Postemployment Benefits

Health and Welfare. Certain U.S. employees that have met age and service requirements are eligible for medical benefits and life insurance coverage during retirement. The retiree medical plan is contributory and provides benefits to retirees, their covered dependents and beneficiaries. The plan provides for annual adjustments to retiree contributions, and also contains, depending on the coverage selected, certain deductibles, co-payments, co-insurance, and coordination with Medicare. Certain management employees also maintain their status under a collective bargaining agreement, which permits them access to post-retirement medical under the multi-employer plan described below. The life insurance plan is non-contributory and covers union retirees only. The Company’s policy, in most cases, is to fund benefits payable under these plans as the obligations become due.

Postemployment Benefits. Mexican law requires that the Company provide certain postemployment benefits to its Mexican union and non-union employees. These plans provide statutorily calculated benefits which are payable upon retirement, death, disability, voluntary or involuntary termination of employees based on length of service.

During September 2010, the Company completed negotiations with the Mexican labor union. Among other matters resolved in these negotiations, the Company is not required to provide an incremental benefit to its union employees upon retirement. Previous to the agreement reached with the Mexican labor union, the Company had recorded a liability for an incremental retirement benefit which was based on various factors including retirement eligibility based on a combination of age and years of credited service and the employee’s salary at the time of retirement. The Company has no legal obligation to fund any benefit previously calculated under these factors.

The Company uses December 31 as the measurement date for its postemployment benefit obligations.

Net Periodic Benefit Cost, Plan Obligations and Funded Status

Components of the net cost (benefit) for these plans were as follows for the years ended December 31 (in millions):



	Health and Welfare									Postemployment Benefits
	2012			2011			2010			2012		2011			2010
Service cost	$	0.1		$	0.1		$	0.1		$	0.9	$	0.9		$	1.3
Interest cost	0.2			0.3			0.3			0.8		0.9			1.4
Actuarial (gain) loss (i)	0.1			1.6			0.8			3.1		0.8			(7.6		)
Foreign currency (gain) loss	—			—			—			0.6		(1.4		)	0.9
Prior service credit (ii)	(0.2		)	(0.2		)	(0.3		)	—		—			—
Net periodic cost (benefit) recognized	$	0.2		$	1.8		$	0.9		$	5.4	$	1.2		$	(4.0	)

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(i)	Net benefit costs above do not include a component for the amortization of actuarial gains or losses as the Company’s policy is to recognize such gains and losses immediately.


(ii)	During 2005, the Company revised its medical plan to exclude prescription drug coverage available under Medicare part D. This negative plan amendment generated an unrecognized prior service benefit of $2.3 million which is being amortized over the estimated remaining life of the affected participants of 9.5 years.

The following table reconciles the change in the benefit obligation, fair value of plan assets, change in the funded status, and the accrued benefit cost as of and for each of the years ended December 31 (in millions):



	Health and Welfare						Postemployment Benefits
	2012			2011			2012			2011
Benefit obligation at beginning of year	$	6.4		$	5.2		$	10.0		$	10.4
Service cost	0.1			0.1			0.9			0.9
Interest cost	0.2			0.3			0.8			0.9
Actuarial (gain) loss	0.1			1.6			3.1			0.8
Foreign currency (gain) loss	—			—			0.6			(1.4		)
Benefits paid, net of retiree contributions	(0.3		)	(0.8		)	(2.2		)	(1.6		)
Benefit obligation at end of year	6.5			6.4			13.2			10.0

Funded status	$	(6.5	)	$	(6.4	)	$	(13.2	)	$	(10.0	)

Assumptions

The assumptions used to determine benefit obligations and costs are selected based on current and expected market conditions. Discount rates are selected based on the rates on low risk government bonds with cash flows approximating the timing of expected benefit payments. The Mexico bond market is utilized for the postemployment obligation and the U.S. bond market is utilized for the U.S. health and welfare obligation.

Weighted average assumptions used to determine benefit obligations were as follows for the years ended December 31:



	Health and Welfare				Postemployment Benefits
	2012		2011		2012		2011
Discount rate	3.50	%	4.00	%	6.75	%	8.00	%
Rate of compensation increase	n/a		n/a		4.50	%	4.50	%

Weighted average assumptions used to determine net benefit cost for the periods were as follows for the years ended December 31:



	Health and Welfare				Postemployment Benefits
	2012		2011		2012		2011
Discount rate	4.00	%	5.25	%	8.00	%	8.25	%
Rate of compensation increase	n/a		n/a		4.50	%	4.50	%

The following table presents the assumed health care cost trends:



	2012		2011		2010
Health care trend rate for next year	8.00	%	8.50	%	9.00	%
Ultimate trend rate	5.00	%	5.00	%	5.00	%
Year that rate reaches ultimate rate	2029		2020		2020

Cash Flows

The following table presents benefit payments expected to be paid, which reflect expected future service, as appropriate, for each of the next five years and the aggregate five years thereafter (in millions):



Year	Health and Welfare		Postemployment Benefits
2013	$	0.5	$	0.8
2014	0.5		0.8
2015	0.5		0.9
2016	0.5		0.9
2017	0.4		1.0
2018-2022	1.9		6.7

Multi-Employer Plan. Under collective bargaining agreements, KCSR participates in a multi-employer benefit plan, which provides certain post-retirement health care and life insurance benefits to eligible union employees and certain retirees. Premiums under this plan are expensed as incurred and were $4.3 million, $4.6 million, and $4.2 million for the years ended December 31, 2012, 2011, and 2010, respectively.

401(k) and Profit Sharing Plan. The Company sponsors the KCS 401(k) and Profit Sharing Plan (the “401(k) plan”), whereby participants can choose to make contributions in the form of salary deductions pursuant to Section 401(k) of the Internal Revenue Code. The Company matches 401(k) contributions up to a maximum of 5% of compensation. The Company recognized expense of $2.3 million, $2.2 million and $1.8 million for the years ended December 31, 2012, 2011 and 2010, related to the KCS 401(k) and Profit Sharing Plan. The 401(k) plan includes the Company’s common stock as an investment option. The common stock is acquired by the 401(k) plan trustee through open market transactions of previously registered shares.