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, 2014 and 2013, were as follows:



(in millions)	2014			2013
Projected benefit obligation at beginning of year	$	7,137		$	7,924
Service cost	68			86
Interest cost	345			314
Benefits paid	(410		)	(410		)
Actuarial losses (gains)	1,190			(784		)
Other	—			7
Projected benefit obligation at end of year	8,330			7,137
Fair value of plan assets at beginning of year	7,077			6,167
Actual return on plan assets	615			927
Employer contributions	15			393
Benefits paid	(410		)	(410		)
Fair value of plan assets at end of year	7,297			7,077
Funded status at December 31	$	(1,033	)	$	(60	)

Amounts recognized in Altria Group, Inc.’s consolidated balance sheets at December 31, 2014 and 2013, were as follows:



(in millions)	2014			2013
Other assets	$	—		$	173
Other accrued liabilities	(21		)	(21		)
Accrued pension costs	(1,012		)	(212		)
	$	(1,033	)	$	(60	)

The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $7.9 billion and $6.8 billion at December 31, 2014 and 2013, respectively.

At December 31, 2014, the accumulated benefit obligations were in excess of plan assets for all pension plans. For plans with accumulated benefit obligations in excess of plan assets at December 31, 2013, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $299 million, $261 million and $66 million, respectively. These amounts were primarily related to plans for salaried employees that cannot be funded under IRS regulations.

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



	2014		2013
Discount rate	4.1	%	4.9	%
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.

At December 31, 2014, Altria Group, Inc. updated its mortality assumptions to reflect longer life expectancy for its pension plan participants, resulting in an increase of $401 million to the projected benefit obligation at December 31, 2014.

▪Components of Net Periodic Benefit Cost: Net periodic pension cost consisted of the following for the years ended December 31, 2014, 2013 and 2012:



(in millions)	2014			2013			2012
Service cost	$	68		$	86		$	79
Interest cost	345			314			344
Expected return on plan assets	(518		)	(493		)	(442		)
Amortization:
Net loss	147			271			224
Prior service cost	10			10			10
Termination and settlement	—			7			21
Net periodic pension cost	$	52		$	195		$	236

Termination and settlement shown in the table above primarily include charges related to the 2011 Cost Reduction Program.

The amounts included in termination and settlement in the table above were comprised of the following changes:



(in millions)	2013		2012
Benefit obligation	$	1	$	—
Other comprehensive earnings/losses:
Net loss	6		21
	$	7	$	21

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 2015 are $237 million and $7 million, respectively.

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



	2014		2013		2012
Discount rate	4.9	%	4.0	%	5.0	%
Expected rate of return on plan assets	8.0		8.0		8.0
Rate of compensation increase	4.0		4.0		4.0

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 $82 million, $80 million and $81 million in 2014, 2013 and 2012, 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%. The composition of Altria Group, Inc.’s plan assets at December 31, 2014 was broadly characterized as an allocation between equity securities (55%), corporate bonds (33%), U.S. Treasury and foreign government securities (7%) and all other types of investments (5%). 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 U.S. 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 corporate bonds of companies from diversified industries. The allocation to below investment grade securities represented 19% of the fixed income holdings or 9% of total plan assets at December 31, 2014. The allocation to emerging markets represented 5% of the equity holdings or 2% of total plan assets at December 31, 2014. The allocation to real estate and private equity investments was immaterial at December 31, 2014.

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, 2014



(in millions)	Level 1		Level 2		Level 3		Total
Common/collective trusts:
U.S. large cap	$	—	$	1,870	$	—	$	1,870
U.S. small cap	—		442		—		442
International developed markets	—		79		—		79
U.S. and foreign government securities or their agencies:
U.S. government and agencies	—		296		—		296
U.S. municipal bonds	—		124		—		124
Foreign government and agencies	—		281		—		281
Corporate debt instruments:
Above investment grade	—		1,765		—		1,765
Below investment grade and no rating	—		527		—		527
Common stock:
International equities	1,000		—		1		1,001
U.S. equities	556		—		—		556
Registered investment companies	63		113		—		176
Other, net	74		91		15		180
Total investments at fair value, net	$	1,693	$	5,588	$	16	$	7,297

Investments at Fair Value as of December 31, 2013



(in millions)	Level 1		Level 2		Level 3		Total
Common/collective trusts:
U.S. large cap	$	—	$	1,971	$	—	$	1,971
U.S. small cap	—		546		—		546
International developed markets	—		159		—		159
U.S. and foreign government securities or their agencies:
U.S. government and agencies	—		226		—		226
U.S. municipal bonds	—		127		—		127
Foreign government and agencies	—		275		—		275
Corporate debt instruments:
Above investment grade	—		1,371		1		1,372
Below investment grade and no rating	—		380		—		380
Common stock:
International equities	1,050		—		1		1,051
U.S. equities	506		—		—		506
Registered investment companies	159		137		—		296
Other, net	108		47		13		168
Total investments at fair value, net	$	1,823	$	5,239	$	15	$	7,077

Level 3 holdings and transactions were immaterial to total plan assets at December 31, 2014 and 2013.

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.

▪

Common/Collective Trusts: Common/collective trusts consist of funds that are intended to mirror indices such as Standard & Poor’s 500 Index, Russell Small Cap Completeness Index and MSCI EAFE Index. 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.

▪

U.S. and Foreign Government Securities: U.S. and foreign government securities consist of investments in Treasury Nominal Bonds and Inflation Protected Securities and municipal securities. Government securities are valued at a price that is based on a compilation of primarily observable market information, such as broker quotes. Matrix pricing, yield curves and indices are used when broker quotes are not available.


▪	Corporate Debt Instruments: Corporate debt instruments are valued at a price that is based on a compilation of primarily observable market information, such as broker quotes. Matrix pricing, yield curves and indices are used when broker quotes are not available.


▪	Common Stock: Common stocks are valued based on the price of the security as listed on an open active exchange on last trade date.

▪

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. Registered investment company funds that 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 and are classified in Level 2.

▪Cash Flows: Altria Group, Inc. makes contributions to the pension plans to the extent that the contributions are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under IRS regulations. Currently, Altria Group, Inc. anticipates making employer contributions to its pension plans of approximately $20 million to

$50 million in 2015 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, 2014, were as follows:



(in millions)
2015	$	422
2016	426
2017	434
2018	440
2019	440
2020-2024	2,306

Postretirement Benefit Plans

Net postretirement health care costs consisted of the following for the years ended December 31, 2014, 2013 and 2012:



(in millions)	2014			2013			2012
Service cost	$	15		$	18		$	18
Interest cost	107			99			115
Amortization:
Net loss	22			51			40
Prior service credit	(43		)	(45		)	(45		)
Curtailment	—			—			(26		)
Net postretirement health care costs	$	101		$	123		$	102

The curtailment gain shown in the table above resulted from plan amendments made to an Altria Group, Inc. postretirement plan during 2012 related to the 2011 Cost Reduction Program. The curtailment gain was recorded as a reduction to prior service credit in other comprehensive earnings/losses.

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 2015 are $46 million and $(39) million, respectively.

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



	2014		2013		2012
Discount rate	4.8	%	3.9	%	4.9	%
Health care cost trend rate	7.0		7.5		8.0

Altria Group, Inc.’s postretirement health care plans are not funded. The changes in the accumulated postretirement benefit obligation at December 31, 2014 and 2013, were as follows:



(in millions)	2014			2013
Accrued postretirement health care costs at beginning of year	$	2,317		$	2,663
Service cost	15			18
Interest cost	107			99
Benefits paid	(132		)	(138		)
Actuarial losses (gains)	306			(327		)
Other	—			2
Accrued postretirement health care costs at end of year	$	2,613		$	2,317

The current portion of Altria Group, Inc.’s accrued postretirement health care costs of $152 million and $162 million at December 31, 2014 and 2013, 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 in 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, 2014 and 2013. Given the complexity of the PPACA and the extended time period during which implementation is expected to occur, future adjustments to Altria Group, Inc.’s accumulated postretirement benefit obligation may be necessary.

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



	2014		2013
Discount rate	4.0	%	4.8	%
Health care cost trend rate assumed for next year	7.0		7.0
Ultimate trend rate	5.0		5.0
Year that the rate reaches the ultimate trend rate	2019		2018

At December 31, 2014, Altria Group, Inc. updated its mortality assumptions to reflect longer life expectancy for its postretirement health care plan participants, resulting in an increase of $110 million to the accrued postretirement health care costs at December 31, 2014.

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 had the following effects as of December 31, 2014:



	One-Percentage-Point Increase		One-Percentage-Point Decrease
Effect on total of service and interest cost	6.3	%	(5.4	)%
Effect on postretirement benefit obligation	7.2		(6.0	)

Altria Group, Inc.’s estimated future benefit payments for its postretirement health care plans at December 31, 2014, were as follows:



(in millions)
2015	$	152
2016	157
2017	158
2018	158
2019	155
2020-2024	722

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, 2014, 2013 and 2012:



(in millions)	2014		2013			2012
Service cost	$	1	$	1		$	1
Interest cost	1		1			1
Amortization of net loss	18		18			17
Other	2		(17		)	(7		)
Net postemployment costs	$	22	$	3		$	12

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 2015 is approximately $19 million.

Altria Group, Inc.’s postemployment benefit plans are not funded. The changes in the benefit obligations of the plans at December 31, 2014 and 2013, were as follows:



(in millions)	2014			2013
Accrued postemployment costs at beginning of year	$	65		$	149
Service cost	1			1
Interest cost	1			1
Benefits paid	(30		)	(65		)
Actuarial losses (gains) and assumption changes	30			(4		)
Other	2			(17		)
Accrued postemployment costs at end of year	$	69		$	65

The accrued postemployment costs were determined using a weighted-average discount rate of 3.0% and 3.7% in 2014 and 2013, respectively, an assumed weighted-average ultimate annual turnover rate of 0.5% in 2014 and 2013, assumed compensation cost increases of 4.0% in 2014 and 2013, 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, 2014 consisted of the following:



(in millions)	Pensions			Post- retirement			Post- employment			Total
Net loss	$	(2,637	)	$	(823	)	$	(122	)	$	(3,582	)
Prior service (cost) credit	(23		)	264			—			241
Deferred income taxes	1,037			218			46			1,301
Amounts recorded in accumulated other comprehensive losses	$	(1,623	)	$	(341	)	$	(76	)	$	(2,040	)

The amounts recorded in accumulated other comprehensive losses at December 31, 2013 consisted of the following:



(in millions)	Pensions			Post- retirement			Post- employment			Total
Net loss	$	(1,691	)	$	(539	)	$	(128	)	$	(2,358	)
Prior service (cost) credit	(33		)	307			—			274
Deferred income taxes	673			90			48			811
Amounts recorded in accumulated other comprehensive losses	$	(1,051	)	$	(142	)	$	(80	)	$	(1,273	)

The movements in other comprehensive earnings/losses during the year ended December 31, 2014 were as follows:



(in millions)	Pensions			Post- retirement			Post- employment			Total
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Net loss	$	147		$	22		$	18		$	187
Prior service cost/credit	10			(43		)	—			(33		)
Deferred income taxes	(61		)	8			(7		)	(60		)
	96			(13		)	11			94
Other movements during the year:
Net loss	(1,093		)	(306		)	(12		)	(1,411		)
Deferred income taxes	425			120			5			550
	(668		)	(186		)	(7		)	(861		)
Total movements in other comprehensive earnings/losses	$	(572	)	$	(199	)	$	4		$	(767	)

The movements in other comprehensive earnings/losses during the year ended December 31, 2013 were as follows:



(in millions)	Pensions			Post- retirement			Post- employment			Total
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Net loss	$	271		$	51		$	18		$	340
Prior service cost/credit	10			(45		)	—			(35		)
Other expense:
Net loss	6			—			—			6
Deferred income taxes	(111		)	(2		)	(7		)	(120		)
	176			4			11			191
Other movements during the year:
Net loss	1,218			327			23			1,568
Prior service cost/credit	(7		)	(2		)	—			(9		)
Deferred income taxes	(470		)	(129		)	(10		)	(609		)
	741			196			13			950
Total movements in other comprehensive earnings/losses	$	917		$	200		$	24		$	1,141

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 reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Net loss	$	224		$	40		$	17		$	281
Prior service cost/credit	10			(45		)	—			(35		)
Other expense (income):
Net loss	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 loss	(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	)