Employee Benefit Plans

The Company sponsors defined benefit pension plans principally for salaried, management personnel. For employees hired prior to 2003, the plans provide eligible employees with retirement benefits based predominantly on years of service and compensation rates near retirement. For employees hired in 2003 or thereafter, benefits are determined based on a cash balance formula, which provides benefits by utilizing interest and pay credits based upon age, service and compensation.

In addition to these plans, the Company sponsors a post-retirement medical plan and a life insurance plan that provide certain benefits to full-time, salaried, management employees hired prior to 2003, upon their retirement if certain eligibility requirements are met. Eligible retirees who are age 65 years or older (Medicare-eligible) are covered by a health reimbursement arrangement, which is an employer-funded account that can be used for reimbursement of eligible medical expenses. Eligible retirees younger than 65 years (non-Medicare eligible) are covered by a self-insured program partially funded by participating retirees. The life insurance plan is non-contributory.

The Company engages independent actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company determines are appropriate based on historical trends, current market rates and future projections. These amounts are reviewed by management. In order to perform this valuation, the actuaries are provided with the details of the population covered at the beginning of the year, summarized in the table below, and projects that population forward to the end of the year.



	Summary of Participants as of
	January 1, 2016
	Pension Plans	Post-retirement Medical Plan
Active Employees	4,823	1,139
Retirees and Beneficiaries	12,018	11,893
Other^(a)	3,853	54
Total	20,694	13,086

(a) For pension plans, the other category consists mostly of terminated but vested former employees. For post-retirement plans, the other category consists of employees on long-term disability that have not yet retired.

The benefit obligation for these plans represents the liability of the Company for current and retired employees and is affected primarily by the following:


•	service cost (benefits attributed to employee service during the period);


•	interest cost (interest on the liability due to the passage of time);


•	actuarial gains/losses (experience during the year different from that assumed and changes in plan assumptions); and


•	benefits paid to participants.

NOTE 8. Employee Benefit Plans, continued

Cash Flows

Plan assets are amounts that have been segregated and restricted to provide qualified pension plan benefits and include amounts contributed by the Company and amounts earned from invested contributions, net of benefits paid. Qualified pension plan obligations are funded in accordance with regulatory requirements and with an objective of meeting or exceeding minimum funding requirements necessary to avoid restrictions on flexibility of plan operation and benefit payments. The Company funds the cost of the post-retirement medical and life insurance benefits as well as nonqualified pension benefits on a pay-as-you go basis. No qualified pension plan contributions were made during 2014 and 2015. Although no contributions to the Company's qualified pension plans were required, CSX made voluntary contributions totaling $250 million during 2016. No contributions to the Company's qualified pension plans are expected in 2017.

Future expected benefit payments are as follows:



	Expected Cash Flows
(Dollars in Millions)	Pension Benefits		Post-retirement Benefits
2017	$	183	$	39
2018	185		28
2019	184		26
2020	182		24
2021	182		22
2022-2026	904		86
Total	$	1,820	$	225

Plan Assets

The CSX Investment Committee (the “Investment Committee”), whose members were selected by the Chief Financial Officer and approved by the Chief Executive Officer, is responsible for oversight and investment of plan assets. The Investment Committee utilizes an investment asset allocation strategy that is monitored on an ongoing basis and updated periodically in consideration of plan or employee changes, or changing market conditions. Periodic studies provide an extensive modeling of asset investment return in conjunction with projected plan liabilities and seek to evaluate how to maximize return within the constraints of acceptable risk. The current asset allocation targets 70% equity investments and 30% fixed income investments and cash. Within equity, a further target is currently established for 42% of total plan assets in domestic equity and 28% in international equity. Allocations are evaluated for levels within 3% of targeted allocations and are adjusted quarterly as necessary. The distribution of pension plan assets as of the measurement date is shown in the table below, and these assets are netted against the pension liabilities on the balance sheet.



	December 2016				December 2015
			Percent of				Percent of
(Dollars in Millions)	Amount		Total Assets		Amount		Total Assets
Equity	$	1,806	71	%	$	1,626	70	%
Fixed Income	665		26		641		28
Cash and Cash Equivalents	68		3		42		2
Total	$	2,539	100	%	$	2,309	100	%

NOTE 8. Employee Benefit Plans, continued

Under the supervision of the Investment Committee, individual investments or fund managers are selected in accordance with standards of prudence applicable to asset diversification and investment suitability. The Company also selects fund managers with differing investment styles and benchmarks their investment returns against appropriate indices. Fund investment performance is continuously monitored. Acceptable performance is determined in the context of the long-term return objectives of the fund and appropriate asset class benchmarks.

Within the Company's equity funds, the U.S. stock segment includes diversification among large and small capitalization stocks. The international stock segment is diversified in a similar manner as well as in developed versus emerging markets stocks. Guidelines established with individual managers limit investment by industry sectors, individual stock issuer concentration and the use of derivatives and CSX securities.

Fixed income securities guidelines established with individual managers specify the types of allowable investments, such as government, corporate and asset-backed bonds, target certain allocation ranges for domestic and foreign investments and limit the use of certain derivatives. Additionally, guidelines stipulate minimum credit quality constraints and any prohibited securities. For detailed information regarding the fair value of pension assets, see Note 13, Fair Value Measurements.

Benefit Obligation, Plan Assets and Funded Status

Changes in benefit obligation and the fair value of plan assets for the 2016 and 2015 calendar plan years are as follows:



	Pension Benefits						Post-retirement Benefits
	Plan Year			Plan Year			Plan Year			Plan Year
(Dollars in Millions)	2016			2015			2016			2015
Actuarial Present Value of Benefit Obligation
Accumulated Benefit Obligation	$	2,717		$	2,672		N/A			N/A
Projected Benefit Obligation	2,871			2,860			$	274		$	314

Change in Projected Benefit Obligation:
Projected Benefit Obligation at Beginning of Plan Year	$	2,860		$	3,002		$	314		$	340
Service Cost	48			45			2			2
Interest Cost	119			116			12			12
Plan Participants' Contributions	—			—			6			7
Workforce Reduction Program/Curtailment	—			7			—			—
Actuarial Loss (Gain)	20			(110		)	(22		)	(7		)
Benefits Paid	(176		)	(200		)	(38		)	(40		)
Benefit Obligation at End of Plan Year	$	2,871		$	2,860		$	274		$	314

Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Plan Year	$	2,309		$	2,504		$	—		$	—
Actual Return on Plan Assets	139			(9		)	—			—
Qualified Employer Contributions	250			—			—			—
Non-qualified Employer Contributions	17			14			32			33
Plan Participants' Contributions	—			—			6			7
Benefits Paid	(176		)	(200		)	(38		)	(40		)
Fair Value of Plan Assets at End of Plan Year	2,539			2,309			—			—
Funded Status at End of Plan Year	$	(332	)	$	(551	)	$	(274	)	$	(314	)

NOTE 8. Employee Benefit Plans, continued

For qualified plan funding purposes, assets and discounted liabilities are measured in accordance with the Employee Retirement Income Security Act ("ERISA"), as well as other related provisions of the IRC and related regulations. Under these funding provisions and the alternative measurements available thereunder, the Company estimates its unfunded obligation for qualified plans on an annual basis.

In accordance with Compensation-Retirement Benefits Topic in the ASC, an employer must recognize the funded status of a pension or other post-retirement benefit plan by recording a liability (underfunded plan) or asset (overfunded plan) for the difference between the projected benefit obligation (or the accumulated post-retirement benefit obligation for a post-retirement benefit plan) and the fair value of plan assets at the plan measurement date. Amounts related to pension and post-retirement benefits recorded in other long-term assets, labor and fringe benefits payable and other long-term liabilities on the balance sheet are as follows:



	Pension Benefits						Post-retirement Benefits
	December			December			December			December
(Dollars in Millions)	2016			2015			2016			2015
Amounts Recorded in Consolidated
Balance Sheets:
Long-term Assets ^(a)	$	9		$	9		$	—		$	—
Current Liabilities	(15		)	(15		)	(39		)	(36		)
Long-term Liabilities	(326		)	(545		)	(235		)	(278		)
Net Amount Recognized in
Consolidated Balance Sheets	$	(332	)	$	(551	)	$	(274	)	$	(314	)


(a)	Long-term assets as of December 2016 and 2015 relate to one of the qualified pension plans whose assets exceed projected benefit obligations.

The funded status, or amount by which the benefit obligation exceeds the fair value of plan assets, represents a liability. At December 2016, the status of CSX plans only with a net liability is disclosed below. The total fair value of all plans as of December 2016 was $2.5 billion, which includes the qualified pension plans with net assets.



	Aggregate
(Dollars in Millions)	Fair Value		Aggregate
Benefit Obligations in Excess of Plan Assets	of Plan Assets		Benefit Obligation
Projected Benefit Obligation	$	2,506	$	(2,847	)
Accumulated Benefit Obligation	2,506		(2,692		)

NOTE 8. Employee Benefit Plans, continued

Net Benefit Expense

The following table describes the components of expense/(income) related to net benefit expense recorded in labor and fringe on the income statement.



	Pension Benefits Fiscal Years									Post-retirement Benefits Fiscal Years
(Dollars in Millions)	2016			2015			2014			2016		2015			2014
Service Cost	$	48		$	45		$	44		$	2	$	2		$	3
Interest Cost	119			116			123			12		12			13
Expected Return on Plan Assets	(157		)	(162		)	(166		)	—		—			—
Amortization of Net Loss	48			70			57			3		4			5
Amortization of Prior Service Cost	—			—			—			—		(1		)	(1		)
Net Periodic Benefit Expense	58			69			58			17		17			20
Special Termination Benefits - Workforce Reduction Program/Curtailment^(a)	—			7			27			—		—			8
Settlement Gain^(b)	(1		)	(2		)	(1		)	—		—			—
Total Expense	$	57		$	74		$	84		$	17	$	17		$	28


(a)	Special termination benefits are charges in 2015 and 2014 that resulted from a management workforce reduction program initiated in 2014. For further information regarding the program, see Note 1. Nature of Operations and Significant Accounting Policies.


(b)	Settlement gains were recognized as one of the pension plan's lump-sum payments to retirees with insignificant balances exceeded the sum of the service cost and interest cost recognized. The gain is the recognition of a portion of its accumulated other comprehensive income related to that plan.

Pension and Other Post-Employment Benefits Adjustments

The following table shows the pre-tax change in other comprehensive loss (income) attributable to the components of net expense and the change in benefit obligation for CSX for pension and other post-employment benefits.



(Dollars in Millions)	Pension Benefits						Post-retirement Benefits
Components of Other Comprehensive	December			December			December			December
Loss (Income)	2016			2015			2016			2015
Recognized in the balance sheet
Losses (Gains)	$	38		$	60		$	(22	)	$	(7	)
Expense (Income) recognized in the income statement
Amortization of net losses ^(a)	$	48		$	70		$	3		$	4
Settlement gain	(1		)	(2		)	—			—
Amortization of prior service costs	—			—			—			(1		)


(a)	Amortization of net losses estimated to be expensed for 2017 is approximately $43 million for pension benefits.

NOTE 8. Employee Benefit Plans, continued

As of December 2016, the balances of pre-tax amounts to be amortized that are included in accumulated other comprehensive loss (a component of shareholders’ equity) are as follows:



	Pension Benefits		Post-retirement Benefits
Losses	$	891	$	24
Prior Service Costs (Credits)	—		—
Total	$	891	$	24

Assumptions

The expected long-term average rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for benefits included in the projected benefit obligation. In estimating that rate, the Company gives appropriate consideration to the returns being earned by the plan assets in the funds and the rates of return expected to be available for reinvestment as well as the current and projected asset mix of the funds. Management balances market expectations obtained from various investment managers and economists with both market and actual plan historical returns to develop a reasonable estimate of the expected long-term rate of return on assets. This assumption is reviewed annually and adjusted as deemed appropriate.

In 2017, the Company will measure the service cost and interest cost components of the net pension and post-retirement benefits expense by using individual spot rates matched with separate cash flows for each future year instead of a single weighted-average discount rate approach, which has been used in prior years.

The Company made this change to improve the correlation between projected pension and post-retirement benefit obligation cash flows and the corresponding spot discount rates and to provide a more precise measurement of service and interest costs. Under the spot rate approach, individual spot discount rates along the same high-quality corporate bonds yield curve used to measure the pension and post-retirement benefit obligations are applied to the relevant projected cash flows at the relevant maturity. The use of the spot rate approach does not affect the measurement of the pension and post-retirement benefits obligations. The Company accounted for this change on a prospective basis as a change in accounting estimate. For 2017, the Company estimates the adoption of the spot rate approach will decrease net pension and post-retirement benefits expense by approximately $25 million compared to the approach applicable in prior years.

NOTE 8. Employee Benefit Plans, continued

The weighted averages of assumptions used by the Company to value its pension and post-retirement obligations were as follows:



	Pension Benefits					Post-retirement Benefits
	2016			2015		2016		2015
Expected Long-term Return on Plan Assets:
Benefit Cost for Current Plan Year	7.00	%		7.25	%	N/A		N/A
Benefit Cost for Subsequent Plan Year	6.75	%		7.00	%	N/A		N/A

Discount Rates:
Benefit Cost for Plan Year	4.30	%		4.00	%	3.85	%	3.60	%
Benefit Obligation at End of Plan Year	4.08	%	^(a)	4.30	%	3.71	%	3.85	%

Salary Scale Inflation	4.60	%		4.60	%	N/A		N/A


(a)	This weighted average discount rate represents the single equivalent discount rate that would result in the same projected benefit obligation as calculated under the spot rate approach for all pension plans and is presented for purposes of comparison across years.

The impact of the health care cost trend rate is immaterial to the post-retirement benefit cost and obligation due to the plan's health reimbursement arrangement that covers Medicare-eligible retirees.

Other Plans

Under collective bargaining agreements, the Company participates in a multi-employer benefit plan, which provides certain post-retirement health care and life insurance benefits to eligible contract employees. Premiums under this plan are expensed as incurred and amounted to $35 million, $32 million and $37 million in 2016, 2015 and 2014, respectively.

The Company maintains savings plans for virtually all full-time salaried employees and certain employees covered by collective bargaining agreements. Expense associated with these plans was $35 million, $36 million and $41 million for 2016, 2015 and 2014, respectively.