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, 2016 and 2015 measurement dates (in thousands):



	Pension and SERPA Benefits						Postretirement Healthcare Benefits
	2016			2015			2016			2015
Change in benefit obligation:
Benefit obligation, beginning of period	$	2,009,000		$	2,069,980		$	354,739		$	361,006
Service cost	33,437			40,039			7,478			8,259
Interest cost	90,827			87,345			14,814			14,166
Actuarial losses (gains)	13,481			(128,082		)	(4,647		)	(6,757		)
Plan participant contributions	—			—			2,669			2,587
Plan amendments	—			6,407			—			—
Special early retirement benefits	—			10,563			—			622
Benefits paid, net of Medicare Part D subsidy	(160,310		)	(77,252		)	(28,622		)	(25,144		)
Benefit obligation, end of period	1,986,435			2,009,000			346,431			354,739
Change in plan assets:
Fair value of plan assets, beginning of period	1,841,967			1,992,646			156,765			156,840
Actual return on plan assets	188,376			(77,980		)	13,327			(75		)
Company contributions	25,000			—			—			—
Plan participant contributions	—			—			2,669			2,587
Benefits paid	(155,454		)	(72,699		)	(2,669		)	(2,587		)
Fair value of plan assets, end of period	1,899,889			1,841,967			170,092			156,765
Funded status of the plans, December 31	$	(86,546	)	$	(167,033	)	$	(176,339	)	$	(197,974	)
Amounts recognized in the Consolidated Balance Sheets, December 31:
Accrued benefit liability (current liabilities)	$	(2,104	)	$	(2,145	)	$	(3,072	)	$	(4,315	)
Accrued benefit liability (long-term liabilities)	(84,442		)	(164,888		)	(173,267		)	(193,659		)
Net amount recognized	$	(86,546	)	$	(167,033	)	$	(176,339	)	$	(197,974	)

Plan asset contributions and payments for 2015 have been adjusted to exclude benefits paid from general Company assets.

Benefit Costs:

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



	Pension and SERPA Benefits									Postretirement Healthcare Benefits
	2016			2015			2014			2016			2015			2014
Service cost	$	33,437		$	40,039		$	31,498		$	7,478		$	8,259		$	7,015
Interest cost	90,827			87,345			86,923			14,814			14,166			16,878
Special early retirement benefits	—			10,563			—			—			622			—
Expected return on plan assets	(145,781		)	(144,929		)	(136,734		)	(12,069		)	(11,506		)	(10,429		)
Amortization of unrecognized:
Prior service cost (credit)	1,019			435			1,119			(2,803		)	(3,217		)	(3,853		)
Net loss	46,351			54,709			36,563			3,537			3,971			4,729
Settlement loss	1,463			368			—			—			—			—
Net periodic benefit cost	$	27,316		$	48,530		$	19,369		$	10,957		$	12,295		$	14,340

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, 2016 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)	$	4,804	$	(7,279	)	$	(2,475	)
Net actuarial loss	464,804		46,250			511,054
Total	$	469,608	$	38,971		$	508,579

Amounts expected to be recognized in net periodic benefit cost, net of tax, during the year ended December 31, 2017 are as follows (in thousands):



	Pension and SERPA Benefits		Postretirement Healthcare Benefits			Total
Prior service cost (credit)	$	641	$	(1,367	)	$	(726	)
Net actuarial loss	27,699		2,053			29,752
Total	$	28,340	$	686		$	29,026

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
	2016		2015		2014		2016		2015		2014
Assumptions for benefit obligations:
Discount rate	4.30	%	4.53	%	4.21	%	4.03	%	4.29	%	3.99	%
Rate of compensation	3.50	%	3.50	%	4.00	%	n/a		n/a		n/a
Assumptions for net periodic benefit cost:
Discount rate	4.53	%	4.21	%	5.08	%	4.29	%	3.99	%	4.70	%
Expected return on plan assets	7.50	%	7.75	%	7.75	%	7.50	%	7.70	%	7.70	%
Rate of compensation increase	3.50	%	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 $1.90 billion and $1.92 billion as of December 31, 2016 and 2015, respectively.

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



	2016		2015
Pension plan with PBOs in excess of fair value of plan assets:
PBO	$	1,934.1	$	1,964.0
Fair value of plan assets	$	1,899.9	$	1,842.0

The fair value of the qualified pension plan assets was greater than the plan's ABO at December 31, 2016 and 2015.

The Company’s SERPA plans, which can only be funded as claims are paid, had projected and accumulated benefit obligations of $52.3 million and $38.4 million, respectively, as of December 31, 2016 and $45.0 million and $35.8 million, respectively, as of December 31, 2015.

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 6.

The fair values of the Company’s pension plan assets as of December 31, 2016 were as follows (in thousands):



	Balance as of December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	84,548	$	1,284	$	83,264
Equity holdings:
U.S. companies	603,568		586,302		17,266
Foreign companies	50,256		50,256		—
Harley-Davidson common stock	74,301		74,301		—
Pooled equity funds	316,225		316,225		—
Other	105		105		—
Total equity holdings	1,044,455		1,027,189		17,266
Fixed-income holdings:
U.S. Treasuries	41,089		41,089		—
Federal agencies	36,210		—		36,210
Corporate bonds	418,522		—		418,522
Pooled fixed income funds	170,741		57,543		113,198
Foreign bonds	69,871		—		69,871
Municipal bonds	12,509		—		12,509
Total fixed-income holdings	748,942		98,632		650,310
Total assets in the fair value hierarchy	1,877,945		$	1,127,105	$	750,840
Assets measured at net asset value as a practical expedient:
Limited partnership interests	9,321
Real estate investment trust	12,623
Total pension plan assets	$	1,899,889

Included in the pension plan assets are 1,273,592 shares of the Company’s common stock with a market value of $74.3 million at December 31, 2016.

The fair values of the Company’s postretirement healthcare plan assets as of December 31, 2016 were as follows (in thousands):



	Balance as of December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	4,442	$	1,180	$	3,262
Equity holdings:
U.S. companies	84,643		84,643		—
Foreign companies	14,190		13,995		195
Pooled equity funds	19,132		19,132		—
Other	9		9		—
Total equity holdings	117,974		117,779		195
Fixed-income holdings:
U.S. Treasuries	12,262		12,262		—
Federal agencies	7,364		—		7,364
Corporate bonds	11,750		—		11,750
Pooled fixed income funds	9,690		—		9,690
Foreign bonds	633		—		633
Municipal bonds	459		—		459
Total fixed-income holdings	42,158		12,262		29,896
Total assets in the fair value hierarchy	164,574		$	131,221	$	33,353
Assets measured at net asset value as a practical expedient:
Real estate investment trust	5,518
Total postretirement healthcare plan assets	$	170,092

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)
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		—
Other	109		109		—
Total equity holdings	1,048,370		1,045,493		2,877
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 assets in the fair value hierarchy	1,818,635		$	1,139,076	$	679,559
Assets measured at net asset value as a practical expedient:
Limited partnership interests	10,530
Real estate investment trust	12,802
Total pension plan assets	$	1,841,967

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 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)
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		—
Other	11		11		—
Total equity holdings	108,771		108,353		418
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 assets in the fair value hierarchy	151,874		$	121,864	$	30,010
Assets measured at net asset value as a practical expedient:
Real estate investment trust	4,891
Total postretirement healthcare plan assets	$	156,765

No plan assets are expected to be returned to the Company during the fiscal year ending December 31, 2017.

For 2017, the Company’s overall expected long-term rate of return is 7.25% for pension assets and 7.25% 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:



	2016		2015
Healthcare cost trend rate for next year	7.25	%	7.50	%
Rate to which the cost trend rate is assumed to decline (the ultimate rate)	5.00	%	5.00	%
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 2016	$	658	$	(624	)
Accumulated benefit obligation as of December 31, 2016	$	12,670	$	(11,443	)

Future Contributions and Benefit Payments:

In January 2017, the Company voluntarily contributed $25.0 million to further fund its qualified pension plan. No pension plan contributions are required in 2017. The Company expects it will continue to make on-going payments related to current benefits for SERPA and postretirement healthcare plans in 2017.

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



	Pension Benefits		SERPA Benefits		Postretirement Healthcare Benefits
2017	$	79,907	$	2,104	$	30,130
2018	$	81,133	$	2,240	$	29,501
2019	$	82,979	$	2,693	$	28,529
2020	$	85,528	$	3,169	$	27,370
2021	$	88,174	$	3,513	$	26,094
2022-2026	$	499,403	$	25,830	$	124,713

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 $18.2 million, $18.0 million and $18.1 million for Company contributions during 2016, 2015 and 2014, respectively.