NOTE 11. EMPLOYEE BENEFIT PLANS

A. Stock-based Compensation Plans. Stock-based compensation consists of the following:

•

Stock Options. Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the dates of grant. Stock options are issued under a graded vesting schedule and have a term of 10 years. Options granted after July 1, 2008 generally vest ratably over four years. Compensation expense is measured based on the fair value of the stock option on the grant date and recognized over the requisite service period for each separately vesting portion of the stock option award. Stock options are forfeited if the employee ceases to be employed by the Company prior to vesting.


•	Restricted Stock.


•	Time-Based Restricted Stock and Time-Based Restricted Stock Units. Time-based restricted stock and time-based restricted stock units granted are generally subject to a vesting period of two years. Awards are forfeited if the employee ceases to be employed by the Company prior to vesting.

Time-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock is measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period. Dividends are paid on shares awarded under the time-based restricted stock program.

Time-based restricted stock units are settled in cash and cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock units is recorded over the vesting period and is initially based on the fair value of the award on the grant date and is subsequently remeasured at each reporting date during the vesting period based on the change in the ADP stock price. No dividend equivalents are paid on units awarded under the time-based restricted stock unit program.

•

Performance-Based Restricted Stock and Performance-Based Restricted Stock Units. Performance-based restricted stock and performance-based restricted stock units generally vest over a one to three year performance period and a subsequent service period of up to 26 months. Under these programs, the Company communicates "target awards" at the beginning of the performance period with possible payouts at the end of the performance period ranging from 0% to 150% of the "target awards." Awards are generally forfeited if the employee ceases to be employed by the Company prior to vesting.

Performance-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of performance-based restricted stock is recognized over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of shares awarded during the performance period based on probable and actual performance against targets. After the performance period, if the performance targets are achieved, employees are eligible to receive dividends during the remaining vesting period on shares awarded under the performance-based restricted stock program.

Performance-based restricted stock units cannot be transferred and are settled in either cash or stock, depending on the employee's home country. Compensation expense relating to the issuance of performance-based restricted stock units settled in cash is recognized over the vesting period initially based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded during the performance period based on probable and actual performance against targets. In addition, compensation expense is remeasured at each reporting period during the vesting period based on the change in the ADP stock price. Compensation expense relating to the issuance of performance-based restricted stock units settled in stock is recorded over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded based on the probable and actual performance against targets. Dividend equivalents are paid on awards under the performance-based restricted stock unit program.


•	Employee Stock Purchase Plan. The Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common stock at a price equal to 95% of the market value for the Company's common stock on the last day of the offering period. This plan has been deemed non-compensatory and, therefore, no compensation expense has been recorded.

The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs. The Company repurchased 8.5 million shares in fiscal 2018 as compared to 13.5 million shares repurchased in fiscal 2017. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions. Cash payments related to the settlement of vested time-based restricted stock units and performance-based restricted stock units were approximately $27.1 million, $24.5 million, and $25.2 million during fiscal years 2018, 2017, and 2016, respectively.

The following table represents stock-based compensation expense and related income tax benefits in each of fiscal 2018, 2017, and 2016, respectively:



Years ended June 30,	2018		2017		2016
Operating expenses	$	22.9	$	21.5	$	23.1
Selling, general and administrative expenses	128.7		99.2		97.4
System development and programming costs	23.8		18.2		17.1
Total pretax stock-based compensation expense	$	175.4	$	138.9	$	137.6

Income tax benefit	$	44.1	$	49.9	$	49.6

As of June 30, 2018, the total remaining unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards amounted to $13.3 million, $54.4 million, and $65.6 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 2.2 years, 1.5 years, and 1.1 years, respectively.

In fiscal 2018, the following activity occurred under the Company’s existing plans.

Stock Options:



	Number of Options (in thousands)		Weighted Average Price (in dollars)
Options outstanding at July 1, 2017	4,172		$	75
Options granted	1,137		$	107
Options exercised	(1,190	)	$	67
Options canceled	(136	)	$	84
Options outstanding at June 30, 2018	3,983		$	87
Options exercisable at June 30, 2018	1,333		$	71
Shares available for future grants, end of year	15,912
Shares reserved for issuance under stock option plans, end of year	19,895

Time-Based Restricted Stock and Time-Based Restricted Stock Units:



	Number of Shares (in thousands)		Number of Units (in thousands)
Restricted shares/units outstanding at July 1, 2017	1,761		386
Restricted shares/units granted	877		182
Restricted shares/units vested	(919	)	(196	)
Restricted shares/units forfeited	(121	)	(27	)
Restricted shares/units outstanding at June 30, 2018	1,598		345

Performance-Based Restricted Stock and Performance-Based Restricted Stock Units:



	Number of Shares (in thousands)		Number of Units (in thousands)
Restricted shares/units outstanding at July 1, 2017	404		769
Restricted shares/units granted	157		352
Restricted shares/units vested	(238	)	(286	)
Restricted shares/units forfeited	(21	)	(46	)
Restricted shares/units outstanding at June 30, 2018	302		789

The aggregate intrinsic value of outstanding stock options and exercisable stock options as of June 30, 2018 was $188.8 million and $83.8 million, respectively, which have a remaining life of 7 years and 6 years, respectively. The aggregate intrinsic value for stock options exercised in fiscal 2018, 2017, and 2016 was $60.0 million, $70.9 million, and $85.4 million, respectively.

The fair value for stock options granted was estimated at the date of grant using the following assumptions:



	2018			2017			2016
Risk-free interest rate	1.8		%	1.2		%	1.6		%
Dividend yield	2.1		%	2.3		%	2.6		%
Weighted average volatility factor	21.7		%	23.2		%	25.6		%
Weighted average expected life (in years)	5.4			5.4			5.4
Weighted average fair value (in dollars)	$	17.50		$	14.36		$	13.16

The weighted average fair values of shares granted were as follows:



Year ended June 30,	2018		2017		2016

Performance-based restricted stock	$	107.43	$	90.63	$	75.95
Time-based restricted stock	$	108.10	$	90.99	$	76.09

B. Pension Plans

The Company has a defined benefit cash balance pension plan under which employees are credited with a percentage of base pay plus interest. Effective January 1, 2015, associates hired on or after this date are not eligible to participate in this pension plan. In addition, associates rehired on or after January 1, 2015 will no longer be eligible to earn additional contributions but will continue to earn interest on any balance that remains in the pension plan. The plan interest credit rate varies from year-to-year based on the ten-year U.S. Treasury rate. Employees are fully vested upon completion of three years of service. The Company's policy is to make contributions within the range determined by generally accepted actuarial principles.

On March 1, 2018, the Company offered a voluntary early retirement program ("VERP") to certain eligible U.S.-based associates aged 55 or above with at least 10 years of service. The early retirement offer was extended to about 3,500 eligible associates, or approximately 6 percent of the Company’s workforce. The window for elections closed on May 1, 2018, with approximately 2,200 ADP associates opting to participate. ADP will fund a significant majority of the program costs from the existing surplus in ADP’s U.S. defined benefit plan, which resulted in a special termination charge from the U.S. pension plan of $319.6 million, which has been included within Other expense/(income), net, on the Statements of Consolidated Earnings in the fourth quarter of fiscal 2018.

The Company also extended to all employees participating in the VERP the opportunity to continue health care coverage at active employee contribution rates for up to 24 months following retirement. The Company recorded $13.4 million of expenses within selling, general, and administrative expenses related to the continuing health coverage for VERP participants who have exited the Company as of June 30, 2018. The Company anticipates recording a charge in fiscal 2019 for the remaining participants who will exit and continue health coverage during fiscal 2019, which may total up to $35 million, but is based on the number of associates electing this benefit and the health care option selected by each associate.

Additionally, as a result of the VERP in fiscal 2018, the Company recorded stock-based compensation expenses of $3.8 million related to the modification of awards previously granted to the VERP participants.

The Company anticipates recording a non-cash settlement charge in fiscal 2019, within Other expense/(income), net, on the Statements of Consolidated Earnings, which is contingent on the number of participants electing the lump sum payment option and other actuarial assumptions, including the discount rate and long-term rate of return on assets.

The Company also has various retirement plans for its non-U.S. employees and maintains a Supplemental Officers Retirement Plan (“SORP”). The SORP is a defined benefit plan pursuant to which the Company pays supplemental pension benefits to certain corporate officers upon retirement based upon the officers' years of service and compensation. The SORP, which is currently closed to new entrants, will be frozen effective July 1, 2019. Benefits under the plan will continue to accrue through June 30, 2019, and as of July 1, 2019 and onward, participants will retain their accrued benefits with no future accruals due to pay and/or service.

A June 30 measurement date was used in determining the Company's benefit obligations and fair value of plan assets.

The Company is required to (a) recognize in its Consolidated Balance Sheets an asset for a plan's net overfunded status or a liability for a plan's net underfunded status, (b) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year, and (c) recognize changes in the funded status of a defined benefit plan in the year in which the changes occur in accumulated other comprehensive income (loss).

The Company's pension plans' funded status as of June 30, 2018 and 2017 is as follows:



June 30,	2018			2017

Change in plan assets:
Fair value of plan assets at beginning of year	$	2,138.4		$	2,006.3
Actual return on plan assets	148.5			195.2
Employer contributions	10.9			11.9
Currency translation adjustments	5.0			(3.2		)
Benefits paid	(124.7		)	(71.8		)
Fair value of plan assets at end of year	$	2,178.1		$	2,138.4

Change in benefit obligation:
Benefit obligation at beginning of year	$	1,866.7		$	1,843.9
Service cost	74.6			80.8
Interest cost	65.4			60.0
Actuarial gain	(73.7		)	(44.5		)
Currency translation adjustments	7.5			2.7
Curtailments and special termination benefits	319.5			(4.4		)
Benefits paid	(124.7		)	(71.8		)
Projected benefit obligation at end of year	$	2,135.3		$	1,866.7

Funded status - plan assets less benefit obligations	$	42.8		$	271.7

The amounts recognized on the Consolidated Balance Sheets as of June 30, 2018 and 2017 consisted of:



June 30,	2018			2017

Noncurrent assets	$	180.8		$	413.8
Current liabilities	(5.3		)	(5.0		)
Noncurrent liabilities	(132.7		)	(137.1		)
Net amount recognized	$	42.8		$	271.7

The accumulated benefit obligation for all defined benefit pension plans was $2,121.1 million and $1,852.5 million at June 30, 2018 and 2017, respectively.

The Company's pension plans with accumulated benefit obligations in excess of plan assets as of June 30, 2018 and 2017 had the following projected benefit obligation, accumulated benefit obligation, and fair value of plan assets:



June 30,	2018		2017

Projected benefit obligation	$	151.3	$	241.0
Accumulated benefit obligation	$	138.1	$	227.9
Fair value of plan assets	$	13.3	$	98.9

The components of net pension expense were as follows:



	2018			2017			2016
Service cost – benefits earned during the period	$	74.6		$	80.8		$	70.4
Interest cost on projected benefits	65.4			60.0			67.4
Expected return on plan assets	(137.5		)	(135.8		)	(131.2		)
Net amortization and deferral	8.4			19.1			11.0
Special termination benefits and plan curtailments	319.5			0.1			0.1
Net pension expense	$	330.4		$	24.2		$	17.7

The net actuarial loss and prior service credit for the defined benefit pension plans that are included in accumulated other comprehensive (loss)/income that have not yet been recognized as components of net periodic benefit cost are $238.1 million and $19.0 million, respectively, at June 30, 2018. There is no remaining transition obligation for the defined benefit pension plans included in accumulated other comprehensive income. The estimated net actuarial loss and prior service credit for the defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost in fiscal 2019 are $1.8 million and $2.2 million, respectively.

Assumptions used to determine the actuarial present value of benefit obligations were:



Years ended June 30,	2018		2017

Discount rate	4.10	%	3.70	%
Increase in compensation levels	4.00	%	4.00	%

Assumptions used to determine the net pension expense generally were:



Years ended June 30,	2018		2017		2016

Discount rate	3.70	%	3.40	%	4.25	%
Expected long-term rate of return on assets	6.75	%	7.00	%	7.00	%
Increase in compensation levels	4.00	%	4.00	%	4.00	%

The discount rate is based upon published rates for high-quality fixed-income investments that produce cash flows that approximate the timing and amount of expected future benefit payments.

The expected long-term rate of return on assets is determined based on historical and expected future rates of return on plan assets considering the target asset mix and the long-term investment strategy.

Plan Assets

The Company's pension plans' asset allocations at June 30, 2018 and 2017 by asset category were as follows:



	2018		2017

Cash and cash equivalents	1	%	1	%
Fixed income securities	52	%	36	%
U.S. equity securities	14	%	19	%
International equity securities	12	%	16	%
Global equity securities	22	%	28	%
	100	%	100	%

The Company's pension plans' asset investment strategy is designed to ensure prudent management of assets, consistent with long-term return objectives and the prompt fulfillment of all pension plan obligations. The investment strategy and asset mix were developed in coordination with an asset liability study conducted by external consultants to maximize the funded ratio with the least amount of volatility.

The pension plans' assets are currently invested in various asset classes with differing expected rates of return, correlations, and volatilities, including large capitalization and small capitalization U.S. equities, international equities, U.S. fixed income securities, and cash.

The target asset allocation ranges for the U.S. plan are generally as follows:



U.S. fixed income securities	35% - 45%
U.S. equity securities	14% - 24%
International equity securities	11% - 21%
Global equity securities	20% - 30%

The U.S. pension plan's fixed income asset allocation for fiscal 2018 was outside of the target range due to the previously mentioned VERP in order to meet anticipated lump sum payments to participants. The Company expects the asset allocation will continue to be outside of the target range through fiscal 2019.

The pension plans' fixed income portfolio is designed to match the duration and liquidity characteristics of the pension plans' liabilities. In addition, the pension plans invest only in investment-grade debt securities to ensure preservation of capital. The pension plans' equity portfolios are subject to diversification guidelines to reduce the impact of losses in single investments. Investment managers are prohibited from buying or selling commodities and from the short selling of securities.

None of the pension plans' assets are directly invested in the Company's stock, although the pension plans may hold a minimal amount of Company stock to the extent of the Company's participation in equity indices.

The pension plans' investments included in Level 1 are valued using closing prices for identical instruments that are traded on active exchanges. The pension plans' investments included in Level 2 are valued utilizing inputs obtained from an independent pricing service, which are reviewed by the Company for reasonableness. To determine the fair value of our Level 2 plan assets, a variety of inputs are utilized, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment information. The pension plans have no Level 3 investments at June 30, 2018.

The following table presents the investments of the pension plans measured at fair value at June 30, 2018:



	Level 1		Level 2		Level 3		Total

Commingled trusts	$	—	$	1,036.7	$	—	$	1,036.7
Government securities	—		507.7		—		507.7
Mutual funds	5.5		—		—		5.5
Corporate and municipal bonds	—		586.8		—		586.8
Mortgage-backed security bonds	—		28.2		—		28.2
Total pension asset investments	$	5.5	$	2,159.4	$	—	$	2,164.9

In addition to the investments in the above table, the pension plans also held cash and cash equivalents of $13.2 million as of June 30, 2018, which have been classified as Level 1 in the fair value hierarchy.

The following table presents the investments of the pension plans measured at fair value at June 30, 2017:



	Level 1		Level 2		Level 3		Total

Commingled trusts	$	—	$	1,338.5	$	—	$	1,338.5
U.S. government securities	—		337.7		—		337.7
Mutual funds	4.8		—		—		4.8
Corporate and municipal bonds	—		409.3		—		409.3
Mortgage-backed security bonds	—		32.9		—		32.9
Total pension asset investments	$	4.8	$	2,118.4	$	—	$	2,123.2

In addition to the investments in the above table, the pension plans also held cash and cash equivalents of $15.2 million as of June 30, 2017, which have been classified as Level 1 in the fair value hierarchy.

Contributions

During fiscal 2018, the Company contributed $10.9 million to the pension plans. The Company expects to contribute $8.3 million to the pension plans during fiscal 2019.

Estimated Future Benefit Payments

The benefits expected to be paid in each year from fiscal 2019 to the year ended June 30, 2023 are $308.0 million, $148.8 million, $160.2 million, $100.3 million, and $107.7 million, respectively. The aggregate benefits expected to be paid in the five fiscal years from the year ended June 30, 2024 to the year ended June 30, 2028 are $669.4 million. The expected benefits to be paid are based on the same assumptions used to measure the Company's pension plans' benefit obligations at June 30, 2018 and includes estimated future employee service.

C. Retirement and Savings Plan. The Company has a 401(k) retirement and savings plan, which allows eligible employees to contribute up to 50% of their compensation annually and allows highly compensated employees to contribute up to 12% of their compensation annually. The Company matches a portion of employee contributions, which amounted to approximately $100.6 million, $87.9 million, and $81.9 million for the calendar years ended December 31, 2017, 2016, and 2015, respectively.