Benefit Plans

Subsidiaries of Altria Group, Inc. sponsor noncontributory defined benefit pension plans covering the majority of all employees of Altria Group, Inc. and its subsidiaries. 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’s subsidiaries 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 postretirement 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. Altria Group, Inc.’s postretirement plans are not funded.

The discount rates for Altria Group, Inc.’s plans were based on a yield curve developed from a model portfolio of high-quality corporate bonds with durations that match the expected future cash flows of the pension and postretirement benefit obligations.


▪	Obligations and Funded Status: The benefit obligations, plan assets and funded status of Altria Group, Inc.’s pension and postretirement plans at December 31, 2016 and 2015 were as follows:



	Pension						Postretirement
(in millions)	2016			2015			2016			2015
Change in benefit obligation:
Benefit obligation at beginning of year	$	8,011		$	8,330		$	2,392		$	2,613
Service cost	76			86			17			18
Interest cost	281			337			77			100
Benefits paid	(440		)	(431		)	(135		)	(141		)
Actuarial losses (gains)	367			(317		)	24			(192		)
Termination and curtailment	13			—			5			—
Other	4			6			(16		)	(6		)
Benefit obligation at end of year	8,312			8,011			2,364			2,392
Change in plan assets:
Fair value of plan assets at beginning of year	6,706			7,297			—			—
Actual return on plan assets	678			(188		)	—			—
Employer contributions	531			28			—			—
Benefits paid	(440		)	(431		)	—			—
Fair value of plan assets at end of year	7,475			6,706			—			—
Funded status at December 31	$	(837	)	$	(1,305	)	$	(2,364	)	$	(2,392	)
Amounts recognized on Altria Group, Inc.’s consolidated balance sheets were as follows:
Other accrued liabilities	$	(32	)	$	(28	)	$	(147	)	$	(147	)
Accrued pension costs	(805		)	(1,277		)	—			—
Accrued postretirement health care costs	—			—			(2,217		)	(2,245		)
	$	(837	)	$	(1,305	)	$	(2,364	)	$	(2,392	)

The table above presents the projected benefit obligation for Altria Group, Inc.’s pension plans. The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $8.0 billion and $7.7 billion at December 31, 2016 and 2015, respectively.

At December 31, 2016 and 2015, the accumulated benefit obligations were in excess of plan assets for all pension plans.

The Patient Protection and Affordable Care Act (“PPACA”), as amended by the Health Care and Education Reconciliation Act of 2010, mandates health care reforms with staggered effective dates from 2010 to 2020, including the imposition of an excise tax on high cost health care plans effective in 2020. 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, 2016 and 2015. 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 pension benefit obligations at December 31:



	2016		2015
Discount rate	4.1	%	4.4	%
Rate of compensation increase	4.0		4.0

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



	2016		2015
Discount rate	4.1	%	4.4	%
Health care cost trend rate assumed for next year	7.0		6.5
Ultimate trend rate	5.0		5.0
Year that the rate reaches the ultimate trend rate	2022		2019


▪	Components of Net Periodic Benefit Cost: Net periodic benefit cost consisted of the following for the years ended December 31, 2016, 2015 and 2014:



	Pension									Postretirement
(in millions)	2016			2015			2014			2016			2015			2014
Service cost	$	76		$	86		$	68		$	17		$	18		$	15
Interest cost	281			337			345			77			100			107
Expected return on plan assets	(553		)	(539		)	(518		)	—			—			—
Amortization:
Net loss	171			234			147			25			43			22
Prior service cost (credit)	5			7			10			(39		)	(39		)	(43		)
Termination, settlement and curtailment	34			8			—			(2		)	—			—
Net periodic benefit cost	$	14		$	133		$	52		$	78		$	122		$	101

Termination, settlement and curtailment shown in the table above primarily relate to the productivity initiative and facilities consolidation discussed in Note 5. Asset Impairment, Exit and Implementation Costs.

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



	Pension				Postretirement
(in millions)	2016		2015		2016
Benefit obligation	$	23	$	—	$	11
Other comprehensive earnings/losses:
Net loss (earnings)	9		8		—
Prior service cost (credit)	2		—		(13		)
	$	34	$	8	$	(2	)

Beginning in 2016, Altria Group, Inc. began using a spot rate approach to estimate the service and interest cost components of net periodic benefit costs by applying the specific spot rates along the yield curve to the relevant projected cash flows, as Altria Group, Inc. believes that this approach is a more precise estimate of service and interest cost. This change resulted in a decrease of approximately $70 million and $20 million to its 2016 pre-tax pension and postretirement net periodic benefit cost, respectively. Prior to 2016, Altria Group, Inc. estimated the service and interest cost components of net periodic benefit cost using a single weighted-average discount rate derived from the yield curve used to measure the pension and postretirement plans benefit obligations.

At December 31, 2014, Altria Group, Inc. updated its mortality assumptions to reflect longer life expectancy for its pension plan and postretirement plan participants, resulting in an increase of approximately $60 million and $10 million to its 2015 pre-tax pension and postretirement net periodic benefit cost, respectively.

The estimated net loss and prior service cost (credit) that are expected to be amortized from accumulated other comprehensive losses into net periodic benefit cost during 2017 is as follows:



(in millions)	Pension		Postretirement
Net loss	$	200	$	32
Prior service cost (credit)	4		(38		)

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



	Pension						Postretirement
	2016		2015		2014		2016		2015		2014
Discount rates:
Service cost	4.7	%	4.1	%	4.9	%	4.5	%	4.0	%	4.8	%
Interest cost	3.6		4.1		4.9		3.4		4.0		4.8
Expected rate of return on plan assets	8.0		8.0		8.0		—		—		—
Rate of compensation increase	4.0		4.0		4.0		—		—		—
Health care cost trend rate	—		—		—		6.5		7.0		7.0

Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement 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, 2016:



	One-Percentage-Point Increase		One-Percentage-Point Decrease
Effect on total of postretirement service and interest cost	8.0	%	(6.7	)%
Effect on postretirement benefit obligation	6.4	%	(5.4	)%

▪Defined Contribution Plans: 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 $93 million, $85 million and $82 million in 2016, 2015 and 2014, respectively.

▪Pension 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, 2016 was broadly characterized as an allocation between equity securities (57%), corporate bonds (32%), U.S. Treasury and foreign government securities (8%) and all other types of investments (3%). 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 18% of the fixed income holdings or 8% of total plan assets at December 31, 2016. The allocation to emerging markets represented 3% of the equity holdings or 2% of total plan assets at December 31, 2016.

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.

On January 1, 2016, Altria Group, Inc. retrospectively adopted ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value (“NAV”) per share as a practical expedient. As a result of the adoption, certain investments have not been classified by level in the fair value table but are disclosed to permit reconciliation to the fair value of plan assets. Certain investments in the fair value table at December 31, 2015 have been reclassified to conform with the current year’s presentation.

The fair values of Altria Group, Inc.’s pension plan assets by asset category at December 31, 2016 and 2015 were as follows:



	2016								2015
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
U.S. and foreign government securities or their agencies:
U.S. government and agencies	$	—	$	444	$	—	$	444	$	—	$	331	$	—	$	331
U.S. municipal bonds	—		102		—		102		—		102		—		102
Foreign government and agencies	—		185		—		185		—		252		—		252
Corporate debt instruments:
Above investment grade	—		1,735		—		1,735		—		1,660		—		1,660
Below investment grade and no rating	—		602		—		602		—		502		—		502
Common stock:
International equities	1,076		—		—		1,076		907		—		2		909
U.S. equities	760		—		—		760		605		—		—		605
Registered investment companies	51		—		—		51		58		—		—		58
Other, net	91		33		13		137		16		58		13		87
	$	1,978	$	3,101	$	13	$	5,092	$	1,586	$	2,905	$	15	$	4,506
Investments measured at NAV as a practical expedient for fair value:
Common/collective trusts:
U.S. large cap							1,940								1,762
U.S. small cap							363								360
International developed markets							80								78
Fair value of plan assets, net							$	7,475							$	6,706

Level 3 holdings and transactions were immaterial to total plan assets at December 31, 2016 and 2015.

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.

▪

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 registered investment companies are valued at the closing NAV publicly reported on the last business day of the year.

▪

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 NAV, which is provided by the investment account manager as a practical expedient to estimate fair value. In accordance with ASU No. 2015-07, these investments have not been classified by level but are disclosed to permit reconciliation to the fair value of plan assets.

▪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. In September 2016, Altria Group, Inc. made voluntary contributions totaling $500 million to its pension plans. Currently, Altria Group, Inc. anticipates making employer contributions to its pension plans of approximately $30 million to $50 million in 2017 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.

Estimated future benefit payments at December 31, 2016 were as follows:



(in millions)	Pension		Postretirement
2017	$	456	$	147
2018	461		149
2019	449		145
2020	456		143
2021	459		141
2022-2026	2,395		655

Comprehensive Earnings/Losses

The amounts recorded in accumulated other comprehensive losses at December 31, 2016 consisted of the following:



(in millions)	Pension			Post- retirement			Post- employment			Total
Net loss	$	(2,857	)	$	(581	)	$	(99	)	$	(3,537	)
Prior service (cost) credit	(19		)	195			—			176
Deferred income taxes	1,124			153			36			1,313
Amounts recorded in accumulated other comprehensive losses	$	(1,752	)	$	(233	)	$	(63	)	$	(2,048	)

The amounts recorded in accumulated other comprehensive losses at December 31, 2015 consisted of the following:



(in millions)	Pension			Post- retirement			Post- employment			Total
Net loss	$	(2,805	)	$	(588	)	$	(108	)	$	(3,501	)
Prior service (cost) credit	(22		)	231			—			209
Deferred income taxes	1,101			141			40			1,282
Amounts recorded in accumulated other comprehensive losses	$	(1,726	)	$	(216	)	$	(68	)	$	(2,010	)

The movements in other comprehensive earnings/losses during the year ended December 31, 2016 were as follows:



(in millions)	Pension			Post- retirement			Post- employment			Total
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Net loss	$	171		$	25		$	18		$	214
Prior service cost/credit	5			(39		)	—			(34		)
Other expense (income):
Net loss	9			—			—			9
Prior service cost/credit	2			(13		)	—			(11		)
Deferred income taxes	(69		)	11			(7		)	(65		)
	118			(16		)	11			113
Other movements during the year:
Net loss	(232		)	(18		)	(9		)	(259		)
Prior service cost/credit	(4		)	16			—			12
Deferred income taxes	92			1			3			96
	(144		)	(1		)	(6		)	(151		)
Total movements in other comprehensive earnings/losses	$	(26	)	$	(17	)	$	5		$	(38	)

The movements in other comprehensive earnings/losses during the year ended December 31, 2015 were as follows:



(in millions)	Pension			Post- retirement			Post- employment			Total
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Net loss	$	234		$	43		$	19		$	296
Prior service cost/credit	7			(39		)	—			(32		)
Other expense:
Net loss	8			—			—			8
Deferred income taxes	(96		)	(2		)	(7		)	(105		)
	153			2			12			167
Other movements during the year:
Net loss	(410		)	192			(5		)	(223		)
Prior service cost/credit	(6		)	6			—			—
Deferred income taxes	160			(75		)	1			86
	(256		)	123			(4		)	(137		)
Total movements in other comprehensive earnings/losses	$	(103	)	$	125		$	8		$	30

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



(in millions)	Pension			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	)