Benefit Plans

Pension plans. The Corporation had a noncontributory qualified defined benefit pension plan that covered all eligible legacy FirstMerit employees vested in the pension plan as of December 31, 2006 (“FirstMerit Pension Plan”). The FirstMerit Pension Plan was frozen for nonvested employees and closed to new entrants after December 31, 2006. Effective December 31, 2012, the FirstMerit Pension Plan was frozen for vested employees resulting in no benefits accruing after December 31, 2012. Employees will have an accrued benefit which will be paid upon retirement.

Certain former Citizens’ employees were covered by a cash balance defined benefit pension plan after the Acquisition Date through December 31, 2013 (“Citizens Pension Plan”). Effective December 31, 2006, the Citizens Pension Plan was frozen, preserving prior earned benefits but discontinuing the accrual of future benefits.

As of December 31, 2013, the Corporation adopted one noncontributory qualified defined pension plan covering all eligible FirstMerit and former Citizens employees, with the FirstMerit Pension Plan being the surviving plan. The Citizens Pension Plan ceased to exist after December 31, 2013. The plan assets of the FirstMerit Pension Plan and the Citizens Pension Plan were combined and invested in a single trust as of December 31, 2013. Benefits remain frozen in the combined plan with the unique benefit structure under each of the FirstMerit and Citizens Pension Plans retained in the combined plan.

A supplemental nonqualified, nonfunded pension plan for certain officers is also maintained and is being provided for by charges to earnings sufficient to meet the projected benefit obligation. The pension cost for this plan is based on substantially the same actuarial methods and economic assumptions as those used for the FirstMerit Pension Plan. On December 18, 2013, the FirstMerit Corporation Amended and Restated Supplemental Executive Retirement Plan was amended to freeze the benefit payable to the Corporation’s Chairman, President and Chief Executive Officer (“CEO”) at the level of the benefit accrued by the CEO under the plan as of November 30, 2013. Subsequent increases or decreases in the CEO’s compensation nor any changes in circumstances will cause any increase or decrease in the amount payable to the CEO under this plan.

Postretirement medical and life insurance plan. The Corporation also sponsors a benefit plan that provided postretirement medical and life insurance for retired employees (“FirstMerit Postretirement Plan”). The Corporation’s medical contribution was limited to 200% of the 1993 level for employees who retire after January 1, 1993.

Effective March 1, 2009, the Corporation discontinued the subsidy for retiree medical for current eligible active employees. Eligible employees who retired on or prior to March 1, 2009, were offered subsidized retiree medical coverage until age 65. Employees who retired after March 1, 2009, do not receive a Corporation subsidy toward retiree medical coverage.

Effective January 1, 2012, the FirstMerit Postretirement Plan was amended to cap the Corporation’s subsidy on retiree medical costs. Any cost incurred over the cap will be the responsibility of the retiree.

Effective January 1, 2016, the FirstMerit Postretirement Plan was amended to cap the life insurance benefits for all retirees at $10,000.

Employer-provided subsidies under the postretirement medical plan will be discontinued after 2018. As a result, a three-year sunset of this subsidized coverage is reflected in the December 31, 2015 disclosures.

Postretirement medical and life insurance plans were also maintained for certain former Citizens employees after the Acquisition Date through December 31, 2013, (“Citizens Postretirement Plan”). Citizens’ Postretirement Plan provided postretirement health and dental care to full-time employees who retired with eligibility for coverage based on historical plan terms.

As of December 31, 2013, the Corporation adopted one postretirement plan covering all eligible FirstMerit and former Citizens employees, with the FirstMerit Postretirement Plan being the surviving plan. The Citizens Postretirement Plan ceased to exist after December 31, 2013, and future benefits to the existing participants of the Citizens Postretirement Plan will be provided under the FirstMerit Postretirement Plan. The Corporation reserves the right to terminate or amend the FirstMerit Postretirement Plan at any time.

Other employee benefits. FirstMerit’s Amended and Restated Executive Deferred Compensation Plan (“FirstMerit Deferred Compensation Plan”) allows participating executives to elect to receive incentive compensation payable with respect to any year in whole Common Stock or cash, or to elect to defer receipt of any incentive compensation otherwise payable with respect to any year in increments of 1%. An account is maintained in the name of each participant and is credited with cash or Common Stock equal to the number of shares that could have been purchased with the amount of any compensation so deferred, at the closing price of the Common Stock on the day as of which the share account is so credited. The deferred compensation liability at December 31, 2015, and 2014, was $18.6 million and $19.0 million, respectively, and is included in accrued taxes, expenses and other liabilities on the accompanying Consolidated Balance Sheet.

Savings plans. The Corporation maintains a retirement savings plan under Section 401(k) of the Internal Revenue Code of 1986, as amended, covering substantially all full-time and part-time employees beginning in the quarter following three months of continuous employment (“FirstMerit 401(k) Plan”). For the years ended December 31, 2015 and 2014, the employer’s matching contribution to the FirstMerit 401(k) Plan was 100% on the first 3% and then 50% on the next 2% of the employee’s qualifying salary. Contributions made by the Corporation to the FirstMerit 401(k) Plan were $7.6 million for 2015, $7.7 million in 2014, and $4.4 million in 2013. Matching contributions vest in accordance with plan specifications.

From the Acquisition Date through the close of business December 31, 2013, eligible Citizens employees who were employed by the Corporation continued to be covered by an employee savings plan under Section 401(k) ("Citizens 401(k) Plan"). Contributions to the Citizens 401(k) Plan were matched 50% on the first 2% of salary deferred and 25% on the next 6% deferred. The Corporation contributed $1.1 million to the Citizens 401(k) Plan from Acquisition Date through December 31, 2013. The Citizens 401(k) Plan was merged with the FirstMerit 401(k) Plan as of close of business December 31, 2013. The plan terms of the merged plans are substantially the same as the FirstMerit 401(k) Plan.

The Corporation maintained a qualified defined contribution plan known as Retirement Investment Plan through December 31, 2012. Effective with the termination of this plan as of January 1, 2013, the Corporation will provide, for a five-year period, a transition contribution equal to 3% of an employee’s qualifying salary to all eligible plan participants that have earned 60 age-plus-service points, as of December 31, 2012. This transition contribution totaled $0.9 million and $0.7 million for the years ended December 31, 2015 and December 31, 2014, respectively.

The combined components of net periodic pension and postretirement benefits and other amounts recognized in AOCI for the Corporation's pension and postretirement benefit plans as of December 31, 2015, 2014 and 2013, are as follows:



	Pension Benefits									Postretirement Benefits
(In thousands)	2015			2014			2013			2015			2014			2013
Net periodic cost consists of:
Service cost	$	830		$	728		$	2,339		$	165		$	65		$	99
Interest cost	14,069			14,337			12,814			575			655			563
Expected return on plan assets	(15,607		)	(16,035		)	(14,938		)	—			—			—
Amortization of prior service cost/(credit)	2,279			2,599			467			(639		)	(468		)	(468		)
Amortization of actuarial (gains)/losses	4,227			2,930			4,693			325			236			268
Settlement / curtailment income	—			—			(524		)	—			—			—
Net periodic cost (benefit)	5,798			4,559			4,851			426			488			462
Other changes in plan assets and benefit obligations recognized in Other comprehensive income:
Current year actuarial losses/(gains)	7,987			49,488			(47,257		)	(8,103		)	64			(682		)
Amortization of actuarial gains/(losses)	(4,227		)	(2,930		)	(4,169		)	(325		)	(236		)	(268		)
Amortization of prior service (cost)/credit	(2,279		)	(2,599		)	(467		)	639			468			468
Total recognized in AOCI, before income taxes	1,481			43,959			(51,893		)	(7,789		)	296			(482		)
Total recognized in net periodic cost and AOCI	$	7,279		$	48,518		$	(47,042	)	$	(7,363	)	$	784		$	(20	)

A measurement date of December 31 is used for plan assets and benefit obligations. The following table sets forth a reconciliation of the changes in the projected benefit obligation for the Corporation’s pension and postretirement benefit plans as of December 31, 2015, and 2014, as well as the change in plan assets for the Corporation’s qualified pension plans:



	Pension Benefits						Postretirement Benefits
(In thousands)	2015			2014			2015			2014
Accumulated benefit obligation, end of year	$	339,661		$	354,402
Change in projected benefit obligation:
Projected benefit obligation, beginning of year	355,642			308,834			$	15,164		$	15,544
Service cost	830			728			165			65
Interest cost	14,069			14,337			575			655
Plan amendments	—			—			(7,657		)	(1,979		)
Participant contributions	—			—			1,805			1,851
Actuarial (gains)/losses and change in assumptions	(10,469		)	50,115			(446		)	2,046
Benefits paid	(19,252		)	(18,372		)	(2,765		)	(3,018		)
Projected benefit obligation, end of year	$	340,820		$	355,642		$	6,841		$	15,164
Change in plan assets, at fair value:
Fair value of plan assets, beginning of year	$	257,355		$	257,510		$	—		$	—
Actual return on plan assets	(2,849		)	16,663			—			—
Participant contributions	—			—			1,805			1,851
Employer contributions	1,527			1,554			960			1,167
Benefits paid	(19,252		)	(18,372		)	(2,765		)	(3,018		)
Fair value of plan assets, end of year	$	236,781		$	257,355		$	—		$	—
Funded status ⁽¹⁾	(104,039		)	(98,287		)	(6,841		)	(15,164		)
Amounts recognized in AOCI before income taxes:
Prior service cost (credit)	$	308		$	2,587		$	(12,389	)	$	(5,370	)
Net actuarial loss	103,477			99,715			4,364			5,138
Amount recognized in AOCI	$	103,785		$	102,302		$	(8,025	)	$	(232	)

(1) The Corporation recognizes the underfunded status of the plans in accrued taxes, expenses and other liabilities on the Consolidated Balance Sheet.

As indicated in the table above, the benefit obligation and accumulated benefit obligation for all of the Corporation’s pension plans were in excess of the fair value of plan assets.

Actuarial assumptions. The actuarial assumptions used to determine year end obligations for the Corporation’s pension and postretirement plans were as follows:



Weighted-average assumptions for year end obligations	2015		2014		2013
Discount rate
Qualified pensions	4.57	%	4.19	%	4.99	%
Nonqualified pensions	3.99	%	3.61	%	4.12	%
Postretirement medical benefits, FirstMerit’s plan	1.76	%	3.50	%	4.01	%
Postretirement medical benefits, Citizens’ plan	1.77	%	3.61	%	3.98	%
Postretirement life insurance benefits	4.79	%	4.36	%	5.08	%
Expected long-term rate of return	6.00	%	6.50	%	6.75	%
Rate of compensation increase
Qualified pensions	na		na		na
Nonqualified pensions	3.75	%	3.75	%	3.75	%
Assumed health care cost trend rate, pre-65 ^{(1) (2)}
Initial trend	na		7.00	%	7.50	%
Ultimate trend	na		5.00	%	5.00	%
Year ultimate trend reached	na		2019		2019
Assumed health care cost trend rate, post-65^{(1) (2)}
Initial trend	na		11.00	%	11.50	%
Ultimate trend	na		5.00	%	5.00	%
Year ultimate trend reached	na		2027		2027
Prescription Drugs ⁽²⁾
Initial trend	na		7.00	%	7.50	%
Ultimate trend	na		5.00	%	5.00	%
Year ultimate trend reached	na		2019		2019

(1) The health care cost trend assumptions relate only to the postretirement benefit plans. Increasing or decreasing the assumed health care cost trend rates by one percentage point each future year would not have a material impact on total service and interest cost or the year end benefit obligation.

(2) Employer-provided subsidies under the postretirement medical plan will be discontinued after 2018. As a result, a three-year sunset of this subsidized coverage is reflected in the December 31, 2015 disclosures. Since employer subsidies are not expected to change from current levels, health care trend rates no longer have any impact on the accounting liabilities.

The actuarial assumptions used as of the beginning of the year to determine the net periodic costs for the Corporation’s pension and postretirement plans were as follows:



Weighted-average assumptions for benefit cost at beginning of year	2015		2014		2013
Discount rate
Qualified pension	4.19	%	4.99	%	4.21	%
Nonqualified pensions	3.61	%	4.12	%	4.21	%
Postretirement medical benefits	3.50	%	4.01	%	3.18	%
Postretirement life insurance benefits	4.36	%	5.08	%	4.30	%
Expected long-term rate of return	6.50	%	6.75	%	7.00	%
Rate of compensation increase
Qualified pension	na		na		na
Nonqualified pensions	3.75	%	3.75	%	3.75	%
Assumed health care cost trend rate, pre-65 ⁽¹⁾
Initial trend	7.00	%	7.50	%	8.00	%
Ultimate trend	5.00	%	5.00	%	5.00	%
Year ultimate trend reached	2019		2019		2019
Assumed health care cost trend rate, post-65⁽¹⁾
Initial trend	11.50	%	11.50	%	12.00	%
Ultimate trend	5.00	%	5.00	%	5.00	%
Year ultimate trend reached	2027		2027		2027
Prescription Drugs
Initial trend	7.50	%	7.50	%	8.00	%
Ultimate trend	5.00	%	5.00	%	5.00	%
Year ultimate trend reached	2019		2019		2019

The discount rates are determined independently for each plan and reflect the market rate for high-quality fixed income debt instruments, that are rated double-A or higher by a recognized ratings agency.

The rate of return on plan assets is a long-term assumption established by considering historic plan asset returns and anticipated returns of the asset classes invested in by the pension plan and the allocation strategy currently in place among those classes. The expected return on equities was computed using a valuation framework, which projected future returns based on current equity valuations rather than historical returns. Due to active management of the plan’s assets, the return on the plan equity investments historically has exceeded market averages. Management estimated the rate by which the plan assets would outperform the market in the future based on historical experience adjusted for changes in asset allocation and expectations for overall future returns on equities compared to past periods.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 introduced a prescription drug benefit under Medicare, and provides a federal subsidy to sponsors of retiree healthcare benefit plans that offer “actuarially equivalent” prescription drug coverage to retirees. For the years ended December 31, 2015, 2014, and 2013, these subsidies did not have a material effect on the APBO and net postretirement benefit cost for the Corporation.

Net unrecognized actuarial gains or losses and prior service costs are recognized as an adjustment to accumulated other comprehensive income, net of tax, in the period they arise and, subsequently, recognized as a component of net periodic benefit cost over the average remaining service period of the active employees. The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost (credit) during the next fiscal year are as follows:



(In thousands)	Pension		Postretirement			Total
Prior service cost/(credit)	$	300	$	(2,542	)	$	(2,242	)
Actuarial net loss	3,321		981			4,302

At December 31, 2015, the FirstMerit Pension Plan was sufficiently funded under the requirements of ERISA, consequently, the Corporation was not required to make a minimum contribution to that plan in 2015. The Corporation expects to make a $35.0 million contribution to its qualified pension plan during 2016 but does not expect to make any significant discretionary contributions to its non-qualified or postretirement plans during 2016.

At December 31, 2015, the following table shows when benefit payments were expected to be paid. The expected benefits were estimated using the same assumptions as those used to calculate the benefit obligations in the preceding tables and includes benefits attributable to estimated future employee service.



(In thousands)
For the year ended December 31,	Pension		Postretirement
2016	$	31,328	$	982
2017	25,366		903
2018	24,653		843
2019	21,567		225
2020	19,463		228
2021 through 2025	95,975		1,210

FirstMerit Pension Plan Investment Policy and Strategy. The FirstMerit Pension Plan invests in equities and other return-seeking assets such as real assets, as well as liability-hedging assets, primarily fixed income. The Investment Policy recognizes that the plan’s asset return requirements and risk tolerances will change over time. The Corporation utilizes a dynamic investment policy, whereby the allocation to return-seeking assets and liability-hedging assets is determined by comparing plan assets to the plan liabilities. As the plan’s funded ratio status improves, the allocation to liability-hedging assets will increase.



Dynamic Investment Policy Schedule
Return-Seeking (and Diversification) Allocation Strategy
Funded Ratio	Minimum	Target	Maximum
≤97%	36%	40%	44%
98%	34%	38%	42%
99%	31%	35%	39%
100%	30%	33%	36%
101%	28%	31%	34%
102%	26%	29%	32%
103%	23%	26%	29%
104%	21%	24%	27%
105%	18%	21%	24%
106%	16%	18%	20%
107%	12%	14%	16%
≥108%	8%	10%	12%

The weighted-average allocations for the FirstMerit Pension Plan as of December 31, 2015 and 2014, by asset category, are as follows:



	Percentage of Plan Assets on Measurement Date
	December 31,
Asset Category	2015		2014
Cash and domestic money market funds	1.95	%	1.49	%
U.S. Treasury obligations	2.40	%	1.97	%
U.S. Government agencies	1.08	%	1.12	%
Corporate bonds	2.74	%	2.79	%
Common stocks	14.30	%	13.54	%
Equity mutual funds	17.61	%	18.85	%
Fixed income mutual funds	49.62	%	50.11	%
Foreign mutual funds	10.30	%	10.13	%
	100.00	%	100.00	%

The following is a description of the valuation methodologies used to measure assets held by the FirstMerit Pension Plans at fair value.


•	Domestic and foreign money market funds: Valued at quoted prices as reported on the active market in which the money market funds are traded.


•	United States government securities, United States government agency issues and corporate bonds: Valued using independent evaluated prices which are based on observable inputs, such as available trade information, spreads, bids and offers, and United States Treasury curves.


•	Common stocks: Valued at the closing price reported on the active market in which the individual securities are traded.


•	Registered equity, fixed income and foreign mutual funds: Valued at quoted prices as reported on the active market in which the securities are traded.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Corporation believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of financial instruments could result in a different fair value measurement at the reporting date.

The following table sets forth by level, within the fair value hierarchy, the FirstMerit Pension Plan’s assets at fair value as of December 31, 2015:



(In thousands)	Level 1		Level 2		Level 3		Total
Domestic money market funds	$	4,620	$	—	$	—	$	4,620
United States government securities	—		5,675		—		5,675
United States government agency issues	—		2,588		—		2,588
Corporate bonds	—		6,479		—		6,479
Common stocks	33,851		—		—		33,851
Equity mutual funds	41,706		—		—		41,706
Fixed income mutual funds	117,485		—		—		117,485
Foreign mutual funds	24,377		—		—		24,377
Total assets at fair value	$	222,039	$	14,742	$	—	$	236,781