Employee Benefit Plans and Other Postretirement Benefits

The Company has a qualified defined benefit pension plan and 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, 2018 and 2017 measurement dates (in thousands):



	Pension and SERPA Benefits						Postretirement Healthcare Benefits
	2018			2017			2018			2017
Change in benefit obligation:
Benefit obligation, beginning of period	$	2,201,021		$	1,986,435		$	338,488		$	346,431
Service cost	32,340			31,584			7,180			7,500
Interest cost	82,778			85,076			11,556			13,648
Actuarial (gains) losses	(213,583		)	195,444			(42,039		)	(8,408		)
Plan participant contributions	—			—			2,492			2,525
Plan amendments	(12,926		)	(13,227		)	(4,710		)	—
Benefits paid	(106,280		)	(84,291		)	(23,448		)	(23,208		)
Net curtailments and settlements	1,358			—			(2,945		)	—
Benefit obligation, end of period	1,984,708			2,201,021			286,574			338,488
Change in plan assets:
Fair value of plan assets, beginning of period	2,162,885			1,899,889			217,537			170,092
Actual return on plan assets	(185,468		)	320,144			(13,287		)	32,445
Company contributions	—			25,000			—			15,000
Plan participant contributions	—			—			2,492			2,525
Benefits paid	(102,799		)	(82,148		)	(16,385		)	(2,525		)
Fair value of plan assets, end of period	1,874,618			2,162,885			190,357			217,537
Funded status of the plans, December 31	$	(110,090	)	$	(38,136	)	$	(96,217	)	$	(120,951	)
Amounts recognized in the Consolidated Balance Sheets, December 31:
Prepaid benefit costs (long-term assets)	$	—		$	19,816		$	—		$	—
Accrued benefit liability (current liabilities)	(2,314		)	(3,346		)	(1,764		)	(2,198		)
Accrued benefit liability (long-term liabilities)	(107,776		)	(54,606		)	(94,453		)	(118,753		)
Net amount recognized	$	(110,090	)	$	(38,136	)	$	(96,217	)	$	(120,951	)

During 2018, the actuarial gains related to the obligation for pension and SERPA benefits were due primarily to an increase in the discount rate. Conversely, during 2017, the actuarial losses related to this obligation were due primarily to a decrease in the discount rate.

During 2018, the actuarial gains related to the obligation for postretirement healthcare benefits were due primarily to an increase in the discount rate, favorable claim cost experience and a change in the benefit delivery structure. During 2017, the actuarial gains related to this obligation were due primarily to favorable claim cost and census experience, partially offset by the impact of a decrease in the discount rate.

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):



	2018		2017
Plans with PBOs in excess of fair value of plan assets:
PBO	$	1,984.7	$	58.0
Fair value of plan assets	$	1,874.6	$	—

Plans with ABOs in excess of fair value of plan assets:
ABO	$	40.1	$	42.1
Fair value of plan assets	$	—	$	—

The total ABO for all the Company's pension and SERPA plans combined was $1.90 billion and $2.10 billion as of December 31, 2018 and 2017, respectively.

Benefit Costs:

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



	Pension and SERPA Benefits									Postretirement Healthcare Benefits
	2018			2017			2016			2018			2017			2016
Service cost	$	32,340		$	31,584		$	33,437		$	7,180		$	7,500		$	7,478
Interest cost	82,778			85,076			90,827			11,556			13,648			14,814
Expected return on plan assets	(147,671		)	(141,385		)	(145,781		)	(14,161		)	(12,623		)	(12,069		)
Amortization of unrecognized:
Prior service (credit) cost	(420		)	1,018			1,019			(1,842		)	(2,171		)	(2,803		)
Net loss	64,773			43,993			46,351			1,817			3,261			3,537
Net curtailment loss (gain)	1,017			—			—			(886		)	—			—
Settlement loss	—			—			1,463			—			—			—
Net periodic benefit cost	$	32,817		$	20,286		$	27,316		$	3,664		$	9,615		$	10,957

Service costs are allocated among selling, administrative and engineering expense, cost of goods sold and inventory. Amounts capitalized in inventory are not significant. Non-service cost components of net periodic benefit cost are presented in other income (expense), net. Refer to Note 1 regarding the adoption of ASU 2017-07 for further discussion regarding the classification of net periodic benefit cost.

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, 2018 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	$	(14,371	)	$	(9,381	)	$	(23,752	)
Net actuarial loss	593,608			12,005			605,613
Total	$	579,237		$	2,624		$	581,861

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
	2018		2017		2016		2018		2017		2016
Assumptions for benefit obligations:
Discount rate	4.38	%	3.71	%	4.30	%	4.23	%	3.52	%	4.03	%
Rate of compensation increase	3.38	%	3.43	%	3.50	%	n/a		n/a		n/a
Assumptions for net periodic benefit cost:
Discount rate	3.71	%	4.30	%	4.53	%	3.52	%	4.03	%	4.29	%
Expected return on plan assets	7.25	%	7.25	%	7.50	%	7.25	%	7.25	%	7.50	%
Rate of compensation increase	3.43	%	3.50	%	3.50	%	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 56% equities and 44% 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 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 13.

The fair values of the Company’s pension plan assets as of December 31, 2018 were as follows (in thousands):



	Balance as of December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	40,984	$	—	$	40,984
Equity holdings:
U.S. companies	636,308		621,459		14,849
Foreign companies	66,143		66,143		—
Harley-Davidson common stock	43,455		43,455		—
Pooled equity funds	330,476		330,476		—
Other	85		85		—
Total equity holdings	1,076,467		1,061,618		14,849
Fixed-income holdings:
U.S. Treasuries	45,102		45,102		—
Federal agencies	27,811		—		27,811
Corporate bonds	434,070		—		434,070
Pooled fixed income funds	140,630		42,400		98,230
Foreign bonds	83,852		266		83,586
Municipal bonds	9,276		—		9,276
Total fixed-income holdings	740,741		87,768		652,973
Total assets in the fair value hierarchy	1,858,192		$	1,149,386	$	708,806
Assets measured at net asset value as a practical expedient:
Limited partnership interests	5,918
Real estate investment trusts	10,508
Total pension plan assets	$	1,874,618

Included in the pension plan assets are 1,273,592 shares of the Company’s common stock with a market value of $43.5 million at December 31, 2018.

The fair values of the Company’s postretirement healthcare plan assets as of December 31, 2018 were as follows (in thousands):



	Balance as of December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	5,276	$	—	$	5,276
Equity holdings:
U.S. companies	86,975		86,949		26
Foreign companies	16,342		16,342		—
Pooled equity funds	20,747		20,747		—
Other	9		9		—
Total equity holdings	124,073		124,047		26
Fixed-income holdings:
U.S. Treasuries	8,707		8,707		—
Federal agencies	5,445		—		5,445
Corporate bonds	6,590		—		6,590
Pooled fixed income funds	33,959		33,959		—
Foreign bonds	538		—		538
Municipal bonds	272		—		272
Total fixed-income holdings	55,511		42,666		12,845
Total assets in the fair value hierarchy	184,860		$	166,713	$	18,147
Assets measured at net asset value as a practical expedient:
Real estate investment trusts	5,497
Total postretirement healthcare plan assets	$	190,357

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 were 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

For 2019, the Company’s overall expected long-term rate of return is 7.10% 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:



	2018		2017
Healthcare cost trend rate for next year	6.75	%	7.00	%
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		2026

Future Contributions and Benefit Payments:

During 2018, the Company did not make any voluntary contributions to its qualified pension plan or postretirement healthcare plans. No pension plan contributions are required in 2019. The Company expects that 2019 postretirement healthcare plan benefits and benefits due under the SERPA plans will be paid by the Company or, in the case of postretirement healthcare plan benefits, funded partially 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
2019	$	111,980	$	2,314	$	25,934
2020	$	93,580	$	2,862	$	27,328
2021	$	95,690	$	3,272	$	26,660
2022	$	99,118	$	3,504	$	25,378
2023	$	102,190	$	4,467	$	23,815
2024-2028	$	568,867	$	28,663	$	109,562

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 $20.1 million, $19.0 million and $18.2 million for Company contributions during 2018, 2017 and 2016, respectively.