Note 14. Employee Benefit Plans

Employee 401(k) Plans

The Company sponsors the Lumentum 401(k) Retirement Plan (the “401(k) Plan”, a defined contribution plan under ERISA, which provides retirement benefits for its eligible employees through tax deferred salary deductions. The 401(k) Plan allows employees to contribute up to 50% of their annual compensation, with contributions limited to $18,000 in calendar year 2016 as set by the Internal Revenue Service.

The Company also makes a matching contribution equal to 100% of employees before-tax contributions up to 3% of their compensation and 50% of employees before-tax contributions to the next 2% of their compensation. The Company match is contributed on a per-pay-period basis and is based on employees before-tax contributions and compensation each pay period.

Employees are eligible for match contributions after completing 180 days of service. All matching contributions are made in cash & vest immediately. We made matching contributions to the 401(k) Plan in the amount of $3.5 million in fiscal 2016. Viavi made matching contributions on our behalf to the 401(k) Plan in the amount of $2.6 million and $2.5 million in fiscal 2015, and 2014, respectively.

Employee Defined Benefit Plans

During the third quarter of fiscal 2014, we assumed a defined benefit plan in connection with the acquisition of Time-Bandwidth. Prior to the third quarter of fiscal 2014, we did not have any significant defined benefit plans. This plan, which covers certain Swiss employees, is open to new participants and additional service costs are being accrued. Benefits are generally based upon age and compensation. As of July 2, 2016, the plan was partially funded. Our policy for partially funded plans is to make contributions equal to or greater than the requirements prescribed by law or regulation. Future estimated benefit payments are summarized below. No other required contributions to this defined benefit plan are expected in fiscal 2017, but we can, at our discretion, make contributions to the plan.

We account for our obligations under this pension plan in accordance with the authoritative guidance which requires us to record our obligation to the participants, as well as the corresponding net periodic cost. We determine our obligation to the participants and our net periodic cost principally using actuarial valuations provided by third-party actuaries. The net obligation of $3.5 million as of July 2, 2016 is recorded in our consolidated balance sheets as non-current liabilities and is reflective of the total PBO less the fair value of plan assets.

The change in the benefit obligations and plan assets of the pension and benefits plan were as follows (in millions):



	Pension Benefit Plans
	2016			2015
Change in benefit obligation:
Benefit obligation at beginning of year	$	6.7		$	4.6
Service cost	0.4			0.3
Interest cost	0.1			0.1
Plan participants' contribution	0.4			0.3
Actuarial (gains)/losses	0.9			1.2
Benefits paid	0.1			0.4
Foreign exchange impact	(0.4		)	(0.2		)
Benefit obligation at end of year	$	8.2		$	6.7
Change in plan assets:
Fair value of plan assets at beginning of year	$	4.6		$	3.0
Actual return on plan assets	(0.6		)	0.2
Employer contribution	0.4			0.8
Plan participants' contribution	0.4			0.3
Benefits paid	0.1			0.4
Foreign exchange impact	(0.2		)	(0.1		)
Fair value of plan assets at end of year	$	4.7		$	4.6
Funded status	$	(3.5	)	$	(2.1	)
Accumulated benefit obligation	$	6.7		$	5.6

Assumptions

Underlying both the calculation of the PBO and net periodic cost are actuarial valuations. These valuations use participant-specific information such as salary, age and assumptions about interest rates, compensation increases and other factors. At a minimum, we evaluate these assumptions annually and make changes as necessary.

The discount rate reflects the estimated rate at which the pension benefits could be effectively settled. In developing the discount rate, we consider the yield available on an appropriate AA corporate bond index, adjusted to reflect the term of the scheme's liabilities.

The expected return on assets was estimated by using the weighted average of the real expected long-term return (net of inflation) on the relevant classes of assets based on the target asset mix and adding the chosen inflation assumption.

The following table summarizes the assumptions used to determine net periodic cost and benefit obligation for the pension plan:



	Pension Benefit Plans
	2016		2015
Assumptions used to determine net periodic cost:
Discount rate	1.1	%	2.0	%
Expected long-term return on plan assets	3.3	%	3.2	%
Rate of pension increase	2.3	%	2.3	%
Assumptions used to determine benefit obligation at end of year:
Discount rate	0.2	%	1.1	%
Rate of pension increase	2.3	%	2.3	%

Fair Value Measurement of Plan Assets

The following table sets forth the plan's assets at fair value and the percentage of assets allocations as of July 2, 2016 (in millions, except percentage data).



							Fair value measurement as of July 2, 2016
	Target Allocation		Total		Percentage of Plan Asset		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs (Level 2)
Assets:
Global equity	26	%	$	1.2	25.5	%	$	—	$	1.2
Fixed income	37	%	1.7		36.2	%	—		1.7
Alternative Investment	19	%	0.9		19.1	%	—		0.9
Cash	1	%	0.1		2.1	%	0.1		—
Other	17	%	0.8		17.1	%	—		0.8
Total Assets			$	4.7	100.0	%	$	0.1	$	4.6

The following table sets forth the plan's assets at fair value and the percentage of assets allocations as of June 27, 2015 (in millions, except percentage data).



							Fair value measurement as of June 27, 2015
	Target Allocation		Total		Percentage of Plan Asset		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs (Level 2)
Assets:
Global equity	23	%	$	1.3	28.3	%	$	—	$	1.3
Fixed income	36	%	1.6		34.8	%	—		1.6
Alternative Investment	22	%	0.9		19.6	%			0.9
Cash	1	%	0.1		2.2	%	0.1		—
Other	18	%	0.7		15.1	%	—		0.7
Total Assets			$	4.6	100.0	%	$	0.1	$	4.5

Our pension assets consist of multiple institutional funds ("pension funds") of which the fair values are based on the quoted prices of the underlying funds. Pension funds are classified as Level 2 assets since such funds are not directly traded in active markets. Global equity consists of several funds that invest primarily in Swiss and Foreign equities; Fixed income consists of several funds that invest primarily in investment grade domestic and overseas bonds; Other consists of several funds that primarily invest in hedge fund, private equity, global real estate and infrastructure funds.

Future Benefit Payments

We estimate our expected benefit payments to defined benefit pension plan participants based on the same assumptions used to measure our PBO at year end which includes benefits attributable to estimated future compensation increases. Based on this approach, we expect to make payments of $0.7 million during the five year period between fiscal 2017 and fiscal 2021 and the remaining $2.8 million of payments in fiscal years subsequent to fiscal 2020.