Benefit Plans

Subsidiaries of Altria Group, Inc. sponsor noncontributory defined benefit pension plans covering the majority of all employees of Altria Group, Inc. However, employees hired on or after a date specific to their employee group are not eligible to participate in these noncontributory defined benefit pension plans but are instead eligible to participate in a defined contribution plan with enhanced benefits. This transition for new hires occurred from October 1, 2006 to January 1, 2008. In addition, effective January 1, 2010, certain employees of UST and Middleton who were participants in noncontributory defined benefit pension plans ceased to earn additional benefit service under those plans and became eligible to participate in a defined contribution plan with enhanced benefits. Altria Group, Inc. and its subsidiaries also provide health care and other benefits to the majority of retired employees.

The plan assets and benefit obligations of Altria Group, Inc.'s pension plans and the benefit obligations of Altria Group, Inc.'s postretirement plans are measured at December 31 of each year.

Pension Plans

▪Obligations and Funded Status: The projected benefit obligations, plan assets and funded status of Altria Group, Inc.'s pension plans at December 31, 2012 and 2011, were as follows:



(in millions)	2012			2011
Projected benefit obligation at beginning of year	$	6,965		$	6,439
Service cost	79			74
Interest cost	344			351
Benefits paid	(420		)	(371		)
Actuarial losses	956			460
Termination and curtailment	—			17
Other	—			(5		)
Projected benefit obligation at end of year	7,924			6,965
Fair value of plan assets at beginning of year	5,275			5,218
Actual return on plan assets	755			188
Employer contributions	557			240
Benefits paid	(420		)	(371		)
Fair value of plan assets at end of year	6,167			5,275
Net pension liability recognized at December 31	$	(1,757	)	$	(1,690	)

The net pension liability recognized in Altria Group, Inc.'s consolidated balance sheets at December 31, 2012 and 2011, was as follows:



(in millions)	2012			2011
Other accrued liabilities	$	(22	)	$	(28	)
Accrued pension costs	(1,735		)	(1,662		)
	$	(1,757	)	$	(1,690	)

The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $7.5 billion and $6.6 billion at December 31, 2012 and 2011, respectively.

At December 31, 2012 and 2011, the accumulated benefit obligations were in excess of plan assets for all pension plans.

The following assumptions were used to determine Altria Group, Inc.'s benefit obligations under the plans at December 31:



	2012		2011
Discount rate	4.0	%	5.0	%
Rate of compensation increase	4.0		4.0

The discount rates for Altria Group, Inc.'s plans were developed from a model portfolio of high-quality corporate bonds with durations that match the expected future cash flows of the benefit obligations.

▪Components of Net Periodic Benefit Cost: Net periodic pension cost consisted of the following for the years ended December 31, 2012, 2011 and 2010:



(in millions)	2012			2011			2010
Service cost	$	79		$	74		$	80
Interest cost	344			351			356
Expected return on plan assets	(442		)	(422		)	(421		)
Amortization:
Net loss	224			171			126
Prior service cost	10			14			13
Termination, settlement and curtailment	21			41			—
Net periodic pension cost	$	236		$	229		$	154

During 2012 and 2011, termination, settlement and curtailment shown in the table above include charges related to Altria Group, Inc.'s 2011 Cost Reduction Program. For more information on Altria Group, Inc.'s 2011 Cost Reduction Program, see Note 4. Asset Impairment, Exit, Implementation and Integration Costs.

The amounts included in termination, settlement and curtailment in the table above for the years ended December 31, 2012 and 2011 were comprised of the following changes:



(in millions)	2012		2011
Benefit obligation	$	—	$	39
Other comprehensive earnings/losses:
Net losses	21		—
Prior service cost	—		2
	$	21	$	41

For the pension plans, the estimated net loss and prior service cost that are expected to be amortized from accumulated other comprehensive losses into net periodic benefit cost during 2013 are $276 million and $10 million, respectively.

The following weighted-average assumptions were used to determine Altria Group, Inc.'s net pension cost for the years ended December 31:



	2012		2011		2010
Discount rate	5.0	%	5.5	%	5.9	%
Expected rate of return on plan assets	8.0		8.0		8.0
Rate of compensation increase	4.0		4.0		4.5

Altria Group, Inc. sponsors deferred profit-sharing plans covering certain salaried, non-union and union employees. Contributions and costs are determined generally as a percentage of earnings, as defined by the plans. Amounts charged to expense for these defined contribution plans totaled $81 million, $106 million and $108 million in 2012, 2011 and 2010, respectively.

▪Plan Assets: Altria Group, Inc.'s pension plans investment strategy is based on an expectation that equity securities will outperform debt securities over the long term. Altria Group, Inc. believes that it implements the investment strategy in a prudent and risk-controlled manner, consistent with the fiduciary requirements of the Employee Retirement Income Security Act of 1974, by investing retirement plan assets in a well-diversified mix of equities, fixed income and other securities that reflects the impact of the demographic mix of plan participants on the benefit obligation using a target asset allocation between equity securities and fixed income investments of 55%/45%. Accordingly, the composition of Altria Group, Inc.'s plan assets at December 31, 2012 was broadly characterized as an allocation between equity securities (54%), corporate bonds (23%), U.S. Treasury and Foreign Government securities (17%) and all other types of investments (6%). Virtually all pension assets can be used to make monthly benefit payments.

Altria Group, Inc.'s pension plans investment objective is accomplished by investing in U.S. and international equity index strategies that are intended to mirror indices such as the Standard & Poor's 500 Index, Russell Small Cap Completeness Index, Research Affiliates Fundamental Index ("RAFI") Low Volatility US Index, and Morgan Stanley Capital International ("MSCI") Europe, Australasia, and the Far East ("EAFE") Index. Altria Group, Inc.'s pension plans also invest in actively managed international equity securities of large, mid and small cap companies located in developed and emerging markets, as well as long duration fixed income securities that primarily include investment grade corporate bonds of companies from diversified industries, U.S. Treasuries and Treasury Inflation Protected Securities. The allocation to below investment grade securities represented 14% of the fixed income holdings or 6% of total plan assets at December 31, 2012. The allocation to emerging markets represented 5% of the equity holdings or 3% of total plan assets at December 31, 2012. The allocation to real estate and private equity investments was immaterial at December 31, 2012.

Altria Group, Inc.'s pension plans risk management practices include ongoing monitoring of asset allocation, investment performance and investment managers' compliance with their investment guidelines, periodic rebalancing between equity and debt asset classes and annual actuarial re-measurement of plan liabilities.

Altria Group, Inc.'s expected rate of return on pension plan assets is determined by the plan assets' historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class. The forward-looking estimates are consistent with the overall long-term averages exhibited by returns on equity and fixed income securities.

The fair values of Altria Group, Inc.'s pension plan assets by asset category were as follows:

Investments at Fair Value as of December 31, 2012



(in millions)	Level 1		Level 2		Level 3		Total
Common/collective trusts:
U.S. large cap	$	—	$	1,566	$	—	$	1,566
U.S. small cap	—		499		—		499
International developed markets	—		179		—		179
Long duration fixed income	—		494		—		494
U.S. and foreign government securities or their agencies:
U.S. government and agencies	—		625		—		625
U.S. municipal bonds	—		71		—		71
Foreign government and agencies	—		311		—		311
Corporate debt instruments:
Above investment grade	—		714		—		714
Below investment grade and no rating	—		391		—		391
Common stock:
International equities	759		—		—		759
U.S. equities	300		—		—		300
Registered investment companies	128		50		—		178
U.S. and foreign cash and cash equivalents	16		4		—		20
Asset backed securities	—		35		—		35
Other, net	9		2		14		25
Total investments at fair value, net	$	1,212	$	4,941	$	14	$	6,167

Investments at Fair Value as of December 31, 2011



(in millions)	Level 1		Level 2		Level 3		Total
Common/collective trusts:
U.S. large cap	$	—	$	1,482	$	—	$	1,482
U.S. small cap	—		441		—		441
International developed markets	—		152		—		152
International emerging markets	—		100		—		100
Long duration fixed income	—		585		—		585
U.S. and foreign government securities or their agencies:
U.S. government and agencies	—		510		—		510
U.S. municipal bonds	—		44		—		44
Foreign government and agencies	—		204		—		204
Corporate debt instruments:
Above investment grade	—		618		—		618
Below investment grade and no rating	—		255		—		255
Common stock:
International equities	550		—		—		550
U.S. equities	21		—		—		21
Registered investment companies	124		63		—		187
U.S. and foreign cash and cash equivalents	42		4		—		46
Asset backed securities	—		49		—		49
Other, net	16		2		13		31
Total investments at fair value, net	$	753	$	4,509	$	13	$	5,275

Level 3 holdings and transactions were immaterial to total plan assets at December 31, 2012 and 2011.

For a description of the fair value hierarchy and the three levels of inputs used to measure fair value, see Note 2. Summary of Significant Accounting Policies.

Following is a description of the valuation methodologies used for investments measured at fair value, including the general classification of such investments pursuant to the fair value hierarchy.

▪

Common/Collective Trusts: Common/collective trusts consist of pools of investments used by institutional investors to obtain exposure to equity and fixed income markets by investing in equity index funds that are intended to mirror indices such as Standard & Poor's 500 Index, Russell Small Cap Completeness Index, State Street Global Advisor's Fundamental Index, MSCI EAFE Index and an actively managed long duration fixed income fund. They are valued on the basis of the relative interest of each participating investor in the fair value of the underlying assets of each of the respective common/collective trusts. The underlying assets are valued based on the net asset value ("NAV") as provided by the investment account manager and are classified in level 2 of the fair value hierarchy. These common/collective trusts have defined redemption terms that vary from a two-day prior notice to semi-monthly openings for redemption. There were no other restrictions on redemption at December 31, 2012 and 2011.

▪

U.S. and Foreign Government Securities: U.S. and foreign government securities consist of investments in Treasury Nominal Bonds and Inflation Protected Securities, investment grade municipal securities and unrated or non-investment grade municipal securities. Government securities, that are traded in a non-active over-the-counter market, are valued at a price that is based on a broker quote, and are classified in level 2 of the fair value hierarchy.


▪	Corporate Debt Instruments: Corporate debt instruments are valued at a price that is based on a compilation of primarily observable market information or a broker quote in a non-active over-the-counter market, and are classified in level 2 of the fair value hierarchy.


▪	Common Stock: Common stocks are valued based on the price of the security as listed on an open active exchange on last trade date, and are classified in level 1 of the fair value hierarchy.

▪

Registered Investment Companies: Investments in mutual funds sponsored by a registered investment company are valued based on exchange listed prices and are classified in level 1 of the fair value hierarchy. Registered investment company funds which are designed specifically to meet Altria Group, Inc.'s pension plans investment strategies but are not traded on an active market are valued based on the NAV of the underlying securities as provided by the investment account manager on the last business day of the period and are classified in level 2 of the fair value hierarchy. The registered investment company funds measured at NAV have daily liquidity and were not subject to any redemption restrictions at December 31, 2012 and 2011.


▪	U.S. and Foreign Cash & Cash Equivalents: Cash and cash equivalents are valued at cost that approximates fair value, and are classified in level 1 of the fair value hierarchy. Cash collateral for forward contracts on U.S. Treasury notes, which approximates fair value, is classified in level 2 of the fair value hierarchy.

▪

Asset Backed Securities: Asset backed securities are fixed income securities such as mortgage backed securities and auto loans that are collateralized by pools of underlying assets that are unable to be sold individually. They are valued at a price which is based on a compilation of primarily observable market information or a broker quote in a non-active over-the-counter market, and are classified in level 2 of the fair value hierarchy.

▪Cash Flows: Altria Group, Inc. makes contributions to the extent that they are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under IRS regulations. On January 2, 2013, Altria Group, Inc. made a voluntary $350 million contribution to its pension plans. Currently, Altria Group, Inc. anticipates making additional employer contributions to its pension plans of approximately $25 million to $50 million in 2013 based on current tax law. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest rates.

The estimated future benefit payments from the Altria Group, Inc. pension plans at December 31, 2012, are as follows:



(in millions)
2013	$	400
2014	412
2015	414
2016	420
2017	427
2018-2022	2,227

Postretirement Benefit Plans

Net postretirement health care costs consisted of the following for the years ended December 31, 2012, 2011 and 2010:



(in millions)	2012			2011			2010
Service cost	$	18		$	34		$	29
Interest cost	115			139			135
Amortization:
Net loss	40			39			32
Prior service credit	(45		)	(21		)	(21		)
Termination and curtailment	(26		)	(4		)	—
Net postretirement health care costs	$	102		$	187		$	175

During 2012 and 2011, termination and curtailment shown in the table above are related to Altria Group, Inc.'s 2011 Cost Reduction Program. For further information on Altria Group, Inc.'s 2011 Cost Reduction Program, see Note 4. Asset Impairment, Exit, Implementation and Integration Costs.

The amounts included in termination and curtailment shown in the table above for the years ended December 31, 2012 and 2011 were comprised of the following changes:



(in millions)	2012			2011
Accrued postretirement health care costs	$	—		$	11
Other comprehensive earnings/losses:
Prior service credit	(26		)	(15		)
	$	(26	)	$	(4	)

For the postretirement benefit plans, the estimated net loss and prior service credit that are expected to be amortized from accumulated other comprehensive losses into net postretirement health care costs during 2013 are $57 million and $(45) million, respectively.

The following assumptions were used to determine Altria Group, Inc.'s net postretirement cost for the years ended December 31:



	2012		2011		2010
Discount rate	4.9	%	5.5	%	5.8	%
Health care cost trend rate	8.0		8.0		7.5

Altria Group, Inc.'s postretirement health care plans are not funded. The changes in the accumulated postretirement benefit obligation at December 31, 2012 and 2011, were as follows:



(in millions)	2012			2011
Accrued postretirement health care costs at beginning of year	$	2,505		$	2,548
Service cost	18			34
Interest cost	115			139
Benefits paid	(135		)	(136		)
Plan amendments	—			(282		)
Actuarial losses	160			191
Termination and curtailment	—			11
Accrued postretirement health care costs at end of year	$	2,663		$	2,505

The current portion of Altria Group, Inc.'s accrued postretirement health care costs of $159 million and $146 million at December 31, 2012 and 2011, respectively, is included in other accrued liabilities on the consolidated balance sheets.

The Patient Protection and Affordable Care Act ("PPACA"), as amended by the Health Care and Education Reconciliation Act of 2010, was signed into law in March 2010. The PPACA mandates health care reforms with staggered effective dates from 2010 to 2018, including the imposition of an excise tax on high cost health care plans effective 2018. The additional accumulated postretirement liability resulting from the PPACA, which is not material to Altria Group, Inc., has been included in Altria Group, Inc.'s accumulated postretirement benefit obligation at December 31, 2012 and 2011. Given the complexity of the PPACA and the extended time period during which implementation is expected to occur, further adjustments to Altria Group, Inc.'s accumulated postretirement benefit obligation may be necessary in the future.

The following assumptions were used to determine Altria Group, Inc.'s postretirement benefit obligations at December 31:



	2012		2011
Discount rate	3.9	%	4.9	%
Health care cost trend rate assumed for next year	7.5		8.0
Ultimate trend rate	5.0		5.0
Year that the rate reaches the ultimate trend rate	2018		2018

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects as of December 31, 2012:



	One-Percentage-Point Increase		One-Percentage-Point Decrease
Effect on total of service and interest cost	7.1	%	(6.0	)%
Effect on postretirement benefit obligation	6.8		(5.8	)

Altria Group, Inc.'s estimated future benefit payments for its postretirement health care plans at December 31, 2012, are as follows:



(in millions)
2013	$	159
2014	168
2015	174
2016	177
2017	177
2018-2022	825

Postemployment Benefit Plans

Altria Group, Inc. sponsors postemployment benefit plans covering substantially all salaried and certain hourly employees. The cost of these plans is charged to expense over the working life of the covered employees. Net postemployment costs consisted of the following for the years ended December 31, 2012, 2011 and 2010:



(in millions)	2012			2011		2010
Service cost	$	1		$	1	$	1
Interest cost	1			2		1
Amortization of net loss	17			16		12
Other	(7		)	121		5
Net postemployment costs	$	12		$	140	$	19

"Other" postemployment cost shown in the table above primarily reflects incremental severance costs related to the 2011 Cost Reduction Program (see Note 4. Asset Impairment, Exit, Implementation and Integration Costs).

For the postemployment benefit plans, the estimated net loss that is expected to be amortized from accumulated other comprehensive losses into net postemployment costs during 2013 is approximately $18 million.

Altria Group, Inc.'s postemployment benefit plans are not funded. The changes in the benefit obligations of the plans at December 31, 2012 and 2011, were as follows:



(in millions)	2012			2011
Accrued postemployment costs at beginning of year	$	270		$	151
Service cost	1			1
Interest cost	1			2
Benefits paid	(143		)	(48		)
Actuarial losses and assumption changes	27			43
Other	(7		)	121
Accrued postemployment costs at end of year	$	149		$	270

The accrued postemployment costs were determined using a weighted-average discount rate of 2.4% and 2.8% in 2012 and 2011, respectively, an assumed weighted-average ultimate annual turnover rate of 0.5% in 2012 and 1.0% in 2011, assumed compensation cost increases of 4.0% in 2012 and 2011, and assumed benefits as defined in the respective plans. Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.

Comprehensive Earnings/Losses

The amounts recorded in accumulated other comprehensive losses at December 31, 2012 consisted of the following:



(in millions)	Pensions			Post- retirement			Post- employment			Total
Net losses	$	(3,186	)	$	(917	)	$	(169	)	$	(4,272	)
Prior service (cost) credit	(36		)	354			—			318
Deferred income taxes	1,254			221			65			1,540
Amounts recorded in accumulated other comprehensive losses	$	(1,968	)	$	(342	)	$	(104	)	$	(2,414	)

The amounts recorded in accumulated other comprehensive losses at December 31, 2011 consisted of the following:



(in millions)	Pensions			Post- retirement			Post- employment			Total
Net losses	$	(2,788	)	$	(796	)	$	(175	)	$	(3,759	)
Prior service (cost) credit	(46		)	425			—			379
Deferred income taxes	1,104			146			68			1,318
Amounts recorded in accumulated other comprehensive losses	$	(1,730	)	$	(225	)	$	(107	)	$	(2,062	)

The movements in other comprehensive earnings/losses during the year ended December 31, 2012 were as follows:



(in millions)	Pensions			Post- retirement			Post- employment			Total
Amounts transferred to earnings as components of net periodic benefit cost:
Amortization:
Net losses	$	224		$	40		$	17		$	281
Prior service cost/credit	10			(45		)	—			(35		)
Other expense (income):
Net losses	21			—			—			21
Prior service cost/credit	—			(26		)	—			(26		)
Deferred income taxes	(99		)	12			(6		)	(93		)
	156			(19		)	11			148
Other movements during the year:
Net losses	(643		)	(161		)	(11		)	(815		)
Deferred income taxes	249			63			3			315
	(394		)	(98		)	(8		)	(500		)
Total movements in other comprehensive earnings/losses	$	(238	)	$	(117	)	$	3		$	(352	)

The movements in other comprehensive earnings/losses during the year ended December 31, 2011 were as follows:



(in millions)	Pensions			Post- retirement			Post- employment			Total
Amounts transferred to earnings as components of net periodic benefit cost:
Amortization:
Net losses	$	171		$	39		$	16		$	226
Prior service cost/credit	14			(21		)	—			(7		)
Deferred income taxes	(72		)	(7		)	(6		)	(85		)
	113			11			10			134
Other movements during the year:
Net losses	(672		)	(188		)	(40		)	(900		)
Prior service cost/credit	2			264			—			266
Deferred income taxes	262			(27		)	14			249
	(408		)	49			(26		)	(385		)
Total movements in other comprehensive earnings/losses	$	(295	)	$	60		$	(16	)	$	(251	)

The movements in other comprehensive earnings/losses during the year ended December 31, 2010 were as follows:



(in millions)	Pensions			Post- retirement			Post- employment			Total
Amounts transferred to earnings as components of net periodic benefit cost:
Amortization:
Net losses	$	126		$	32		$	12		$	170
Prior service cost/credit	13			(21		)	—			(8		)
Deferred income taxes	(55		)	(4		)	(4		)	(63		)
	84			7			8			99
Other movements during the year:
Net losses	(41		)	(95		)	(10		)	(146		)
Prior service cost/credit	(16		)	58			—			42
Deferred income taxes	21			15			4			40
	(36		)	(22		)	(6		)	(64		)
Total movements in other comprehensive earnings/losses	$	48		$	(15	)	$	2		$	35