Employee Benefit Plans and Other Postretirement Benefits

The Company has a qualified defined benefit pension plan and several postretirement healthcare benefit plans, which cover employees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993. During 2012, the Company consolidated four qualified defined benefit pension plans into one qualified pension plan. The consolidation had no impact on participant benefits.

Pension benefits are based primarily on years of service and, for certain plans, levels of compensation. Employees are eligible to receive postretirement healthcare benefits upon attaining age 55 after rendering at least 10 years of service to the Company. Some of the plans require employee contributions to partially offset benefit costs.

Obligations and Funded Status:

The following table provides the changes in the benefit obligations, fair value of plan assets and funded status of the Company’s pension, SERPA and postretirement healthcare plans as of the Company’s December 31, 2013 and 2012 measurement dates (in thousands):



	Pension and SERPA Benefits						Postretirement Healthcare Benefits
	2013			2012			2013			2012
Change in benefit obligation
Benefit obligation, beginning of period	$	1,871,575		$	1,570,930		$	403,227		$	380,625
Service cost	35,987			33,681			7,858			7,413
Interest cost	79,248			83,265			15,599			18,310
Actuarial (gains) losses	(199,408		)	276,069			(33,729		)	23,367
Plan participant contributions	—			1,459			2,609			1,561
Benefits paid, net of Medicare Part D subsidy	(72,752		)	(93,829		)	(29,040		)	(28,049		)
Benefit obligation, end of period	1,714,650			1,871,575			366,524			403,227
Change in plan assets:
Fair value of plan assets, beginning of period	1,539,018			1,253,916			123,106			109,160
Actual return on plan assets	277,388			160,731			24,769			13,946
Company contributions	176,947			216,741			27,849			27,675
Plan participant contributions	—			1,459			2,609			1,561
Benefits paid	(72,752		)	(93,829		)	(30,458		)	(29,236		)
Fair value of plan assets, end of period	1,920,601			1,539,018			147,875			123,106
Funded status of the plans, December 31	$	205,951		$	(332,557	)	$	(218,649	)	$	(280,121	)
Amounts recognized in the Consolidated Balance Sheets, December 31,:
Prepaid benefit costs (long-term assets)	$	244,871		$	—		$	—		$	—
Accrued benefit liability (current liabilities)	(2,549		)	(2,263		)	(2,484		)	(2,059		)
Accrued benefit liability (long-term liabilities)	(36,371		)	(330,294		)	(216,165		)	(278,062		)
Net amount recognized	$	205,951		$	(332,557	)	$	(218,649	)	$	(280,121	)

Benefit Costs:

Components of net periodic benefit costs for the years ended December 31 (in thousands):



	Pension and SERPA Benefits									Postretirement Healthcare Benefits
	2013			2012			2011			2013			2012			2011
Service cost	$	35,987		$	33,681		$	37,341		$	7,858		$	7,413		$	7,630
Interest cost	79,248			83,265			80,805			15,599			18,310			19,644
Expected return on plan assets	(127,327		)	(117,110		)	(106,612		)	(9,537		)	(9,423		)	(9,386		)
Amortization of unrecognized:
Prior service cost (credit)	1,746			2,958			2,981			(3,853		)	(3,853		)	(3,878		)
Net loss	58,608			43,874			30,266			8,549			7,421			7,192
Net curtailment loss	—			—			236			—			—			—
Settlement loss	—			6,242			274			—			—			—
Net periodic benefit cost	$	48,262		$	52,910		$	45,291		$	18,616		$	19,868		$	21,202

Net periodic benefit costs are allocated among selling, administrative and engineering expense, cost of goods sold and inventory. The 2010 Restructuring Plan actions discussed in Note 4 resulted in the pension and postretirement healthcare plan net curtailment losses noted in the table above and were included in restructuring expense in the consolidated income statement.

Amounts included in accumulated other comprehensive income, net of tax, at December 31, 2013 which have not yet been recognized in net periodic benefit cost are as follows (in thousands):



	Pension and SERPA Benefits		Postretirement Healthcare Benefits			Total
Prior service cost (credit)	$	2,390	$	(13,495	)	$	(11,105	)
Net actuarial loss	326,588		48,563			375,151
	$	328,978	$	35,068		$	364,046

Amounts expected to be recognized in net periodic benefit cost, net of tax, during the year ended December 31, 2014 are as follows (in thousands):



	Pension and SERPA Benefits		Postretirement Healthcare Benefits			Total
Prior service cost (credit)	$	704	$	(2,426	)	$	(1,722	)
Net actuarial loss	23,020		2,977			25,997
	$	23,724	$	551		$	24,275

Assumptions:

Weighted-average assumptions used to determine benefit obligations and net periodic benefit cost at December 31 were as follows:



	Pension and SERPA Benefits						Postretirement Healthcare Benefits
	2013		2012		2011		2013		2012		2011
Assumptions for benefit obligations:
Discount rate	5.08	%	4.23	%	5.30	%	4.70	%	3.93	%	4.90	%
Rate of compensation	4.00	%	4.00	%	3.49	%	n/a		n/a		n/a
Assumptions for net periodic benefit cost:
Discount rate	4.23	%	5.30	%	5.79	%	3.93	%	4.90	%	5.28	%
Expected return on plan assets	7.75	%	7.80	%	8.00	%	8.00	%	8.00	%	8.00	%
Rate of compensation increase	4.00	%	3.49	%	3.49	%	n/a		n/a		n/a

Pension and SERPA Accumulated Benefit Obligation:

The Company’s pension and SERPA plans have a separately determined accumulated benefit obligation (ABO) and plan asset value. The ABO is the actuarial present value of benefits based on service rendered and current and past compensation levels. This differs from the projected benefit obligation (PBO) in that it includes no assumption about future compensation levels. The total ABO for all the Company’s pension and SERPA plans combined was $1.60 billion and $1.73 billion as of December 31, 2013 and 2012, respectively.

The Company pension plan did not have a PBO in excess of plan assets at December 31, 2013. The following table summarizes information related to Company pension plan with a PBO in excess of the fair value of plan assets at December 31, 2012 (in billions):



	2012
Pension plan with PBOs in excess of fair value of plan assets:
PBO	$	1.8
Fair value of plan assets	$	1.5
Number of plans	1

The Company pension plan did not have an ABO in excess of fair value at December 31, 2013. The following table summarizes information related to Company pension plan with an ABO in excess of the fair value of plan assets at December 31, 2012 (in billions):



	2012
Pension plan with ABOs in excess of fair value of plan assets:
ABO	$	1.7
Fair value of plan assets	$	1.5
Number of plans	1

The Company’s SERPA plans, which can only be funded as claims are paid, had projected and accumulated benefit obligations of $38.9 million and $25.8 million, respectively, as of December 31, 2013 and $37.8 million and $20.1 million, respectively, as of December 31, 2012.

Plan Assets:

Pension Plan Assets - The Company’s investment objective is to ensure assets are sufficient to pay benefits while mitigating the volatility of retirement plan assets or liabilities recorded in the balance sheet. The Company mitigates volatility through asset diversification and partial asset/liability matching. The investment portfolio for the Company's pension plan assets contains a diversified blend of equity and fixed-income investments. The Company’s current overall targeted asset allocation as a percentage of total market value was approximately 65% equities and 35% fixed-income. Assets are rebalanced regularly to keep the actual allocation in line with targets. Equity holdings primarily include investments in small-, medium- and large-cap companies in the U.S. (including Company stock), investments in developed and emerging foreign markets and other investments such as private equity and real estate. Fixed-income holdings consist of U.S. government and agency securities, state and municipal bonds, corporate bonds from diversified industries and foreign obligations. In addition, cash equivalent balances are maintained at levels adequate to meet near-term plan expenses and benefit payments. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews.

Postretirement Healthcare Plan Assets - The Company's investment objective is to maximize the return on assets to help pay the benefits by prudently investing in equities, fixed income and alternative assets. The Company's current overall targeted asset allocation as a percentage of total market value was approximately 70% equities and 30% fixed-income. Equity holdings primarily include investments in small-, medium-, and large-cap companies in the U.S., investments in developed and emerging foreign markets and alternative investments such as private equity and real estate. Fixed-income holdings consist of U.S. government and agency securities, state and municipal bonds, corporate bonds from diversified industries and foreign obligations. In addition, cash equivalent balances are maintained at levels adequate to meet near-term plan expenses and benefit payments. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews.

The following tables present the fair values of the plan assets related to the Company’s pension and postretirement healthcare plans within the fair value hierarchy as defined in Note 8.

The fair values of the Company’s pension plan assets as of December 31, 2013 were as follows (in thousands):



	Balance as of December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	40,578	$	—	$	40,578	$	—
Equity holdings:
U.S. companies	519,405		516,444		2,961		—
Foreign companies	125,361		125,320		41		—
Harley-Davidson common stock	88,184		88,184		—		—
Pooled equity funds	558,004		558,004		—		—
Limited partnership interests	34,234		—		—		34,234
Other	—		—		—		—
Total equity holdings	1,325,188		1,287,952		3,002		34,234
Fixed-income holdings:
U.S. Treasuries	34,044		34,044		—		—
Federal agencies	33,250		—		33,250		—
Corporate bonds	223,992		—		223,992		—
Pooled fixed income funds	212,465		51,959		160,506		—
Foreign bonds	40,885		—		40,885		—
Municipal bonds	10,199		—		10,199		—
Total fixed-income holdings	554,835		86,003		468,832		—
Total pension plan assets	$	1,920,601	$	1,373,955	$	512,412	$	34,234

Included in the pension plan assets are 1,273,592 shares of the Company’s common stock with a market value of $88.2 million at December 31, 2013.

The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2013 (in thousands):



	Total			Limited Partnership Interests			Other
Balance, beginning of period	$	36,582		$	35,954		$	628
Actual return on plan assets:
Relating to assets still held at the reporting date	2,951			2,951			—
Purchases, sales and settlements	(5,299		)	(4,671		)	(628		)
Balance, end of period	$	34,234		$	34,234		$	—

The fair values of the Company’s postretirement healthcare plan assets, which did not contain any Level 3 assets, as of December 31, 2013, were as follows (in thousands):



	Balance as of December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents	$	8,402	$	—	$	8,402
Equity holdings:
U.S. companies	29,365		29,365		—
Foreign companies	18,010		17,630		380
Pooled equity funds	61,134		61,134		—
Total equity holdings	108,509		108,129		380
Fixed-income holdings:
U.S. Treasuries	9,488		9,488		—
Federal agencies	2,579		—		2,579
Corporate bonds	8,685		—		8,685
Pooled fixed income funds	8,977		—		8,977
Foreign bonds	941		—		941
Municipal bonds	294		—		294
Total fixed-income holdings	30,964		9,488		21,476
Total postretirement healthcare plan assets	$	147,875	$	117,617	$	30,258

The fair values of the Company’s pension plan assets as of December 31, 2012 were as follows (in thousands):



	Balance as of December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	42,625	$	—	$	42,625	$	—
Equity holdings:
U.S. companies	540,579		540,578		1		—
Foreign companies	85,415		85,415		—		—
Harley-Davidson common stock	62,189		62,189		—		—
Pooled equity funds	309,878		309,878		—		—
Limited partnership interests	35,954		—		—		35,954
Other	628		—		—		628
Total equity holdings	1,034,643		998,060		1		36,582
Fixed-income holdings:
U.S. Treasuries	55,014		55,014		—		—
Federal agencies	14,302		—		14,302		—
Corporate bonds	189,643		—		189,643		—
Pooled fixed income funds	165,192		48,528		116,664		—
Foreign bonds	29,149		—		29,149		—
Municipal bonds	8,450		—		8,450		—
Total fixed-income holdings	461,750		103,542		358,208		—
Total pension plan assets	$	1,539,018	$	1,101,602	$	400,834	$	36,582

Included in the pension plan assets are 1,273,592 shares of the Company’s common stock with a market value of $62.2 million at December 31, 2012.

The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2012 (in thousands):



	Total			Limited Partnership Interests			Other
Balance, beginning of period	$	42,127		$	40,016		$	2,111
Actual return on plan assets:
Relating to assets still held at the reporting date	(820		)	(930		)	110
Purchases, sales and settlements	(4,725		)	(3,132		)	(1,593		)
Balance, end of period	$	36,582		$	35,954		$	628

The fair values of the Company’s postretirement healthcare plan assets, which did not contain any Level 3 assets, as of December 31, 2012, were as follows (in thousands):



	Balance as of December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents	$	5,522	$	—	$	5,522
Equity holdings:
U.S. companies	60,658		60,658		—
Foreign companies	13,625		13,625		—
Pooled equity funds	27,617		27,617		—
Total equity holdings	101,900		101,900		—
Fixed-income holdings:
U.S. Treasuries	5,370		5,370		—
Federal agencies	3,489		—		3,489
Corporate bonds	6,033		—		6,033
Foreign bonds	659		—		659
Municipal bonds	133		—		133
Total fixed-income holdings	15,684		5,370		10,314
Total postretirement healthcare plan assets	$	123,106	$	107,270	$	15,836

No plan assets are expected to be returned to the Company during the fiscal year ending December 31, 2014.

For 2014, the Company’s overall expected long-term rate of return is 7.75% for pension assets and 7.70% for postretirement healthcare plan assets. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based on historical returns adjusted to reflect the current view of the long-term investment market.

Postretirement Healthcare Cost:

The weighted-average healthcare cost trend rate used in determining the accumulated postretirement benefit obligation of the healthcare plans was as follows:



	2013		2012
Healthcare cost trend rate for next year	8.0	%	7.5	%
Rate to which the cost trend rate is assumed to decline (the ultimate rate)	5.0	%	5.0	%
Year that the rate reaches the ultimate trend rate	2021		2019

This healthcare cost trend rate assumption can have a significant effect on the amounts reported. A one-percentage-point change in the assumed healthcare cost trend rate would have the following effects (in thousands):



	One Percent Increase		One Percent Decrease
Total of service and interest cost components in 2013	$	729	$	(729	)
Accumulated benefit obligation as of December 31, 2013	$	13,318	$	(12,368	)

Future Contributions and Benefit Payments:

No pension plan contributions are required in 2014. The Company expects it will continue to make on-going contributions related to current benefit payments for SERPA and postretirement healthcare plans in 2014⁽¹⁾.

The expected benefit payments and Medicare subsidy receipts for the next five years and thereafter were as follows (in thousands):



	Pension Benefits		SERPA Benefits		Postretirement Healthcare Benefits		Medicare Subsidy Receipts
2014	$	68,418	$	2,549	$	30,694	$	1,507
2015	$	69,178	$	1,440	$	31,047	$	1,716
2016	$	70,098	$	1,895	$	30,644	$	1,988
2017	$	71,508	$	1,880	$	29,817	$	2,224
2018	$	73,150	$	2,014	$	28,785	$	2,466
2019-2023	$	430,427	$	16,506	$	147,623	$	16,125

Defined Contribution Plans:

The Company has various defined contribution benefit plans that in total cover substantially all full-time employees. Employees can make voluntary contributions in accordance with the provisions of their respective plan, which includes a 401(k) tax deferral option. The Company expensed $14.9 million, $15.3 million and $12.5 million for Company contributions during 2013, 2012 and 2011, respectively.