Employee Benefits

Pension, Post-Retirement and Other Post-Employment Benefits

We sponsor various defined benefit pension plans (qualified and non-qualified), which in the aggregate cover a substantial portion of our employees including legacy CenturyLink, legacy Qwest and legacy Embarq employees. On December 31, 2014, we merged our existing qualified pension plans, which included merging the Qwest Pension Plan and Embarq Retirement Pension Plan into the CenturyLink Retirement Plan. The CenturyLink Retirement Plan was renamed the CenturyLink Combined Pension Plan ("Combined Plan"). Pension benefits for participants of the new Combined Plan who are represented by a collective bargaining agreement are based on negotiated schedules. All other participants' pension benefits are based on each individual participant's years of service and compensation. We use a December 31 measurement date for all our plans. We also maintain non-qualified pension plans for certain current and former highly compensated employees. We maintain post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees. We also provide other post-employment benefits for eligible former employees.

Pension Benefits

Current funding laws require a company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Our funding policy for our Combined Plan is to make contributions with the objective of accumulating sufficient assets to pay all qualified pension benefits when due under the terms of the plans. The accounting unfunded status of our qualified pension plans was $2.4 billion as of December 31, 2014.

In 2014, we made cash contributions of approximately $157 million to our qualified pension plans and paid approximately $6 million of benefits directly to participants of our non-qualified pension plans. Based on current laws and circumstances, we are not required to make any contributions to our qualified pension plans in 2015, but we estimate that we will pay approximately $6 million of benefits to participants of our non-qualified pension plans.

Our pension plans contain provisions that allow us, from time to time, to offer lump sum payment options to certain employees in settlement of their future retirement benefits. We record these payments as a settlement only if, in the aggregate, they exceed the sum of the annual service and interest costs for the plan’s net periodic pension benefit cost, which represents the settlement threshold. On December 8, 2014, lump sum pension settlement payments to terminated, but not-yet-retired participants in our Qwest qualified pension plan amounted to $460 million, which exceeded the settlement threshold of $418 million. As a result, we were required to recognize a non-cash settlement charge of $63 million in 2014 to accelerate the recognition of a portion of the previously unrecognized actuarial losses in the qualified pension plan, which has been allocated and reflected in cost of services and products (exclusive of depreciation and amortization) and selling, general and administrative in our consolidated statement of operations for the year ended December 31, 2014. This non-cash charge reduced our recorded net income and retained earnings, with an offset to accumulated other comprehensive loss in shareholders’ equity. The amount of any future non-cash settlement charges will be dependent on the level of lump sum benefit payments made in 2015 and beyond.

Post-Retirement Benefits

Our post-retirement health care plans provide post-retirement benefits to qualified retirees. The post-retirement health care plans we assumed as part of our acquisitions of Qwest and Embarq provide post-retirement benefits to qualified retirees and allow (i) eligible employees retiring before certain dates to receive benefits at no or reduced cost and (ii) eligible employees retiring after certain dates to receive benefits on a shared cost basis. The post-retirement health care plans are primarily funded by us and we expect to continue funding these post-retirement obligations as benefits are paid.

No contributions were made to the post-retirement trusts in 2014, and we do not expect to make a contribution in 2015. However, in 2014 we paid approximately $88 million of benefits (net of participant contributions and direct subsidies) that were not payable by the trusts, and we estimate that in 2015, we will pay approximately $139 million of benefits (net of participant contributions and direct subsidies) that are not payable by the trusts.

We expect our health care cost trend rate to decrease between 0.25% to 0.15% per year from 6.00% in 2015 to an ultimate rate of 4.50% in 2024. Our post-retirement health care expense, for certain eligible Legacy Qwest retirees and certain eligible Legacy CenturyLink retirees, is capped at a set dollar amount. Therefore, those health care benefit obligations are not subject to increasing health care trends after the effective date of the caps.

A change of 100 basis points in the assumed initial health care cost trend rate would have had the following effects in 2014:



	100 Basis Points Change
	Increase		(Decrease)
	(Dollars in millions)
Effect on the aggregate of the service and interest cost components of net periodic post-retirement benefit expense (consolidated statement of operations)	$	4	(3	)
Effect on benefit obligation (consolidated balance sheet)	92		(82	)

Expected Cash Flows

The qualified pension, non-qualified pension and post-retirement health care benefit payments and premiums and life insurance premium payments are paid by us or distributed from plan assets. The estimated benefit payments provided below are based on actuarial assumptions using the demographics of the employee and retiree populations and have been reduced by estimated participant contributions.



	Pension Plans		Post-Retirement Benefit Plans	Medicare Part D Subsidy Receipts
	(Dollars in millions)
Estimated future benefit payments:
2015	$	1,061	309	(7	)
2016	1,011		300	(7	)
2017	996		292	(7	)
2018	980		285	(7	)
2019	965		279	(7	)
2020 - 2024	4,568		1,276	(31	)

Net Periodic Benefit Expense

The actuarial assumptions used to compute the net periodic benefit expense for our qualified pension, non-qualified pension and post-retirement benefit plans are based upon information available as of the beginning of the year, as presented in the following table.



	Pension Plans						Post-Retirement Benefit Plans
	2014		2013		2012		2014		2013		2012
Actuarial assumptions at beginning of year:
Discount rate	4.20% - 5.10%		3.50% - 4.20%		4.25% - 5.10%		4.50	%	3.60	%	4.60% - 4.80%
Rate of compensation increase	3.25	%	3.25	%	3.25	%	N/A		N/A		N/A
Expected long-term rate of return on plan assets	7.50	%	7.50	%	7.50	%	6.00% - 7.50%		6.00% - 7.30%		6.00% - 7.50%
Initial health care cost trend rate	N/A		N/A		N/A		6.00% - 6.50%		6.50% - 7.00%		8.00	%
Ultimate health care cost trend rate	N/A		N/A		N/A		4.50	%	4.50	%	5.00	%
Year ultimate trend rate is reached	N/A		N/A		N/A		2024		2022		2018

_______________________________________________________________________________

N/A-Not applicable

Net periodic (income) expense for our qualified and non-qualified pension plans include the following components:



	Pension Plans Years Ended December 31,
	2014			2013		2012
	(Dollars in millions)
Service cost	$	77		91		87
Interest cost	602			544		625
Expected return on plan assets	(891		)	(896	)	(847	)
Settlements	63			—		—
Recognition of prior service cost	5			5		4
Recognition of actuarial loss	22			84		35
Net periodic pension benefit income	$	(122	)	(172	)	(96	)

Net periodic expense (income) for our post-retirement benefit plans include the following components:



	Post-Retirement Plans Years Ended December 31,
	2014			2013		2012
	(Dollars in millions)
Service cost	$	22		24		22
Interest cost	159			140		173
Expected return on plan assets	(33		)	(39	)	(45	)
Recognition of prior service cost	20			—		—
Recognition of actuarial loss	—			4		—
Net periodic post-retirement benefit expense	$	168		129		150

We report net periodic benefit (income) expense for our qualified pension, non-qualified pension and post-retirement benefit plans in both cost of services and products and selling, general and administrative expenses on our consolidated statements of operations for the years ended December 31, 2014, 2013 and 2012.

Benefit Obligations

The actuarial assumptions used to compute the funded status for the plans are based upon information available as of December 31, 2014 and 2013 and are as follows:



	Pension Plans				Post-Retirement Benefit Plans
	December 31,				December 31,
	2014		2013		2014		2013
Actuarial assumptions at end of year:
Discount rate	3.50% - 4.10%		4.20% - 5.10%		3.80	%	4.50	%
Rate of compensation increase	3.25	%	3.25	%	N/A		N/A
Initial health care cost trend rate	N/A		N/A		6.00% / 6.50%		6.50% / 7.00%
Ultimate health care cost trend rate	N/A		N/A		4.50	%	4.50	%
Year ultimate trend rate is reached	N/A		N/A		2024		2022 / 2024

_______________________________________________________________________________

N/A-Not applicable

For our defined benefit plans, we adopted a new mortality rate table in 2014 to better reflect the expected lifetimes of our plan participants. The table used is based on Society of Actuaries tables and increases the projected benefit obligation by approximately $1.3 billion. The increase in the projected obligation was recognized as part of the net actuarial loss and is included in the other comprehensive loss, a portion of which is subject to be amortized over the remaining estimated life of plan participants (approximately 8 years).

The following tables summarize the change in the benefit obligations for the pension and post-retirement benefit plans:



	Pension Plans Years Ended December 31,
	2014			2013		2012
	(Dollars in millions)
Change in benefit obligation
Benefit obligation at beginning of year	$	13,401		14,881		13,596
Service cost	77			91		87
Interest cost	602			544		625
Plan amendments	4			—		14
Actuarial loss (gain)	2,269			(1,179	)	1,565
Settlements	(460		)	—		—
Benefits paid by company	(6		)	(5	)	(5	)
Benefits paid from plan assets	(845		)	(931	)	(1,001	)
Benefit obligation at end of year	$	15,042		13,401		14,881



	Post-Retirement Benefit Plans Years Ended December 31,
	2014			2013		2012
	(Dollars in millions)
Change in benefit obligation
Benefit obligation at beginning of year	$	3,688		4,075		3,930
Service cost	22			24		22
Interest cost	159			140		173
Participant contributions	69			96		86
Plan amendments	23			141		—
Direct subsidy receipts	9			13		19
Actuarial loss (gain)	245			(399	)	260
Benefits paid by company	(166		)	(266	)	(268	)
Benefits paid from plan assets	(219		)	(136	)	(147	)
Benefit obligation at end of year	$	3,830		3,688		4,075

Our aggregate benefit obligation as of December 31, 2014, 2013 and 2012 was $18.872 billion, $17.089 billion and $18.956 billion, respectively.

Plan Assets

We maintain plan assets for our qualified pension plans and certain post-retirement benefit plans. The qualified pension plan assets are used for the payment of pension benefits and certain eligible plan expenses. The post-retirement benefit plan's assets are used to pay health care benefits and premiums on behalf of eligible retirees and to pay certain eligible plan expenses. The expected rate of return on plan assets is the long-term rate of return we expect to earn on the plans' assets. The rate of return is determined by the strategic allocation of plan assets and the long-term risk and return forecast for each asset class. The forecasts for each asset class are generated primarily from an analysis of the long-term expectations of various third party investment management organizations. The expected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment strategy.

The following tables summarize the change in the fair value of plan assets for the pension and post-retirement benefit plans:



	Pension Plans Years Ended December 31,
	2014			2013		2012
	(Dollars in millions)
Change in plan assets
Fair value of plan assets at beginning of year	$	12,346		12,321		11,814
Return on plan assets	1,373			810		1,476
Employer contributions	157			146		32
Settlements	(460		)	—		—
Benefits paid from plan assets	(845		)	(931	)	(1,001	)
Fair value of plan assets at end of year	$	12,571		12,346		12,321



	Post-Retirement Benefit Plans Years Ended December 31,
	2014			2013		2012
	(Dollars in millions)
Change in plan assets
Fair value of plan assets at beginning of year	$	535		626		693
Return on plan assets	37			45		80
Benefits paid from plan assets	(219		)	(136	)	(147	)
Fair value of plan assets at end of year	$	353		535		626

Pension Plans: Our investment objective for the pension plan assets is to achieve an attractive risk-adjusted return over time that will provide for the payment of benefits and minimize the risk of large losses. Our pension plan investment strategy is designed to meet this objective by broadly diversifying plan assets across numerous strategies with differing expected returns, volatilities and correlations. The pension plan assets have target allocations of 41.5% to interest rate sensitive investments and 58.5% to investments designed to provide higher expected returns than the interest rate sensitive investments. Interest rate sensitive investments include 26% of plan assets targeted primarily to long-duration investment grade bonds, 10.5% targeted to high yield and emerging market bonds and 5% targeted to diversified strategies, which primarily have exposures to global bonds, as well as some exposures to global stocks and commodities. Assets expected to provide higher returns than the interest rate sensitive assets include broadly diversified equity investments with targets of approximately 14.5% to U.S. stocks and 14.5% to developed and emerging market non-U.S. stocks. Approximately 11% is targeted to broadly diversified multi-asset class strategies that have the flexibility to adjust exposures to different asset classes. Approximately 10.5% is allocated to private markets investments including funds primarily invested in private equity, private debt and hedge funds. Real estate investments are targeted at 8% of plan assets. At the beginning of 2015, our expected annual long-term rate of return on pension assets is assumed to be 7.5%.

Post-Retirement Benefit Plans: Our investment objective for the post-retirement benefit plan assets is to achieve an attractive risk-adjusted return and minimize the risk of large losses over the expected life of the assets. Investment risk is managed by broadly diversifying assets across numerous strategies with differing expected returns, volatilities and correlations. Our investment strategy is designed to be consistent with the investment objective, with particular focus on providing liquidity for the reimbursement of our union-represented employees' post-retirement health care costs. The post-retirement benefit plan assets have target allocations of 30% to equities and 70% to non-equity investments. Specific target allocations within these broad categories are allowed to vary to provide liquidity in order to meet reimbursement requirements. Equity investments are broadly diversified with exposure to publicly traded U.S., non-U.S. and emerging market stocks and private market investments. While no new private market investments have been made in recent years, the percent allocation to existing private market investments is expected to increase as liquid, publicly traded stocks are drawn down for the reimbursement of health care costs. The 70% non-equity allocation includes investment grade bonds, real estate, hedge funds and diversified strategies. At the beginning of 2015, our expected annual long-term rate of return on post-retirement benefit plan assets is assumed to be 7.5%.

Permitted investments: Plan assets are managed consistent with the restrictions set forth by the Employee Retirement Income Security Act of 1974, as amended, which requires diversification of assets and also generally prohibits defined benefit and welfare plans from investing more than 10% of their assets in securities issued by the sponsor company. At December 31, 2014 and 2013, the pension and post-retirement benefit plans did not directly own any shares of our common stock or any of our debt.

Derivative instruments: Derivative instruments are used to reduce risk as well as provide return. The pension and post-retirement benefit plans use exchange traded futures to gain exposure to equity and Treasury markets consistent with target asset allocations. Interest rate swaps are used in the pension plans to reduce risk relative to measurement of the benefit obligation, which is sensitive to interest rate changes. Foreign exchange forward contracts are used to manage currency exposures. Credit default swaps are used to manage credit risk exposures in a cost effective and targeted manner relative to transacting with physical corporate fixed income securities. Options are currently used to manage interest rate exposure taking into account the implied volatility and current pricing of the specific underlying market instrument. Some derivative instruments subject the plans to counterparty risk. The external investment managers, along with Plan Management, monitor counterparty exposure and mitigate this risk by diversifying the exposure among multiple high credit quality counterparties, requiring collateral and limiting exposure by periodically settling contracts.

The gross notional exposure of the derivative instruments directly held by the plans is shown below. The notional amount of the derivatives corresponds to market exposure but does not represent an actual cash investment.



	Gross Notional Exposure
	Pension Plans			Post-Retirement Benefit Plans
	Years Ended December 31,
	2014		2013	2014	2013
	(Dollars in millions)
Derivative instruments:
Exchange-traded U.S. equity futures	$	134	95	7	16
Exchange-traded non-U.S. equity futures	—		—	—	—
Exchange-traded Treasury futures	2,451		3,011	—	—
Interest rate swaps	579		556	—	—
Credit default swaps	382		253	—	—
Foreign exchange forwards	1,195		938	13	29
Options	529		261	—	—

Fair Value Measurements: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB. For additional information on the fair value hierarchy, see Note 10—Fair Value Disclosure.

At December 31, 2014, we used the following valuation techniques to measure fair value for assets. There were no changes to these methodologies during 2014:


•	Level 1—Assets were valued using the closing price reported in the active market in which the individual security was traded.


•	Level 2—Assets were valued using quoted prices in markets that are not active, broker dealer quotations, net asset value of shares held by the plans and other methods by which all significant input were observable at the measurement date.


•	Level 3—Assets were valued using unobservable inputs in which little or no market data exists as reported by the respective institutions at the measurement date.

The tables below present the fair value of plan assets by category and the input levels used to determine those fair values at December 31, 2014. It is important to note that the asset allocations do not include market exposures that are gained with derivatives. Investments include dividend and interest receivables, pending trades and accrued expenses.



	Fair Value of Pension Plan Assets at December 31, 2014
	Level 1		Level 2	Level 3	Total
	(Dollars in millions)
Investment grade bonds (a)	$	1,013	1,480	—	$	2,493
High yield bonds (b)	—		1,480	33	1,513
Emerging market bonds (c)	208		434	—	642
Convertible bonds (d)	—		14	—	14
Diversified strategies (e)	—		718	—	718
U.S. stocks (f)	1,389		87	—	1,476
Non-U.S. stocks (g)	1,169		384	—	1,553
Emerging market stocks (h)	—		102	—	102
Private equity (i)	—		—	673	673
Private debt (j)	—		—	395	395
Market neutral hedge funds (k)	—		928	100	1,028
Directional hedge funds (k)	—		530	28	558
Real estate (l)	—		483	216	699
Derivatives (m)	—		17	—	17
Cash equivalents and short-term investments (n)	—		690	—	690
Total investments	$	3,779	7,347	1,445	12,571
Total pension plan assets					$	12,571



	Fair Value of Post-Retirement Plan Assets at December 31, 2014
	Level 1		Level 2	Level 3	Total
	(Dollars in millions)
Investment grade bonds (a)	$	5	72	—	$	77
High yield bonds (b)	—		15	—	15
Emerging market bonds (c)	—		1	—	1
Diversified strategies (e)	—		89	—	89
U.S. stocks (f)	35		—	—	35
Non-U.S. stocks (g)	33		—	—	33
Emerging market stocks (h)	6		—	—	6
Private equity (i)	—		—	28	28
Private debt (j)	—		—	3	3
Market neutral hedge funds (k)	—		25	—	25
Directional hedge funds (k)	—		1	—	1
Real estate (l)	—		24	4	28
Cash equivalents and short-term investments (n)	—		12	—	12
Total investments	$	79	239	35	353
Total post-retirement plan assets					$	353

The tables below present the fair value of plan assets by category and the input levels used to determine those fair values at December 31, 2013. It is important to note that the asset allocations do not include market exposures that are gained with derivatives. Investments include dividend and interest receivable, pending trades and accrued expenses.



	Fair Value of Pension Plan Assets at December 31, 2013
	Level 1		Level 2		Level 3	Total
	(Dollars in millions)
Investment grade bonds (a)	$	813	1,504		—	$	2,317
High yield bonds (b)	—		1,265		26	1,291
Emerging market bonds (c)	196		367		—	563
Convertible bonds (d)	—		389		—	389
Diversified strategies (e)	—		723		—	723
U.S. stocks (f)	1,408		92		—	1,500
Non-U.S. stocks (g)	1,159		299		—	1,458
Emerging market stocks (h)	—		110		—	110
Private equity (i)	—		—		721	721
Private debt (j)	—		—		436	436
Market neutral hedge funds (k)	—		867		99	966
Directional hedge funds (k)	—		582		32	614
Real estate (l)	—		306		265	571
Derivatives (m)	—		(34	)	—	(34		)
Cash equivalents and short-term investments (n)	—		721		—	721
Total investments	$	3,576	7,191		1,579	12,346
Total pension plan assets						$	12,346



	Fair Value of Post-Retirement Plan Assets at December 31, 2013
	Level 1		Level 2	Level 3	Total
	(Dollars in millions)
Investment grade bonds (a)	$	21	56	—	$	77
High yield bonds (b)	—		56	—	56
Emerging market bonds (c)	—		37	—	37
Diversified strategies (e)	—		86	—	86
U.S. stocks (f)	56		—	—	56
Non-U.S. stocks (g)	58		—	—	58
Emerging market stocks (h)	—		12	—	12
Private equity (i)	—		—	40	40
Private debt (j)	—		—	5	5
Market neutral hedge funds (k)	—		35	—	35
Directional hedge funds (k)	—		14	—	14
Real estate (l)	—		22	12	34
Cash equivalents and short-term investments (n)	—		24	—	24
Total investments	$	135	342	57	534
Contribution receivable					1
Total post-retirement plan assets					$	535

The plans' assets are invested in various asset categories utilizing multiple strategies and investment managers. For several of the investments in the tables above and discussed below, the plans own units in commingled funds and limited partnerships that invest in various types of assets. Interests in commingled funds are valued using the net asset value ("NAV") per unit of each fund. The NAV reported by the fund manager is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding. Commingled funds held by the plans that can be redeemed at NAV within a year of the financial statement date are generally classified as Level 2. Investments in limited partnerships represent long-term commitments with a fixed maturity date, typically ten years. Valuation inputs for these limited partnership interests are generally based on assumptions and other information not observable in the market and are classified as Level 3 investments. The assumptions and valuation methodologies of the pricing vendors, account managers, fund managers and partnerships are monitored and evaluated for reasonableness. Below is an overview of the asset categories, the underlying strategies and valuation inputs used to value the assets in the preceding tables:

(a) Investment grade bonds represent investments in fixed income securities as well as commingled bond funds comprised of U.S. Treasury securities, agencies, corporate bonds, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities. Treasury securities are valued at the bid price reported in the active market in which the security is traded and are classified as Level 1. The valuation inputs of other investment grade bonds primarily utilize observable market information and are based on a spread to U.S. Treasury securities and consider yields available on comparable securities of issuers with similar credit ratings. The primary observable inputs include references to the new issue market for similar securities, the secondary trading markets and dealer quotes. Option adjusted spread models are utilized to evaluate securities such as asset backed securities that have early redemption features. These securities are classified as Level 2. The commingled funds are valued at NAV based on the market value of the underlying fixed income securities using the same valuation inputs described above. The commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2.

(b) High yield bonds represent investments in below investment grade fixed income securities as well as commingled high yield bond funds. The valuation inputs for the securities primarily utilize observable market information and are based on a spread to U.S. Treasury securities and consider yields available on comparable securities of issuers with similar credit ratings. These securities are classified as Level 2. The commingled funds are valued at NAV based on the market value of the underlying high yield instruments using the same valuation inputs described above. Commingled funds that can be redeemed at NAV within a year of the financial statement date are classified as Level 2. Commingled funds that cannot be redeemed at NAV or that cannot be redeemed at NAV within a year of the financial statement date are classified as Level 3.

(c) Emerging market bonds represent investments in securities issued by governments and other entities located in developing countries as well as registered mutual funds and commingled emerging market bond funds. The valuation inputs for the securities utilize observable market information and are primarily based on dealer quotes or a spread relative to the local government bonds. These securities are classified as Level 2. The commingled funds are valued at NAV based on the market value of the underlying emerging market bonds using the same valuation inputs described above. The commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2. The registered mutual funds trade at the daily NAV, as determined by the market value of the underlying investments, and are classified as Level 1.

(d) Convertible bonds primarily represent investments in corporate debt securities that have features that allow the debt to be converted into equity securities under certain circumstances. The valuation inputs for the individual convertible bonds primarily utilize observable market information including a spread to U.S. Treasuries and the value and volatility of the underlying equity security. Convertible bonds are classified as Level 2.

(e) Diversified strategies represent an investment in a commingled fund that primarily has exposures to global government, corporate and inflation linked bonds, global stocks and commodities. The commingled fund is valued at NAV based on the market value of the underlying investments. The valuation inputs utilize observable market information including published prices for exchange traded securities, bid prices for government bonds, and spreads and yields available for comparable fixed income securities with similar credit ratings. This fund can be redeemed at NAV within a year of the financial statement date and is classified as Level 2.

(f) U.S. stocks represent investments in stocks of U.S. based companies as well as commingled U.S. stock funds. The valuation inputs for U.S. stocks are based on the last published price reported on the major stock market on which the securities are traded and are classified as Level 1. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation inputs described above. These commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2.

(g) Non-U.S. stocks represent investments in stocks of companies based in developed countries outside the U.S. as well as commingled funds. The valuation inputs for non-U.S. stocks are based on the last published price reported on the major stock market on which the securities are traded and are classified as Level 1. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation inputs described above. These commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2.

(h) Emerging market stocks represent investments in a registered mutual fund and commingled funds comprised of stocks of companies located in developing markets. Registered mutual funds trade at the daily NAV, as determined by the market value of the underlying investments, and are classified as Level 1. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation inputs described previously for individual stocks. These commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2.

(i) Private equity represents non-public investments in domestic and foreign buy out and venture capital funds. Private equity funds are structured as limited partnerships and are valued according to the valuation policy of each partnership, subject to prevailing accounting and other regulatory guidelines. The partnerships use valuation methodologies that give consideration to a range of factors, including but not limited to the price at which investments were acquired, the nature of the investments, market conditions, trading values on comparable public securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investments. These valuation methodologies involve a significant degree of judgment. Private equity investments are classified as Level 3.

(j) Private debt represents non-public investments in distressed or mezzanine debt funds. Mezzanine debt instruments are debt instruments that are subordinated to other debt issues and may include embedded equity instruments such as warrants. Private debt funds are structured as limited partnerships and are valued according to the valuation policy of each partnership, subject to prevailing accounting and other regulatory guidelines. The valuation of underlying fund investments are based on factors including the issuer's current and projected credit worthiness, the security's terms, reference to the securities of comparable companies, and other market factors. These valuation methodologies involve a significant degree of judgment. Private debt investments are classified as Level 3.

(k) Market neutral hedge funds hold investments in a diversified mix of instruments that are intended in combination to exhibit low correlations to market fluctuations. These investments are typically combined with futures to achieve uncorrelated excess returns over various markets. Directional hedge funds—This asset category represents investments that may exhibit somewhat higher correlations to market fluctuations than the market neutral hedge funds. Investments in hedge funds include both direct investments and investments in diversified funds of funds. Hedge Funds are valued at NAV based on the market value of the underlying investments which include publicly traded equity and fixed income securities and privately negotiated debt securities. The hedge funds are valued by third party administrators using the same valuation inputs previously described. Hedge funds that can be redeemed at NAV within a year of the financial statement date are classified as Level 2. Hedge fund investments that cannot be redeemed at NAV or that cannot be redeemed at NAV within a year of the financial statement date are classified as Level 3.

(l) Real estate represents investments in commingled funds and limited partnerships that invest in a diversified portfolio of real estate properties. These investments are valued at NAV according to the valuation policy of each fund or partnership, subject to prevailing accounting and other regulatory guidelines. The valuation inputs of the underlying properties are generally based on third-party appraisals that use comparable sales or a projection of future cash flows to determine fair value. Real estate investments that can be redeemed at NAV within a year of the financial statement date are classified as Level 2. Real estate investments that cannot be redeemed at NAV or that cannot be redeemed at NAV within a year of the financial statement date are classified as Level 3.

(m) Derivatives include exchange traded futures contracts, as well as privately negotiated over-the-counter swaps and options that are valued based on the change in interest rates or a specific market index and are classified as Level 2. The market values represent gains or losses that occur due to fluctuations in interest rates, foreign currency exchange rates, security prices, or other factors.

(n) Cash equivalents and short-term investments represent investments that are used in conjunction with derivatives positions or are used to provide liquidity for the payment of benefits or other purposes. The valuation inputs of securities are based on a spread to U.S. Treasury Bills, the Federal Funds Rate, or London Interbank Offered Rate and consider yields available on comparable securities of issuers with similar credit ratings and are classified as Level 2. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation inputs described above. These commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2.

Concentrations of Risk: Investments, in general, are exposed to various risks, such as significant world events, interest rate, credit, foreign currency and overall market volatility risk. These risks are managed by broadly diversifying assets across numerous asset classes and strategies with differing expected returns, volatilities and correlations. Risk is also broadly diversified across numerous market sectors and individual companies. Financial instruments that potentially subject the plans to concentrations of counterparty risk consist principally of investment contracts with high quality financial institutions. These investment contracts are typically collateralized obligations and/or are actively managed, limiting the amount of counterparty exposure to any one financial institution. Although the investments are well diversified, the value of plan assets could change materially depending upon the overall market volatility, which could affect the funded status of the plans.

The table below presents a rollforward of the pension plan assets valued using Level 3 inputs:



	Pension Plan Assets Valued Using Level 3 Inputs
	High Yield Bonds			Private Equity		Private Debt		Market Neutral Hedge Fund		Directional Hedge Funds		Real Estate		Total
	(Dollars in millions)
Balance at December 31, 2012	$	59		711		465		—		194		337		1,766
Net transfers	—			—		—		—		(165	)	—		(165	)
Acquisitions	5			82		71		100		—		9		267
Dispositions	(43		)	(179	)	(144	)	—		(1	)	(97	)	(464	)
Actual return on plan assets:
Gains relating to assets sold during the year	12			68		18		—		—		11		109
(Losses) gains relating to assets still held at year-end	(7		)	39		26		(1	)	4		5		66
Balance at December 31, 2013	26			721		436		99		32		265		1,579
Net transfers	6			4		—		—		—		(4	)	6
Acquisitions	14			125		109		—		—		5		253
Dispositions	(16		)	(246	)	(111	)	—		—		(61	)	(434	)
Actual return on plan assets:
Gains relating to assets sold during the year	8			115		25		—		—		3		151
(Losses) gains relating to assets still held at year-end	(5		)	(46	)	(64	)	1		(4	)	8		(110	)
Balance at December 31, 2014	$	33		673		395		100		28		216		1,445

The table below presents a rollforward of the post-retirement plan assets valued using Level 3 inputs:



	Post-Retirement Plan Assets Valued Using Level 3 Inputs
	Private Equity			Private Debt		Real Estate		Total
	(Dollars in millions)
Balance at December 31, 2012	$	45		6		28		79
Acquisitions	1			—		—		1
Dispositions	(11		)	(1	)	(18	)	(30	)
Actual return on plan assets:
Gains (losses) relating to assets sold during the year	4			—		(1	)	3
Gains relating to assets still held at year-end	1			—		3		4
Balance at December 31, 2013	40			5		12		57
Acquisitions	1			—		—		1
Dispositions	(15		)	(2	)	(8	)	(25	)
Actual return on plan assets:
Gains relating to assets sold during the year	7			1		—		8
Losses relating to assets still held at year-end	(5		)	(1	)	—		(6	)
Balance at December 31, 2014	$	28		3		4		35

Certain gains and losses are allocated between assets sold during the year and assets still held at year-end based on transactions and changes in valuations that occurred during the year. These allocations also impact our calculation of net acquisitions and dispositions.

For the year ended December 31, 2014, the investment program produced actual gains on qualified pension and post-retirement plan assets of $1.410 billion as compared to the expected returns of $924 million for a difference of $486 million. For the year ended December 31, 2013, the investment program produced actual gains on pension and post-retirement plan assets of $855 million as compared to the expected returns of $935 million for a difference of $80 million. The short-term annual returns on plan assets will almost always be different from the expected long-term returns and the plans could experience net gains or losses, due primarily to the volatility occurring in the financial markets during any given year.

Unfunded Status

The following table presents the unfunded status of the pensions and post-retirement benefit plans:



	Pension Plans					Post-Retirement Benefit Plans
	Years Ended December 31,					Years Ended December 31,
	2014			2013		2014		2013
	(Dollars in millions)
Benefit obligation	$	(15,042	)	(13,401	)	(3,830	)	(3,688	)
Fair value of plan assets	12,571			12,346		353		535
Unfunded status	(2,471		)	(1,055	)	(3,477	)	(3,153	)
Current portion of unfunded status	$	(6	)	(5	)	(134	)	(154	)
Non-current portion of unfunded status	$	(2,465	)	(1,050	)	(3,343	)	(2,999	)

The current portion of our post-retirement benefit obligations is recorded on our consolidated balance sheets in accrued expenses and other current liabilities-salaries and benefits.

Accumulated Other Comprehensive Loss-Recognition and Deferrals

The following tables present cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2013, items recognized as a component of net periodic benefits expense in 2014, additional items deferred during 2014 and cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2014. The items not recognized as a component of net periodic benefits expense have been recorded on our consolidated balance sheets in accumulated other comprehensive loss:



	As of and for the Years Ended December 31,
	2013			Recognition of Net Periodic Benefits Expense		Deferrals		Net Change in AOCL		2014
	(Dollars in millions)
Accumulated other comprehensive loss:
Pension plans:
Net actuarial (loss) gain	$	(1,058	)	85		(1,787	)	(1,702	)	(2,760	)
Prior service (cost) benefit	(33		)	5		(4	)	1		(32	)
Deferred income tax benefit (expense)	422			(34	)	684		650		1,072
Total pension plans	(669		)	56		(1,107	)	(1,051	)	(1,720	)
Post-retirement benefit plans:
Net actuarial (loss) gain	(37		)	—		(240	)	(240	)	(277	)
Prior service (cost) benefit	(163		)	20		(23	)	(3	)	(166	)
Deferred income tax benefit (expense)	78			(8	)	101		93		171
Total post-retirement benefit plans	(122		)	12		(162	)	(150	)	(272	)
Total accumulated other comprehensive loss	$	(791	)	68		(1,269	)	(1,201	)	(1,992	)

The following table presents estimated items to be recognized in 2015 as a component of net periodic benefit expense of the pension, non-qualified pension and post-retirement benefit plans:



	Pension Plans			Post-Retirement Plans
	(Dollars in millions)
Estimated recognition of net periodic benefit expense in 2015:
Net actuarial loss	$	(148	)	—
Prior service cost	(5		)	(19	)
Deferred income tax benefit	58			7
Estimated net periodic benefit expense to be recorded in 2015 as a component of other comprehensive income (loss)	$	(95	)	(12	)

Medicare Prescription Drug, Improvement and Modernization Act of 2003

We sponsor post-retirement health care plans with several benefit options that provide prescription drug benefits that we deem actuarially equivalent to or exceeding Medicare Part D. We recognize the impact of the federal subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the calculation of our post-retirement benefit obligation and net periodic post-retirement benefit expense.

Other Benefit Plans

Health Care and Life Insurance

We provide health care and life insurance benefits to essentially all of our active employees. We are largely self-funded for the cost of the health care plan. Our health care benefit expenses for current employees was $381 million, $362 million and $360 million for the years ended December 31, 2014, 2013 and 2012, respectively. Union-represented employee benefits are based on negotiated collective bargaining agreements. Employees contributed $136 million, $117 million and $113 million for the years ended December 31, 2014, 2013 and 2012, respectively. Our group basic life insurance plans are fully insured and the premiums are paid by us.

401(k) Plan

We sponsor qualified defined contribution benefit plans covering substantially all of our employees. Under these plans, employees may contribute a percentage of their annual compensation up to certain maximums, as defined by the plans and by the Internal Revenue Service ("IRS"). Currently, we match a percentage of employee contributions in cash. At December 31, 2014 and December 31, 2013, the assets of the plans included approximately 8 million and 9 million shares of our common stock, respectively, as a result of the combination of previous employer match and participant directed contributions. We recognized expenses related to these plans of $81 million, $89 million and $76 million and for the years ended December 31, 2014, 2013 and 2012, respectively.

Deferred Compensation Plans

We sponsored non-qualified unfunded deferred compensation plans for various groups that included certain of our current and former highly compensated employees. The value of assets and liabilities related to these plans was not significant.