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.

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, 2015 and 2014 measurement dates (in thousands):



	Pension and SERPA Benefits						Postretirement Healthcare Benefits
	2015			2014			2015			2014
Change in benefit obligation:
Benefit obligation, beginning of period	$	2,069,980		$	1,714,650		$	361,006		$	366,524
Service cost	40,039			31,498			8,259			7,015
Interest cost	87,345			86,923			14,166			16,878
Actuarial (gains) losses	(128,082		)	309,542			(6,757		)	(2,870		)
Plan participant contributions	—			—			2,587			2,368
Plan amendments	6,407			—			—			—
Special early retirement benefits	10,563			—			622			—
Benefits paid, net of Medicare Part D subsidy	(77,252		)	(72,633		)	(25,144		)	(28,909		)
Benefit obligation, end of period	2,009,000			2,069,980			354,739			361,006
Change in plan assets:
Fair value of plan assets, beginning of period	1,992,646			1,920,601			156,840			147,875
Actual return on plan assets	(77,980		)	143,040			(75		)	8,965
Company contributions	4,553			1,638			23,937			28,048
Plan participant contributions	—			—			2,587			2,368
Benefits paid	(77,252		)	(72,633		)	(26,524		)	(30,416		)
Fair value of plan assets, end of period	1,841,967			1,992,646			156,765			156,840
Funded status of the plans, December 31	$	(167,033	)	$	(77,334	)	$	(197,974	)	$	(204,166	)
Amounts recognized in the Consolidated Balance Sheets, December 31:
Accrued benefit liability (current liabilities)	$	(2,145	)	$	(1,148	)	$	(4,315	)	$	(1,160	)
Accrued benefit liability (long-term liabilities)	(164,888		)	(76,186		)	(193,659		)	(203,006		)
Net amount recognized	$	(167,033	)	$	(77,334	)	$	(197,974	)	$	(204,166	)

Benefit Costs:

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



	Pension and SERPA Benefits									Postretirement Healthcare Benefits
	2015			2014			2013			2015			2014			2013
Service cost	$	40,039		$	31,498		$	35,987		$	8,259		$	7,015		$	7,858
Interest cost	87,345			86,923			79,248			14,166			16,878			15,599
Special early retirement benefits	10,563			—			—			622			—			—
Expected return on plan assets	(144,929		)	(136,734		)	(127,327		)	(11,506		)	(10,429		)	(9,537		)
Amortization of unrecognized:
Prior service cost (credit)	435			1,119			1,746			(3,217		)	(3,853		)	(3,853		)
Net loss	54,709			36,563			58,608			3,971			4,729			8,549
Settlement loss	368			—			—			—			—			—
Net periodic benefit cost	$	48,530		$	19,369		$	48,262		$	12,295		$	14,340		$	18,616

Net periodic benefit costs are allocated among selling, administrative and engineering expense, cost of goods sold and inventory.

The expected return on plan assets is calculated based on the market-related value of plan assets. The market-related value of plan assets is different from the fair value in that asset gains/losses are smoothed over a five year period.

Unrecognized gains and losses related to plan obligations and assets are initially recorded in other comprehensive income and result from actual experience that differs from assumed or expected results, and the impacts of changes in assumptions. Unrecognized plan asset gains and losses not yet reflected in the market-related value of plan assets are not subject to amortization. Remaining unrecognized gains and losses that exceed 10% of the greater of the projected benefit obligation or the market-related value of plan assets are amortized to earnings over the estimated future service period of active plan participants. The impacts of plan amendments, if any, are amortized over the estimated future service period of plan participants at the time of the amendment.

Amounts included in accumulated other comprehensive income, net of tax, at December 31, 2015 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)	$	5,445	$	(9,044	)	$	(3,599	)
Net actuarial loss	513,107		51,645			564,752
Total	$	518,552	$	42,601		$	561,153

Amounts expected to be recognized in net periodic benefit cost, net of tax, during the year ended December 31, 2016 are as follows (in thousands):



	Pension and SERPA Benefits		Postretirement Healthcare Benefits			Total
Prior service cost (credit)	$	636	$	(1,765	)	$	(1,129	)
Net actuarial loss	29,182		2,227			31,409
Total	$	29,818	$	462		$	30,280

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
	2015		2014		2013		2015		2014		2013
Assumptions for benefit obligations:
Discount rate	4.53	%	4.21	%	5.08	%	4.29	%	3.99	%	4.70	%
Rate of compensation	3.50	%	4.00	%	4.00	%	n/a		n/a		n/a
Assumptions for net periodic benefit cost:
Discount rate	4.21	%	5.08	%	4.23	%	3.99	%	4.70	%	3.93	%
Expected return on plan assets	7.75	%	7.75	%	7.75	%	7.70	%	7.70	%	8.00	%
Rate of compensation increase	4.00	%	4.00	%	4.00	%	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 $1.92 billion and $1.92 billion as of December 31, 2015 and 2014, respectively.

The following table summarizes information related to the Company pension plan with a PBO in excess of the fair value of plan assets at December 31 (in millions):



	2015		2014
Pension plan with PBOs in excess of fair value of plan assets:
PBO	$	1,964.0	$	2,023.4
Fair value of plan assets	$	1,842.0	$	1,992.6

The fair value of pension plan assets was greater than the plan's ABO at December 31, 2015 and 2014.

The Company’s SERPA plans, which can only be funded as claims are paid, had projected and accumulated benefit obligations of $45.0 million and $35.8 million, respectively, as of December 31, 2015 and $46.6 million and $33.6 million, respectively, as of December 31, 2014.

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 63% equities and 37% fixed-income and cash. 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 69% equities and 31% fixed-income and cash. Equity holdings primarily include investments in small-, medium-, and large-cap companies in the U.S., 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.

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 7.

The fair values of the Company’s pension plan assets as of December 31, 2015 were as follows (in thousands):



	Balance as of December 31, 2015		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	$	33,539	$	1,485	$	32,054	$	—
Equity holdings:
U.S. companies	574,826		571,949		2,877		—
Foreign companies	113,803		113,803		—		—
Harley-Davidson common stock	57,808		57,808		—		—
Pooled equity funds	301,824		301,824		—		—
Private equity/real estate	23,441		109		—		23,332
Total equity holdings	1,071,702		1,045,493		2,877		23,332
Fixed-income holdings:
U.S. Treasuries	42,827		42,827		—		—
Federal agencies	43,695		—		43,695		—
Corporate bonds	388,439		—		388,439		—
Pooled fixed income funds	184,142		49,271		134,871		—
Foreign bonds	64,533		—		64,533		—
Municipal bonds	13,090		—		13,090		—
Total fixed-income holdings	736,726		92,098		644,628		—
Total pension plan assets	$	1,841,967	$	1,139,076	$	679,559	$	23,332

Included in the pension plan assets are 1,273,592 shares of the Company’s common stock with a market value of $57.8 million at December 31, 2015.

The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2015 (in thousands):



	Private Equity/ Real Estate
Balance, beginning of period	$	31,086
Actual return on plan assets:
Relating to assets still held at the reporting date	2,375
Purchases, sales and settlements	(10,129		)
Balance, end of period	$	23,332

The fair values of the Company’s postretirement healthcare plan assets as of December 31, 2015, were as follows (in thousands):



	Balance as of December 31, 2015		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	$	6,068	$	2,980	$	3,088	$	—
Equity holdings:
U.S. companies	74,083		74,083		—		—
Foreign companies	17,267		16,849		418		—
Pooled equity funds	17,410		17,410		—		—
Private equity/real estate	4,902		11		—		4,891
Total equity holdings	113,662		108,353		418		4,891
Fixed-income holdings:
U.S. Treasuries	10,531		10,531		—		—
Federal agencies	6,508		—		6,508		—
Corporate bonds	10,270		—		10,270		—
Pooled fixed income funds	8,305		—		8,305		—
Foreign bonds	890		—		890		—
Municipal bonds	531		—		531		—
Total fixed-income holdings	37,035		10,531		26,504		—
Total postretirement healthcare plan assets	$	156,765	$	121,864	$	30,010	$	4,891

The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2015 (in thousands):



	Private Equity/ Real Estate
Balance, beginning of period	$	3,869
Actual return on plan assets:
Relating to assets still held at the reporting date	1,362
Purchases, sales and settlements	(340		)
Balance, end of period	$	4,891

The fair values of the Company’s pension plan assets as of December 31, 2014 were as follows (in thousands):



	Balance as of December 31, 2014		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	$	38,131	$	2,965	$	35,166	$	—
Equity holdings:
U.S. companies	625,174		620,964		4,210		—
Foreign companies	109,088		109,088		—		—
Harley-Davidson common stock	83,942		83,942		—		—
Pooled equity funds	323,613		323,613		—		—
Private equity/real estate	31,227		140		1		31,086
Total equity holdings	1,173,044		1,137,747		4,211		31,086
Fixed-income holdings:
U.S. Treasuries	51,375		51,375		—		—
Federal agencies	45,282		—		45,282		—
Corporate bonds	376,454		—		376,454		—
Pooled fixed income funds	236,024		52,335		183,689		—
Foreign bonds	58,956		—		58,956		—
Municipal bonds	13,380		—		13,380		—
Total fixed-income holdings	781,471		103,710		677,761		—
Total pension plan assets	$	1,992,646	$	1,244,422	$	717,138	$	31,086

Included in the pension plan assets are 1,273,592 shares of the Company’s common stock with a market value of $83.9 million at December 31, 2014.

The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2014 (in thousands):



	Private Equity/ Real Estate
Balance, beginning of period	$	34,234
Actual return on plan assets:
Relating to assets still held at the reporting date	(3,178		)
Purchases, sales and settlements	30
Balance, end of period	$	31,086

The fair values of the Company’s postretirement healthcare plan assets as of December 31, 2014, were as follows (in thousands):



	Balance as of December 31, 2014		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	$	8,033	$	7,278	$	755	$	—
Equity holdings:
U.S. companies	75,349		75,349		—		—
Foreign companies	15,571		15,050		521		—
Pooled equity funds	19,138		19,138		—		—
Private equity/real estate	3,884		15		—		3,869
Total equity holdings	113,942		109,552		521		3,869
Fixed-income holdings:
U.S. Treasuries	11,457		11,457		—		—
Federal agencies	1,876		—		1,876		—
Corporate bonds	11,549		—		11,549		—
Pooled fixed income funds	8,996		—		8,996		—
Foreign bonds	770		—		770		—
Municipal bonds	217		—		217		—
Total fixed-income holdings	34,865		11,457		23,408		—
Total postretirement healthcare plan assets	$	156,840	$	128,287	$	24,684	$	3,869

The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2014 (in thousands):



	Private Equity/ Real Estate
Balance, beginning of period	$	—
Actual return on plan assets:
Relating to assets still held at the reporting date	(178		)
Purchases, sales and settlements	4,047
Balance, end of period	$	3,869

No plan assets are expected to be returned to the Company during the fiscal year ending December 31, 2016.

For 2016, the Company’s overall expected long-term rate of return is 7.5% for pension assets and 7.5% 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:



	2015		2014
Healthcare cost trend rate for next year	7.5	%	8.0	%
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		2021

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 2015	$	755	$	(605	)
Accumulated benefit obligation as of December 31, 2015	$	12,211	$	(10,875	)

Future Contributions and Benefit Payments:

In January 2016, the Company voluntarily contributed $25.0 million to further fund its qualified pension plan. No pension plan contributions are required in 2016. The Company expects it will continue to make on-going contributions related to current benefit payments for SERPA and postretirement healthcare plans in 2016⁽¹⁾.

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



	Pension Benefits		SERPA Benefits		Postretirement Healthcare Benefits
2016	$	77,310	$	2,145	$	33,848
2017	$	78,884	$	2,215	$	33,160
2018	$	80,877	$	2,234	$	31,571
2019	$	83,377	$	2,683	$	29,975
2020	$	86,533	$	2,976	$	28,139
2021-2025	$	497,276	$	21,253	$	129,295

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 $18.0 million, $18.1 million and $14.9 million for Company contributions during 2015, 2014 and 2013, respectively.