market exposures that are gained with derivatives. Investments include dividend and interest receivable, pending trades and accrued expenses.



	Fair Value of Pension Plan Assets at December 31, 2016
	Level 1		Level 2	Level 3	Total
	(Dollars in millions)
Investment grade bonds (a)	$	420	1,404	—	$	1,824
High yield bonds (b)	7		597	11	615
Emerging market bonds (c)	212		212	—	424
U.S. stocks (e)	1,146		1	—	1,147
Non-U.S. stocks (f)	721		1	—	722
Multi-asset strategies (l)	389		—	—	389
Cash equivalents and short-term investments (n)	—		207	—	207
Total investments, excluding investments valued at NAV	$	2,895	2,422	11	5,328
Investments valued at NAV					5,564
Total pension plan assets					$	10,892



	Fair Value of Post-Retirement Plan Assets at December 31, 2016
	Level 1		Level 2	Level 3	Total
	(Dollars in millions)
Investment grade bonds (a)	$	1	2	—	$	3
High yield bonds (b)	—		1	—	1
U.S. stocks (e)	2		—	—	2
Non-U.S. stocks (f)	1		—	—	1
Cash equivalents and short-term investments (n)	—		5	—	5
Total investments, excluding investments valued at NAV	$	4	8	—	12
Investments valued at NAV					41
Total post-retirement plan assets					$	53

The table below presents the fair value of plan assets valued at NAV by category for our pension and post-retirement plans at December 31, 2017 and 2016.



	Fair Value of Plan Assets Valued at NAV
	Pension Plans at December 31,			Post-Retirement Benefit Plans at December 31,
	2017		2016	2017	2016
	(Dollars in millions)
Investment grade bonds (a)	$	163	106	—	—
High yield bonds (b)	483		521	—	1
Emerging market bonds (c)	14		6	—	—
Diversified strategies (d)	538		522	—	1
U.S. stocks (e)	73		58	—	—
Non-U.S. stocks (f)	627		560	—	1
Emerging market stocks (g)	98		76	—	—
Private equity (h)	460		506	10	14
Private debt (i)	374		369	1	1
Market neutral hedge funds (j)	769		739	—	1
Directional hedge funds (j)	636		657	—	1
Real estate (k)	903		926	1	8
Multi-asset strategies (l)	424		412	—	—
Cash equivalents and short-term investments (n)	57		106	10	13
Total investments valued at NAV	$	5,619	5,564	22	41

The plans' assets are invested in various asset categories utilizing multiple strategies and investment managers. Interests in commingled funds are valued using the net asset value ("NAV") per unit of each fund. The NAV reported by the fund manager is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding. Commingled funds can be redeemed at NAV, generally within a year of the financial statement date. Investments in private funds, primarily limited partnerships, represent long-term commitments with a fixed maturity date and are also valued at NAV. Valuation inputs for these private fund interests are generally based on assumptions and other information not observable in the market. The assumptions and valuation methodologies of the pricing vendors, account managers, fund managers and partnerships are monitored and evaluated for reasonableness. Below is an overview of the asset categories, the underlying strategies and valuation inputs used to value the assets in the preceding tables:

(a) Investment grade bonds represent investments in fixed income securities as well as commingled bond funds comprised of U.S. Treasury securities, agencies, corporate bonds, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities. Treasury securities are valued at the bid price reported in the active market in which the security is traded and are classified as Level 1. The valuation inputs of other investment grade bonds primarily utilize observable market information and are based on a spread to U.S. Treasury securities and consider yields available on comparable securities of issuers with similar credit ratings. The primary observable inputs include references to the new issue market for similar securities, the secondary trading markets and dealer quotes. Option adjusted spread models are utilized to evaluate securities such as asset backed securities that have early redemption features. These securities are classified as Level 2. The commingled funds are valued at NAV based on the market value of the underlying fixed income securities using the same valuation inputs previously described.

(b) High yield bonds represent investments in below investment grade fixed income securities as well as commingled high yield bond funds. The valuation inputs for the securities primarily utilize observable market information and are based on a spread to U.S. Treasury securities and consider yields available on comparable securities of issuers with similar credit ratings. These securities are primarily classified as Level 2. Securities whose valuation inputs are not based on observable market information are classified as Level 3. The commingled funds are valued at NAV based on the market value of the underlying high yield instruments using the same valuation inputs previously described.

(c) Emerging market bonds represent investments in securities issued by governments and other entities located in developing countries as well as registered mutual funds and commingled emerging market bond funds. The valuation inputs for the securities utilize observable market information and are primarily based on dealer quotes or a spread relative to the local government bonds. The registered mutual fund is classified as Level 1 while individual securities are primarily classified as Level 2. Securities whose valuation inputs are not based on observable market information are classified as Level 3. The commingled funds are valued at NAV based on the market value of the underlying emerging market bonds using the same valuation inputs previously described.

(d) Diversified strategies represent an investment in a commingled fund that primarily has exposures to global government, corporate and inflation linked bonds, global stocks and commodities. This asset category includes investments in a registered mutual fund which is classified at Level 1, and a commingled fund which is valued at NAV based on the market value of the underlying investments. The valuation inputs utilize observable market information including published prices for exchange traded securities, bid prices for government bonds, and spreads and yields available for comparable fixed income securities with similar credit ratings.

(e) U.S. stocks represent investments in stocks of U.S. based companies as well as commingled U.S. stock funds. The valuation inputs for U.S. stocks are based on the last published price reported on the major stock market on which the securities are traded and are primarily classified as Level 1. Securities whose valuation inputs are not based on observable market information are classified as Level 3. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation inputs previously described.

(f) Non-U.S. stocks represent investments in stocks of companies based in developed countries outside the U.S. as well as commingled funds. The valuation inputs for non-U.S. stocks are based on the last published price reported on the major stock market on which the securities are traded and are primarily classified as Level 1. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation inputs previously described.

(g) Emerging market stocks represent investments in commingled funds comprised of stocks of companies located in developing markets. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation inputs described previously for individual stocks.

(h) Private equity represents non-public investments in domestic and foreign buy out and venture capital funds. Private equity funds are primarily structured as limited partnerships and are valued according to the valuation policy of each partnership, subject to prevailing accounting and other regulatory guidelines. The partnerships are valued at NAV using valuation methodologies that consider a range of factors, including but not limited to the price at which investments were acquired, the nature of the investments, market conditions, trading values on comparable public securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investments. These valuation methodologies involve a significant degree of judgment.

(i) Private debt represents non-public investments in distressed or mezzanine debt funds and pension group insurance contracts. Pension group insurance contracts are valued based on actuarial assumptions, and are classified as Level 3. Mezzanine debt instruments are debt instruments that are subordinated to other debt issues and may include embedded equity instruments such as warrants. Private debt funds are primarily structured as limited partnerships and are valued at NAV according to the valuation policy of each partnership, subject to prevailing accounting and other regulatory guidelines. The valuation of underlying fund investments are based on factors including the issuer's current and projected credit worthiness, the security's terms, reference to the securities of comparable companies, and other market factors. These valuation methodologies involve a significant degree of judgment.

(j) Market neutral hedge funds hold investments in a diversified mix of instruments that are intended in combination to exhibit low correlations to market fluctuations. These investments are typically combined with futures to achieve uncorrelated excess returns over various markets. Directional hedge funds—This asset category represents investments that may exhibit somewhat higher correlations to market fluctuations than the market neutral hedge funds. Investments in hedge funds include both direct investments and investments in diversified funds of funds. Hedge funds are valued at NAV based on the market value of the underlying investments which include publicly traded equity and fixed income securities and privately negotiated debt securities. The hedge funds are valued by third party administrators using the same valuation inputs previously described.

(k) Real estate represents investments in commingled funds and limited partnerships that invest in a diversified portfolio of real estate properties. These investments are valued at NAV according to the valuation policy of each fund or partnership, subject to prevailing accounting and other regulatory guidelines. The valuation inputs of the underlying properties are generally based on third-party appraisals that use comparable sales or a projection of future cash flows to determine fair value.

(l) Multi-asset strategies represent broadly diversified strategies that have the flexibility to tactically adjust exposures to different asset classes through time. This asset category includes investments in a registered mutual fund which is classified as Level 1 and a commingled fund which is valued at NAV based on the market value of the underlying investments.

(m) Derivatives include exchange traded futures contracts which are classified as Level 1, as well as privately negotiated over the counter swaps and options that are valued based on the change in interest rates or a specific market index and are classified as Level 2. The market values represent gains or losses that occur due to fluctuations in interest rates, foreign currency exchange rates, security prices, or other factors.

(n) Cash equivalents and short-term investments represent investments that are used in conjunction with derivatives positions or are used to provide liquidity for the payment of benefits or other purposes. The valuation inputs of securities are based on a spread to U.S. Treasury Bills, the Federal Funds Rate, or London Interbank Offered Rate and consider yields available on comparable securities of issuers with similar credit ratings and are primarily classified as Level 2. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation inputs described above.

Concentrations of Risk: Investments, in general, are exposed to various risks, such as significant world events, interest rate, credit, foreign currency and overall market volatility risk. These risks are managed by broadly diversifying assets across numerous asset classes and strategies with differing expected returns, volatilities and correlations. Risk is also broadly diversified across numerous market sectors and individual companies. Financial instruments that potentially subject the plans to concentrations of counterparty risk consist principally of investment contracts with high quality financial institutions. These investment contracts are typically collateralized obligations and/or are actively managed, limiting the amount of counterparty exposure to any one financial institution. Although the investments are well diversified, the value of plan assets could change materially depending upon the overall market volatility, which could affect the funded status of the plans.

The table below presents a rollforward of the pension plan assets valued using Level 3 inputs:



	Pension Plan Assets Valued Using Level 3 Inputs
	High Yield Bonds			Emerging Market Bonds		U.S. Stocks	Private Debt	Cash	Total
	(Dollars in millions)
Balance at December 31, 2015	$	13		1		—	—	—	14
Net transfers	(2		)	—		—	—	—	(2	)
Acquisitions	1			—		—	—	—	1
Dispositions	(1		)	(1	)	—	—	—	(2	)
Balance at December 31, 2016	11			—		—	—	—	11
Net transfers	(1		)	—		—	14	—	13
Acquisitions	2			1		—	1	1	5
Actual return on plan assets	(5		)	—		3	—	—	(2	)
Balance at December 31, 2017	$	7		1		3	15	1	27

Certain gains and losses are allocated between assets sold during the year and assets still held at year-end based on transactions and changes in valuations that occurred during the year. These allocations also impact our calculation of net acquisitions and dispositions.

For the year ended December 31, 2017, the investment program produced actual gains on qualified pension and post-retirement plan assets of $1.307 billion as compared to expected returns of $668 million for a difference of $639 million. For the year ended December 31, 2016, the investment program produced actual losses on pension and post-retirement plan assets of $759 million as compared to the expected returns of $739 million for a difference of $20 million. The short-term annual returns on plan assets will almost always be different from the expected long-term returns and the plans could experience net gains or losses, due primarily to the volatility occurring in the financial markets during any given year.

Unfunded Status

The following table presents the unfunded status of the pensions and post-retirement benefit plans:



	Pension Plans					Post-Retirement Benefit Plans
	Years Ended December 31,					Years Ended December 31,
	2017			2016		2017		2016
	(Dollars in millions)
Benefit obligation	$	(13,122	)	(13,301	)	(3,375	)	(3,413	)
Fair value of plan assets	11,060			10,892		23		53
Unfunded status	(2,062		)	(2,409	)	(3,352	)	(3,360	)
Current portion of unfunded status	$	(5	)	(6	)	(262	)	(236	)
Non-current portion of unfunded status	$	(2,057	)	(2,403	)	(3,090	)	(3,124	)

The current portion of our post-retirement benefit obligations is recorded on our consolidated balance sheets in accrued expenses and other current liabilities-salaries and benefits.

Accumulated Other Comprehensive Loss-Recognition and Deferrals

The following table presents cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2016, items recognized as a component of net periodic benefits expense in 2017, additional items deferred during 2017 and cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2017. The items not recognized as a component of net periodic benefits expense have been recorded on our consolidated balance sheets in accumulated other comprehensive loss:



	As of and for the Years Ended December 31,
	2016			Recognition of Net Periodic Benefits Expense		Deferrals		Net Change in AOCL		2017
	(Dollars in millions)
Accumulated other comprehensive loss:
Pension plans:
Net actuarial (loss) gain	$	(3,148	)	205		51		256		(2,892	)
Prior service benefit (cost)	62			(8	)	—		(8	)	54
Deferred income tax benefit (expense)	1,191			(72	)	(12	)	(84	)	1,107
Total pension plans	(1,895		)	125		39		164		(1,731	)
Post-retirement benefit plans:
Net actuarial (loss) gain	(137		)	—		(113	)	(113	)	(250	)
Prior service (cost) benefit	(127		)	20		—		20		(107	)
Deferred income tax benefit (expense)	102			(7	)	27		20		122
Total post-retirement benefit plans	(162		)	13		(86	)	(73	)	(235	)
Total accumulated other comprehensive loss	$	(2,057	)	138		(47	)	91		(1,966	)

The following table presents cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2015, items recognized as a component of net periodic benefits expense in 2016, additional items deferred during 2016 and cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2016. The items not recognized as a component of net periodic benefits expense have been recorded on our consolidated balance sheets in accumulated other comprehensive loss:



	As of and for the Years Ended December 31,
	2015			Recognition of Net Periodic Benefits Expense		Deferrals		Net Change in AOCL		2016
	(Dollars in millions)
Accumulated other comprehensive loss:
Pension plans:
Net actuarial (loss) gain	$	(2,857	)	175		(466	)	(291	)	(3,148	)
Prior service benefit (cost)	72			(8	)	(2	)	(10	)	62
Deferred income tax benefit (expense)	1,070			(67	)	188		121		1,191
Total pension plans	(1,715		)	100		(280	)	(180	)	(1,895	)
Post-retirement benefit plans:
Net actuarial (loss) gain	(147		)	—		10		10		(137	)
Prior service (cost) benefit	(147		)	20		—		20		(127	)
Deferred income tax benefit (expense)	114			(8	)	(4	)	(12	)	102
Total post-retirement benefit plans	(180		)	12		6		18		(162	)
Total accumulated other comprehensive loss	$	(1,895	)	112		(274	)	(162	)	(2,057	)

The following table presents estimated items to be recognized in 2018 as a component of net periodic benefit expense of the pension, non-qualified pension and post-retirement benefit plans:



	Pension Plans			Post-Retirement Plans
	(Dollars in millions)
Estimated recognition of net periodic (cost) benefit income in 2018:
Net actuarial loss	$	(205	)	—
Prior service income (cost)	8			(20	)
Deferred income tax benefit	48			4
Estimated net periodic benefit expense to be recorded in 2018 as a component of other comprehensive (loss) income	$	(149	)	(16	)

Medicare Prescription Drug, Improvement and Modernization Act of 2003

We sponsor post-retirement health care plans with several benefit options that provide prescription drug benefits that we deem actuarially equivalent to or exceeding Medicare Part D. We recognize the impact of the federal subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the calculation of our post-retirement benefit obligation and net periodic post-retirement benefit expense.

Other Benefit Plans

Health Care and Life Insurance

We provide health care and life insurance benefits to essentially all of our active employees. We are largely self-funded for the cost of the health care plan. Our health care benefit expense for current employees was $341 million, $399 million and $381 million for the years ended December 31, 2017, 2016 and 2015, respectively. Union-represented employee benefits are based on negotiated collective bargaining agreements. Employees contributed $128 million, $127 million and $125 million for the years ended December 31, 2017, 2016 and 2015, respectively. Our group basic life insurance plans are fully insured and the premiums are paid by us.

401(k) Plans

We sponsor qualified defined contribution plans covering substantially all of our employees. Under these plans, employees may contribute a percentage of their annual compensation up to certain maximums, as defined by the plans and by the Internal Revenue Service ("IRS"). Currently, we match a percentage of employee contributions in cash. At December 31, 2017 and 2016, the assets of the plans included approximately 7 million shares and 7 million shares, respectively, of our common stock all of which were the result of the combination of previous employer match and participant directed contributions. We recognized expenses related to these plans of $77 million, $79 million and $83 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Upon the November 1, 2017 closing of our acquisition of Level 3, we assumed various defined contribution plans covering substantially all eligible employees of Level 3. On December 31, 2017, we merged the Level 3 Communications, Inc. 401(k) Plan into the CenturyLink Dollar & Sense 401(k) Plan. The resulting plan covers substantially all eligible non-represented employees of the combined company in the US.

Deferred Compensation Plans

We sponsored non-qualified deferred compensation plans for various groups that included certain of our current and former highly compensated employees. The value of liabilities related to these plans was not significant.