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, 2017 and 2016 measurement dates (in thousands):



	Pension and SERPA Benefits						Postretirement Healthcare Benefits
	2017			2016			2017			2016
Change in benefit obligation:
Benefit obligation, beginning of period	$	1,986,435		$	2,009,000		$	346,431		$	354,739
Service cost	31,584			33,437			7,500			7,478
Interest cost	85,076			90,827			13,648			14,814
Actuarial losses (gains)	195,444			13,481			(8,408		)	(4,647		)
Plan participant contributions	—			—			2,525			2,669
Plan amendments	(13,227		)	—			—			—
Benefits paid	(84,291		)	(160,310		)	(23,208		)	(28,622		)
Benefit obligation, end of period	2,201,021			1,986,435			338,488			346,431
Change in plan assets:
Fair value of plan assets, beginning of period	1,899,889			1,841,967			170,092			156,765
Actual return on plan assets	320,144			188,376			32,445			13,327
Company contributions	25,000			25,000			15,000			—
Plan participant contributions	—			—			2,525			2,669
Benefits paid	(82,148		)	(155,454		)	(2,525		)	(2,669		)
Fair value of plan assets, end of period	2,162,885			1,899,889			217,537			170,092
Funded status of the plans, December 31	$	(38,136	)	$	(86,546	)	$	(120,951	)	$	(176,339	)
Amounts recognized in the Consolidated Balance Sheets, December 31:
Prepaid benefit costs (long-term assets)	$	19,816		$	—		$	—		$	—
Accrued benefit liability (current liabilities)	(3,346		)	(2,104		)	(2,198		)	(3,072		)
Accrued benefit liability (long-term liabilities)	(54,606		)	(84,442		)	(118,753		)	(173,267		)
Net amount recognized	$	(38,136	)	$	(86,546	)	$	(120,951	)	$	(176,339	)

The funded status of the qualified pension plan and the SERPA plans are combined above. Plan level information for plans with projected benefit obligations (PBO) or accumulated benefit obligations (ABO) in excess of the fair value of plan assets at December 31 is presented below (in millions):



	2017		2016
Plans with PBOs in excess of fair value of plan assets:
PBO	$	58.0	$	1,986.4
Fair value of plan assets	$	—	$	1,899.9

Plans with ABOs in excess of fair value of plan assets:
PBO	$	58.0	$	52.3
ABO	$	42.1	$	38.4
Fair value of plan assets	$	—	$	—

The total ABO for all the Company's pension and SERPA plans combined was $2.10 billion and $1.90 billion as of December 31, 2017 and 2016, respectively.

Benefit Costs:

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



	Pension and SERPA Benefits									Postretirement Healthcare Benefits
	2017			2016			2015			2017			2016			2015
Service cost	$	31,584		$	33,437		$	40,039		$	7,500		$	7,478		$	8,259
Interest cost	85,076			90,827			87,345			13,648			14,814			14,166
Special early retirement benefits	—			—			10,563			—			—			622
Expected return on plan assets	(141,385		)	(145,781		)	(144,929		)	(12,623		)	(12,069		)	(11,506		)
Amortization of unrecognized:
Prior service cost (credit)	1,018			1,019			435			(2,171		)	(2,803		)	(3,217		)
Net loss	43,993			46,351			54,709			3,261			3,537			3,971
Settlement loss	—			1,463			368			—			—			—
Net periodic benefit cost	$	20,286		$	27,316		$	48,530		$	9,615		$	10,957		$	12,295

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 loss, net of tax, at December 31, 2017 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 credit	$	(4,136	)	$	(5,871	)	$	(10,007	)
Net actuarial loss	450,754			20,196			470,950
Total	$	446,618		$	14,325		$	460,943

Amounts expected to be recognized in net periodic benefit cost, net of tax, during the year ended December 31, 2018 are as follows (in thousands):



	Pension and SERPA Benefits			Postretirement Healthcare Benefits			Total
Prior service credit	$	(329	)	$	(1,409	)	$	(1,738	)
Net actuarial loss	45,364			1,391			46,755
Total	$	45,035		$	(18	)	$	45,017

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
	2017		2016		2015		2017		2016		2015
Assumptions for benefit obligations:
Discount rate	3.71	%	4.30	%	4.53	%	3.52	%	4.03	%	4.29	%
Rate of compensation	3.43	%	3.50	%	3.50	%	n/a		n/a		n/a
Assumptions for net periodic benefit cost:
Discount rate	4.30	%	4.53	%	4.21	%	4.03	%	4.29	%	3.99	%
Expected return on plan assets	7.25	%	7.50	%	7.75	%	7.25	%	7.50	%	7.70	%
Rate of compensation increase	3.50	%	3.50	%	4.00	%	n/a		n/a		n/a

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, 2017 were as follows (in thousands):



	Balance as of December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	51,082	$	1,057	$	50,025
Equity holdings:
U.S. companies	722,527		705,111		17,416
Foreign companies	78,765		78,765		—
Harley-Davidson common stock	64,800		64,800		—
Pooled equity funds	416,881		416,881		—
Other	119		119		—
Total equity holdings	1,283,092		1,265,676		17,416
Fixed-income holdings:
U.S. Treasuries	39,866		39,866		—
Federal agencies	29,188		—		29,188
Corporate bonds	462,563		—		462,563
Pooled fixed income funds	189,361		61,875		127,486
Foreign bonds	81,732		—		81,732
Municipal bonds	11,800		—		11,800
Total fixed-income holdings	814,510		101,741		712,769
Total assets in the fair value hierarchy	2,148,684		$	1,368,474	$	780,210
Assets measured at net asset value as a practical expedient:
Limited partnership interests	9,099
Real estate investment trust	5,102
Total pension plan assets	$	2,162,885

Included in the pension plan assets are 1,273,592 shares of the Company’s common stock with a market value of $64.8 million at December 31, 2017.

The fair values of the Company’s postretirement healthcare plan assets as of December 31, 2017 were as follows (in thousands):



	Balance as of December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	19,317	$	—	$	19,317
Equity holdings:
U.S. companies	101,720		101,720		—
Foreign companies	19,498		19,495		3
Pooled equity funds	23,563		23,563		—
Other	14		14		—
Total equity holdings	144,795		144,792		3
Fixed-income holdings:
U.S. Treasuries	6,803		6,803		—
Federal agencies	5,060		—		5,060
Corporate bonds	6,756		—		6,756
Pooled fixed income funds	27,461		27,461		—
Foreign bonds	311		—		311
Municipal bonds	284		—		284
Total fixed-income holdings	46,675		34,264		12,411
Total assets in the fair value hierarchy	210,787		$	179,056	$	31,731
Assets measured at net asset value as a practical expedient:
Real estate investment trust	6,750
Total postretirement healthcare plan assets	$	217,537

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

No plan assets are expected to be returned to the Company during the fiscal year ending December 31, 2018.

For 2018, 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:



	2017		2016
Healthcare cost trend rate for next year	7.00	%	7.25	%
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	2026		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 2017	$	648	$	(623	)
Accumulated benefit obligation as of December 31, 2017	$	11,984	$	(10,940	)

Future Contributions and Benefit Payments:

During 2017, the Company voluntarily contributed $25.0 million to its qualified pension plan and $15.0 million to its postretirement healthcare plans. No pension plan contributions are required in 2018. The Company expects that 2018 postretirement healthcare plan benefits and benefits due under the SERPA plans will be paid by the Company or funded with plan assets.

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



	Pension Benefits		SERPA Benefits		Postretirement Healthcare Benefits
2018	$	90,510	$	3,346	$	28,446
2019	$	92,694	$	2,325	$	28,309
2020	$	95,930	$	2,843	$	27,351
2021	$	98,109	$	3,294	$	26,175
2022	$	102,258	$	3,528	$	25,096
2023-2027	$	574,745	$	27,719	$	120,438

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 $19.0 million, $18.2 million and $18.0 million for Company contributions during 2017, 2016 and 2015, respectively.