15. Employee Benefit Plans and Other Postretirement Benefits

The Company has several defined benefit pension plans and several postretirement healthcare benefit plans, which cover substantially all 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, 2011 and 2010 measurement dates (in thousands):


	Pension and SERPA Benefits						Postretirement Healthcare Benefits
	2011			2010			2011			2010
Change in benefit obligation
Benefit obligation, beginning of period	$	1,390,374		$	1,284,722		$	378,341		$	377,283
Service cost		37,341			42,889			7,630			9,957
Interest cost		80,805			77,996			19,644			20,774
Plan amendments		—			1,855			—			(22,282	)
Actuarial losses (gains)		127,259			46,035			(1,364	)		(231	)
Plan participant contributions		3,441			3,840			1,527			1,431
Early Retirement Reinsurance Program Proceeds		—			—			2,249			—
Benefits paid, net of Medicare Part D subsidy		(68,525	)		(81,188	)		(27,402	)		(23,729	)
Net curtailments and settlements		235			14,225			—			15,138

Benefit obligation, end of period		1,570,930			1,390,374			380,625			378,341

Change in plan assets:
Fair value of plan assets, beginning of period		1,105,487			1,026,124			121,064			109,143
Actual return on plan assets		8,129			136,711			820			15,151
Company contributions		205,383			20,000			14,111			19,957
Plan participant contributions		3,441			3,840			1,527			1,431
Benefits paid		(68,524	)		(81,188	)		(28,362	)		(24,618	)

Fair value of plan assets, end of period		1,253,916			1,105,487			109,160			121,064

Funded status of the plans, December 31	$	(317,014	)	$	(284,887	)	$	(271,465	)	$	(257,277	)

Amounts recognized in the Consolidated Balance Sheets, December 31:
Accrued benefit liability (other current liabilities)	$	(14,531	)	$	(2,802	)	$	(2,883	)	$	(2,515	)
Accrued benefit liability (other long-term liabilities)		(302,483	)		(282,085	)		(268,582	)		(254,762	)

Net amount recognized	$	(317,014	)	$	(284,887	)	$	(271,465	)	$	(257,277	)

Benefit Costs:

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


	Pension and SERPA Benefits									Postretirement Healthcare Benefits
	2011			2010			2009			2011			2010			2009
Service cost	$	37,341		$	42,889		$	47,308		$	7,630		$	9,957		$	11,390
Interest cost		80,805			77,996			74,578			19,644			20,774			22,449
Expected return on plan assets		(106,612	)		(97,376	)		(86,225	)		(9,386	)		(9,781	)		(11,175	)
Amortization of unrecognized:
Prior service cost (credit)		2,981			4,383			5,553			(3,878	)		(2,914	)		(1,299	)
Net loss		30,266			23,872			12,755			7,192			9,394			5,924
Net curtailment loss		236			15,508			29,390			—			11,643			7,014
Settlement loss		274			4,673			1,411			—			—			—

Net periodic benefit cost	$	45,291		$	71,945		$	84,770		$	21,202		$	39,073		$	34,303

The 2010 and 2009 restructuring actions discussed in Note 5 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, 2011 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)	$	5,352	$	(18,348	)	$	(12,996	)
Net actuarial loss		462,004		83,994			545,998

	$	467,356	$	65,646		$	533,002

Amounts expected to be recognized in net periodic benefit cost, net of tax, during the year ended December 31, 2012 are as follows (in thousands):


	Pension and SERPA Benefits		Postretirement Healthcare Benefits			Total
Prior service cost (credit)	$	1,862	$	(2,426	)	$	(564	)
Net actuarial loss		27,623		4,672			32,295

	$	29,485	$	2,246		$	31,731

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
	2011			2010			2009			2011			2010			2009
Assumptions for benefit obligations:
Discount rate		5.30	%		5.79	%		6.00	%		4.90	%		5.28	%		5.65	%
Rate of compensation		3.49	%		3.49	%		3.66	%		n/a			n/a			n/a

Assumptions for net periodic benefit cost:
Discount rate		5.79	%		6.00	%		6.10	%		5.28	%		5.65	%		6.10	%
Expected return on plan assets		8.00	%		8.25	%		8.25	%		8.00	%		8.25	%		8.25	%
Rate of compensation increase		3.49	%		3.66	%		3.64	%		n/a			n/a			n/a

Pension and SERPA Accumulated Benefit Obligation:

Each of the Company's pension and SERPA plans has 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 $1.46 billion and $1.31 billion as of December 31, 2011 and 2010, respectively.

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


	2011		2010
Pension plans with PBOs in excess of fair value of plan assets:
PBO	$	1,530.0	$	1,351.6
Fair value of plan assets	$	1,253.9	$	1,105.5
Number of plans		4		4

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


	2011		2010
Pension plans with ABOs in excess of fair value of plan assets:
ABO	$	1,436.8	$	1,280.8
Fair value of plan assets	$	1,253.9	$	1,105.5
Number of plans		4		4

The Company's SERPA plans, which can only be funded as claims are paid, had projected and accumulated benefit obligations of $41.0 million and $27.4 million, respectively, as of December 31, 2011 and $38.7 million and $27.6 million, respectively, as of December 31, 2010.

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 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 70% equity and 30% 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 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 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 10.

The fair values of the Company's pension plan assets as of December 31, 2011 are as follows (in thousands):


	Balance as of December 31, 2011		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	$	48,286	$	—	$	48,286	$	—
Equity holdings:
U.S. companies		533,030		529,630		3,400		—
Foreign companies		55,555		55,555		—		—
Harley-Davidson common stock		49,505		49,505		—		—
Pooled equity funds		166,460		166,460		—		—
Limited partnership interests		40,016		—		—		40,016
Other		2,111		—		—		2,111

Total equity holdings		846,677		801,150		3,400		42,127
Fixed-income holdings:
U.S. Treasuries		50,715		50,715		—		—
Federal agencies		51,290		—		51,290		—
Corporate bonds		77,295		—		77,295		—
Pooled fixed income funds		172,968		172,968		—		—
Foreign bonds		6,312		—		6,312		—
Municipal bonds		373		—		373		—

Total fixed-income holdings		358,953		223,683		135,270		—

Total pension plan assets	$	1,253,916	$	1,024,833	$	186,956	$	42,127

Included in the pension plan assets are 1,273,592 shares of the Company's common stock with a market value of $49.5 million at December 31, 2011.

The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2011 (in thousands):


	Total			Limited Partnership Interests			Other
Balance, beginning of period	$	42,632		$	40,421		$	2,211
Actual return on plan assets:
Relating to assets still held at the reporting date		(2,888	)		(3,018	)		130
Purchases, sales and settlements		2,383			2,613			(230	)

Balance, end of period	$	42,127		$	40,016		$	2,111

The fair values of the Company's postretirement healthcare plan assets, which did not contain any Level 3 assets, as of December 31, 2011, are as follows (in thousands):


	Balance as of December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents	$	1,858	$	—	$	1,858
Equity holdings:
U.S. companies		79,544		79,091		453
Foreign companies		10,365		10,365		—

Total equity holdings		89,909		89,456		453
Fixed-income holdings:
U.S. Treasuries		7,237		7,237		—
Federal agencies		4,172		—		4,172
Corporate bonds		5,537		—		5,537
Foreign bonds		307		—		307
Municipal bonds		140		—		140

Total fixed-income holdings		17,393		7,237		10,156

Total postretirement healthcare plan assets	$	109,160	$	96,693	$	12,467

The fair values of the Company's pension plan assets as of December 31, 2010 are as follows (in thousands):


	Balance as of December 31, 2010		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	$	29,402	$	—	$	29,402	$	—
Equity holdings:
U.S. companies		509,976		508,304		1,672		—
Foreign companies		56,133		56,133		—		—
Harley-Davidson common stock		44,155		44,155		—		—
Pooled equity funds		136,693		136,693		—		—
Limited partnership interests		40,421		—		—		40,421
Other		2,211		—		—		2,211

Total equity holdings		789,589		745,285		1,672		42,632
Fixed-income holdings:
U.S. Treasuries		35,239		35,239		—		—
Federal agencies		48,166		—		48,166		—
Corporate bonds		86,783		—		86,783		—
Pooled fixed income funds		107,084		107,084		—		—
Foreign bonds		8,853		—		8,853		—
Municipal bonds		371		—		371		—

Total fixed-income holdings		286,496		142,323		144,173		—

Total pension plan assets	$	1,105,487	$	887,608	$	175,247	$	42,632

Included in the pension plan assets are 1,273,592 shares of the Company's common stock with a market value of $44.2 million at December 31, 2010.

The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2010 (in thousands):


	Total		Limited Partnership Interests		Other
Balance, beginning of period	$	32,814	$	30,332	$	2,482
Actual return on plan assets:
Relating to assets still held at the reporting date		4,227		4,086		141
Purchases, sales and settlements		5,591		6,003		(412	)

Balance, end of period	$	42,632	$	40,421	$	2,211

The fair values of the Company's postretirement healthcare plan assets, which did not contain any Level 3 assets, as of December 31, 2010, are as follows (in thousands):


	Balance as of December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents	$	14,404	$	—	$	14,404
Equity holdings:
U.S. companies		80,915		80,577		338
Foreign companies		9,365		9,365		—

Total equity holdings		90,280		89,942		338
Fixed-income holdings:
U.S. Treasuries		3,507		3,507		—
Federal agencies		6,116		—		6,116
Corporate bonds		6,158		—		6,158
Foreign bonds		459		—		459
Municipal bonds		140		—		140

Total fixed-income holdings		16,380		3,507		12,873

Total postretirement healthcare plan assets	$	121,064	$	93,449	$	27,615

No plan assets are expected to be returned to the Company during the fiscal year-ended December 31, 2012.

For 2012, the Company's overall expected long-term rate of return on assets is 7.8%. 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:


	2011			2010
Healthcare cost trend rate for next year		8.5	%		8.5	%
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		2019			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 2011	$	906	$	(879	)
Accumulated benefit obligation as of December 31, 2011	$	14,225	$	(13,231	)

Future Contributions and Benefit Payments:

In January 2012, the Company contributed $200.0 million to further fund its qualified pension plans. As a result, no additional pension plan contributions are required in 2012. The Company expects it will continue to make on-going contributions related to current benefit payments for SERPA and postretirement healthcare plans in 2012.

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


	Pension Benefits		SERPA Benefits		Postretirement Healthcare Benefits		Medicare Subsidy Receipts
2012	$	66,118	$	14,531	$	30,239	$	1,187
2013	$	66,232	$	2,096	$	31,666	$	1,390
2014	$	67,171	$	3,042	$	32,192	$	1,594
2015	$	68,654	$	1,529	$	32,052	$	1,788
2016	$	70,532	$	1,711	$	31,629	$	2,014
2017-2021	$	411,974	$	10,843	$	157,494	$	13,279

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 $12.5 million, $12.6 million and $3.4 million for Company contributions during 2011, 2010 and 2009, respectively.