Benefit Plans

Subsidiaries of Altria sponsor noncontributory defined benefit pension plans covering certain employees of Altria and its subsidiaries. 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 and its subsidiaries also provide postretirement health care and other benefits to certain retired employees.

The plan assets and benefit obligations of Altria’s pension plans and postretirement plans are measured at December 31 of each year. In December 2017, Altria made a contribution of $270 million to a trust to fund certain postretirement benefits. Prior to this contribution, Altria’s postretirement plans were not funded.

The discount rates for Altria’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.

On January 1, 2018 Altria adopted ASU No. 2017-07, which requires an employer to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item or items as other compensation costs arising from services rendered by employees during the period. The other components of net periodic pension cost and net periodic postretirement benefit cost are required to be presented in the statements of earnings separately from the service cost component and outside the subtotal of operating income. Additionally, only the service cost component is eligible for capitalization. Altria retrospectively adopted the guidance for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in its consolidated statements of earnings, and prospectively adopted the capitalization of service cost. Altria used the practical expedient provided in ASU No. 2017-07 that permits Altria to use the amounts disclosed in its benefit plans note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. For the year ended December 31, 2017, the adoption of ASU No. 2017-07 resulted in a reclassification of net periodic benefit cost of $12 million, $24 million and $1 million from cost of sales, marketing, administration and research costs, and asset impairment and exit costs, respectively, to net periodic benefit (income) cost, excluding service cost in Altria’s consolidated statement of earnings. For the year ended December 31, 2016, the adoption resulted in a reclassification of net periodic benefit income of $19 million and $12 million from cost of sales and marketing, administration and research costs, respectively, and a reclassification of net periodic benefit cost of $30 million from asset impairment and exit costs, to net periodic benefit (income) cost, excluding service cost in Altria’s consolidated statement of earnings. In addition, certain prior-period segment data has been reclassified to conform with the current period’s presentation. For further discussion, see Note 16. Segment Reporting.


▪	Obligations and Funded Status: The benefit obligations, plan assets and funded status of Altria’s pension and postretirement plans at December 31, 2018 and 2017 were as follows:



	Pension						Postretirement
(in millions)	2018			2017			2018			2017
Change in benefit obligation:
Benefit obligation at beginning of year	$	8,510		$	8,312		$	2,335		$	2,364
Service cost	81			75			18			16
Interest cost	276			288			70			76
Benefits paid	(488		)	(703		)	(130		)	(139		)
Actuarial (gains) losses	(660		)	589			(298		)	56
Termination, settlement and curtailment	(18		)	(51		)	—			—
Other	25			—			45			(38		)
Benefit obligation at end of year	7,726			8,510			2,040			2,335
Change in plan assets:
Fair value of plan assets at beginning of year	8,015			7,475			270			—
Actual return on plan assets	(430		)	1,219			(14		)	—
Employer contributions	41			24			—			270
Benefits paid	(488		)	(703		)	(45		)	—
Fair value of plan assets at end of year	7,138			8,015			211			270
Funded status at December 31	$	(588	)	$	(495	)	$	(1,829	)	$	(2,065	)
Amounts recognized on Altria’s consolidated balance sheets were as follows:
Other accrued liabilities	$	(44	)	$	(51	)	$	(80	)	$	(78	)
Accrued pension costs	(544		)	(445		)	—			—
Other assets	—			1			—			—
Accrued postretirement health care costs	—			—			(1,749		)	(1,987		)
	$	(588	)	$	(495	)	$	(1,829	)	$	(2,065	)

The table above presents the projected benefit obligation for Altria’s pension plans. The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $7.4 billion and $8.2 billion at December 31, 2018 and 2017, respectively.

For plans with accumulated benefit obligations in excess of plan assets at December 31, 2018, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $7,598 million, $7,239 million and $7,012 million, respectively. For plans with accumulated benefit obligations in excess of plan assets at December 31, 2017, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $413 million, $364 million and $124 million, respectively.

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 2022, including the imposition of an excise tax on high cost health care plans effective in 2022. The additional accumulated postretirement liability resulting from the PPACA, which is not material to Altria, has been included in Altria’s accumulated postretirement benefit obligation at December 31, 2018 and 2017. Given the complexity of the PPACA and the extended time period during which implementation is expected to occur, future adjustments to Altria’s accumulated postretirement benefit obligation may be necessary.

The following assumptions were used to determine Altria’s pension and postretirement benefit obligations at December 31:



	Pension				Postretirement
	2018		2017		2018		2017
Discount rate	4.4	%	3.7	%	4.4	%	3.7	%
Rate of compensation increase	4.0		4.0		—		—
Health care cost trend rate assumed for next year	—		—		6.5		7.0
Ultimate trend rate	—		—		5.0		5.0
Year that the rate reaches the ultimate trend rate	—		—		2025		2022


▪	Components of Net Periodic Benefit Cost: Net periodic benefit cost consisted of the following for the years ended December 31, 2018, 2017 and 2016:



	Pension									Postretirement
(in millions)	2018			2017			2016			2018			2017			2016
Service cost	$	81		$	75		$	76		$	18		$	16		$	17
Interest cost	276			288			281			70			76			77
Expected return on plan assets	(585		)	(601		)	(553		)	(19		)	—			—
Amortization:
Net loss	225			197			171			21			25			25
Prior service cost (credit)	4			4			5			(42		)	(38		)	(39		)
Termination, settlement and curtailment	16			86			34			—			—			(2		)
Net periodic benefit cost	$	17		$	49		$	14		$	48		$	79		$	78

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

In the third quarter of 2017, Altria made a voluntary, limited-time offer to former employees with vested benefits in the Altria Retirement Plan who had not commenced receiving benefit payments and who met certain other conditions. Eligible participants were offered the opportunity to make a one-time election to receive their pension benefit as a single lump sum payment or as a monthly annuity. Distributions to former employees who elected to receive lump sum payments totaled approximately $277 million, substantially all of which were made in December 2017 from the Altria Retirement Plan’s assets. Payments began on January 1, 2018 to former employees who elected a monthly annuity. As a result of the lump sum distributions, Altria recorded a one-time settlement charge of $81 million in 2017.

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



	Pension						Post-retirement
(in millions)	2018		2017		2016		2016
Benefit obligation	$	—	$	—	$	23	$	11
Other comprehensive earnings/losses:
Net loss	13		86		9		—
Prior service cost (credit)	3		—		2		(13		)
	$	16	$	86	$	34	$	(2	)

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 2019 is as follows:



(in millions)	Pension		Postretirement
Net loss	$	169	$	12
Prior service cost (credit)	6		(32		)

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



	Pension						Postretirement
	2018		2017		2016		2018		2017		2016
Discount rates:
Service cost	3.8	%	4.3	%	4.7	%	3.8	%	4.3	%	4.5	%
Interest cost	3.3		3.5		3.6		3.3		3.5		3.4
Expected rate of return on plan assets	7.8		8.0		8.0		7.8		—		—
Rate of compensation increase	4.0		4.0		4.0		—		—		—
Health care cost trend rate	—		—		—		7.0		7.0		6.5

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, 2018:



	One-Percentage-Point Increase		One-Percentage-Point Decrease
Effect on total of postretirement service and interest cost	7.5	%	(6.3	)%
Effect on postretirement benefit obligation	5.6	%	(4.8	)%

▪Defined Contribution Plans: Altria 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 $85 million, $83 million and $93 million in 2018, 2017 and 2016, respectively.

▪Pension and Postretirement Plan Assets: Altria’s investment strategy for its pension and postretirement plan assets is based on an expectation that equity securities will outperform debt securities over the long term. Altria 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’s plan assets at December 31, 2018 was broadly characterized with the following allocation:



	Pension		Postretirement
Equity securities	48	%	48	%
Corporate bonds	32	%	42	%
U.S. Treasury and foreign government securities	20	%	10	%

Altria’s plan asset allocations at December 31, 2018 reflect fourth quarter 2018 equity market underperformance and are monitored on an ongoing basis to adjust as necessary.

Substantially all pension and all postretirement assets can be used to make monthly benefit payments.

Altria’s investment objective for its pension and postretirement plan assets is accomplished by investing in U.S. and international equity index strategies that are intended to mirror indices including, but not limited to, the Standard & Poor’s 500 Index and Morgan Stanley Capital International (“MSCI”) Europe, Australasia, and the Far East (“EAFE”) Index. Altria’s pension and postretirement 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. For pension plan assets, the allocation to below investment grade securities represented 14% of the fixed income holdings or 7% of the total plan assets at December 31, 2018. The allocation to emerging markets represented 1% of equity holdings or less than 1% of total plan assets at December 31, 2018. For postretirement plan assets, the allocation to below investment grade securities represented 13% of the fixed income holdings or 6% of the total plan assets at December 31, 2018. There were no postretirement plan assets invested in emerging markets at December 31, 2018.

Altria’s risk management practices for its pension and postretirement plans 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’s expected rate of return on pension and postretirement

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’s pension plan assets by asset category at December 31, 2018 and 2017 were as follows:



	2018								2017
(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	$	—	$	868	$	—	$	868	$	—	$	588	$	—	$	588
U.S. municipal bonds	—		73		—		73		—		81		—		81
Foreign government and agencies	—		115		—		115		—		150		—		150
Corporate debt instruments:
Above investment grade	—		1,726		—		1,726		—		1,789		—		1,789
Below investment grade and no rating	—		478		—		478		—		511		—		511
Common stock:
International equities	237		—		—		237		1,396		—		—		1,396
U.S. equities	1,082		—		—		1,082		831		—		—		831
Cash and cash equivalents	—		303		—		303		—		106		—		106
Other, net	36		36		—		72		47		42		—		89
	$	1,355	$	3,599	$	—	$	4,954	$	2,274	$	3,267	$	—	$	5,541
Investments measured at NAV as a practical expedient for fair value:
Collective investment funds
U.S. large cap							$	1,722							$	2,014
U.S. small cap							328								361
International developed markets							86								100
Total investments measured at NAV							$	2,136							$	2,475

Other							48								(1		)
Fair value of plan assets, net							$	7,138							$	8,015

Level 3 holdings and transactions were immaterial to total plan assets at December 31, 2018 and 2017.

The fair value of Altria’s postretirement plan assets at December 31, 2018 were as follows:



			2018
(in millions)	Level 1		Level 2		Total
U.S. and foreign government securities or their agencies:
U.S. government and agencies	$	—	$	13	$	13
Foreign government and agencies	—		3		3
Corporate debt instruments:
Above investment grade	—		71		71
Below investment grade and no rating	—		8		8
Other, net	2		2		4
	$	2	$	97	$	99
Investments measured at NAV as a practical expedient for fair value:
Collective investment funds:
U.S. large cap					$	77
International developed markets					26
Total investments measured at NAV					$	103

Other					9
Fair value of plan assets, net					$	211

At December 31, 2017, postretirement plan assets totaled $270 million, of which $148 million was invested in collective investment funds and $122 million was held in a non-interest bearing cash account. There were no postretirement plan investments classified in Level 1, Level 2 or Level 3 of the fair value hierarchy at December 31, 2017.

There were no Level 3 postretirement plan holdings or transactions during 2018 and 2017.

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.

▪

Collective Investment Funds: Collective investment funds consist of funds that are intended to mirror indices such as Standard & Poor’s 500 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 collective investment funds. The underlying assets are valued based on the net asset value (“NAV”), which is provided by the investment account manager as a practical expedient to estimate fair value. These investments are not classified by level but are disclosed to permit reconciliation to the fair value of plan assets.

Cash Flows: Altria 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 anticipates making employer contributions to its pension plans of up to approximately $50 million in 2019 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 plan assets, or changes in interest rates. Currently, Altria anticipates making employer contributions to its postretirement plans of up to approximately $60 million in 2019. 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 postretirement plan assets.

Estimated future benefit payments at December 31, 2018 were as follows:



(in millions)	Pension		Postretirement
2019	$	484	$	132
2020	464		130
2021	468		129
2022	470		129
2023	474		125
2024-2028	2,362		598

Comprehensive Earnings/Losses

The amounts recorded in accumulated other comprehensive losses at December 31, 2018 consisted of the following:



(in millions)	Pension			Post- retirement			Post- employment			Total
Net loss	$	(2,591	)	$	(327	)	$	(78	)	$	(2,996	)
Prior service (cost) credit	(34		)	108			(6		)	68
Deferred income taxes	679			61			20			760
Amounts recorded in accumulated other comprehensive losses	$	(1,946	)	$	(158	)	$	(64	)	$	(2,168	)

The amounts recorded in accumulated other comprehensive losses at December 31, 2017 consisted of the following:



(in millions)	Pension			Post- retirement			Post- employment			Total
Net loss	$	(2,493	)	$	(612	)	$	(93	)	$	(3,198	)
Prior service (cost) credit	(15		)	195			—			180
Deferred income taxes	979			166			34			1,179
Amounts recorded in accumulated other comprehensive losses	$	(1,529	)	$	(251	)	$	(59	)	$	(1,839	)

The movements in other comprehensive earnings/losses during the year ended December 31, 2018 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	$	225		$	21		$	17		$	263
Prior service cost/credit	4			(42		)	—			(38		)
Other expense:
Net loss	13			—			—			13
Prior service cost/credit	3			—			—			3
Deferred income taxes	(61		)	4			(4		)	(61		)
	$	184		$	(17	)	$	13		$	180
Other movements during the year:
Adoption of ASU 2018-02 ⁽¹⁾	$	(330	)	$	(55	)	$	(12	)	$	(397	)
Net loss	(336		)	264			(2		)	(74		)
Prior service cost/credit	(26		)	(45		)	(6		)	(77		)
Deferred income taxes	91			(54		)	2			39
	$	(601	)	$	110		$	(18	)	$	(509	)
Total movements in other comprehensive earnings/losses	$	(417	)	$	93		$	(5	)	$	(329	)

⁽¹⁾ Reflects the reclassification of the stranded income tax effects of the Tax Reform Act. For further discussion, see Note 15. Income Taxes.

The movements in other comprehensive earnings/losses during the year ended December 31, 2017 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	$	197		$	25		$	17		$	239
Prior service cost/credit	4			(38		)	—			(34		)
Other expense:
Net loss	86			—			—			86
Deferred income taxes	(113		)	6			(6		)	(113		)
	$	174		$	(7	)	$	11		$	178
Other movements during the year:
Net loss	$	81		$	(56	)	$	(11	)	$	14
Prior service cost/credit	—			38			—			38
Deferred income taxes	(32		)	7			4			(21		)
	$	49		$	(11	)	$	(7	)	$	31
Total movements in other comprehensive earnings/losses	$	223		$	(18	)	$	4		$	209

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	)