Employee Benefit Plans

Pension Plans

In conjunction with the acquisition of G&K, Cintas assumed G&K's noncontributory defined benefit pension plan (the Pension Plan) that covers substantially all G&K employees who were employed as of July 1, 2005, except certain employees who were covered by union-administered plans. Benefits are based on the number of years of service and each employee’s compensation near retirement. We will make annual contributions to the Pension Plan consistent with federal funding requirements. The Pension Plan was frozen by G&K effective December 31, 2006. Future growth in benefits will not occur beyond this date. Applicable accounting standards require that the Consolidated Balance Sheet reflect the funded status of the pension plan. The funded status of the Pension Plan is measured as the difference between the plan assets at fair value and the projected benefit obligation. We do not expect to make any contributions to the Pension Plan over the next 12 months that exceed the fair value of plan assets as of May 31, 2017. The net pension liability at May 31, 2017 is included in the Long-Term Accrued Liabilities on the Consolidated Balance Sheet. Unrecognized differences between actual amounts and estimates based on actuarial assumptions are included in Accumulated Other Comprehensive Income in our Consolidated Balance Sheet. The difference between actual amounts and estimates based on actuarial assumptions are recognized in other comprehensive income in the period in which they occur. The estimated amortization from accumulated other comprehensive income into net periodic benefit cost during fiscal year 2018 is immaterial.

Obligations and Funded Status at May 31, 2017



Change in benefit obligation:
Projected benefit obligation, beginning of year	$	—
Projected benefit obligation acquired in G&K acquisition	84,553
Interest cost	562
Actuarial loss	2,750
Benefits paid	(478		)
Projected benefit obligation, end of year	$	87,387

Change in plan assets:
Fair value of plan assets, beginning of year	$	—
Plan assets acquired in G&K acquisition	57,747
Actual return on plan assets	2,127
Benefits paid	(478		)
Fair value of plan assets, end of year	$	59,396

Funded status-net amount recognized	$	(27,991	)

The accrued benefit liability of $28.0 million was included in long-term accrued liabilities on the Consolidated Balance Sheet as of May 31, 2017. The unrecognized net actuarial loss of $1.2 million related to the Pension Plan was included in accumulated other comprehensive loss on the Consolidated Balance Sheet as of May 31, 2017.

Components of Net Periodic Benefit Cost



	2017⁽¹⁾
Interest cost	$	562
Expected return on assets	(590		)
Amortization of net loss	—
Net periodic benefit cost	$	(28	)

⁽¹⁾ Represents the net periodic benefit cost for the period subsequent to the acquisition of G&K on March 21, 2017 through May 31, 2017.

Assumptions

The following weighted average assumptions were used to determine benefit obligations for the Pension Plan at May 31, 2017:



Discount rate	3.79	%
Rate of compensation increase	N/A

The following weighted average assumptions were used to determine net periodic benefit cost for the Pension Plan for the fiscal year ended May 31, 2017:



Discount rate	4.00	%
Expected return on plan assets	5.40	%
Rate of compensation increase	N/A

Plan Assets

The target asset allocation and actual asset allocation of the Pension Plan at May 31, 2017 are as follows:



	Target Asset Allocation		Actual Asset Allocation
International equity	8.0	%	8.3	%
Large cap equity	26.0	%	26.3	%
Small cap equity	5.0	%	5.3	%
Absolute return strategy funds	16.0	%	16.2	%
Fixed income	45.0	%	43.6	%
Long/short equity fund	—	%	0.3	%
Total	100	%	100	%

Our investment committee, assisted by outside consultants, evaluates the objectives and investment policies concerning our long-term investment goals and asset allocation strategies. Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and investment return over the long term. To develop the expected long-term rate of return on asset assumptions, we consider the historical returns and future expectations of returns for each asset class, as well as the target asset allocation, changes in investments expenses and investment goals of the pension portfolio. This resulted in the selection of 5.40% expected return on plan assets for fiscal year 2017. The investment goals are (1) to meet or exceed the assumed actuarial rate of return over the long term within reasonable and prudent levels of risk, and (2) to preserve the real purchasing power of assets to meet future obligations. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives. Pension plan assets for our qualified pension plans are held in a trust for the benefit of the plan participants and are invested in a diversified portfolio of equity investments, fixed income investments and cash. Risk targets are established and monitored against acceptable ranges. All investment policies and procedures are designed to ensure that the plans' investments are in compliance with the Employee Retirement Income Security Act. Guidelines are established defining permitted investments within each asset class.

The implementation of the investment strategy discussed above is executed through a variety of investment types, including U.S. government securities, corporate debt and mutual funds. These investments are valued at the closing price reported on the active market on which the individual securities are traded.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following table presents the Pension Plan investments as of May 31, 2017 using the fair value hierarchy discussed in Note 1 entitled Significant Accounting Polices:



	(Level 1)		(Level 2)		(Level 3)		Total
Cash equivalents	$	629	$	—	$	—	$	629
U.S. government securities	1,874		3,401		—		5,275
Corporate debt	—		20,210		—		20,210
Mutual funds
U.S. securities	28,353		—		—		28,353
International securities	4,929		—		—		4,929
Total	$	35,785	$	23,611	$	—	$	59,396

We don't expect to make any contributions to the Pension Plan during the next 12 months.

Future changes in plan asset returns, assumed discount rates and various other factors related to the Pension Plan will impact future pension expense and liabilities. We cannot predict the impact of these changes in the future and any changes may have a material impact on our results of operations and financial position.

Estimated Future Benefit Payments

The following Pension Plan benefit payments are expected to be paid:



2018	$	2,966
2019	3,110
2020	3,317
2021	3,548
2022	3,686
2023 to 2027	20,423

Cintas administers a pension plan that was assumed in a previous acquisition and has historically been deemed immaterial for disclosure purposes. As of May 31, 2017 and 2016, the fair value of this pension plan's total assets was $7.1 million and $6.5 million, respectively and the projected benefit obligation was $7.5 million and $7.7 million, respectively. For the years ended May 31, 2017 and 2016, the net periodic benefit cost recorded for this plan was an expense of $0.1 million and income of $0.1 million, respectively.

Non-Contributory Retirement Plans

Cintas' Partners' Plan (the Plan) is a non-contributory profit sharing plan and Employee Stock Ownership Plan (ESOP) for the benefit of substantially all U.S. Cintas employee-partners who have completed one year of service. The Plan also includes a 401(k) savings feature covering substantially all U.S. employee-partners. The amounts of contributions to the Plan and ESOP, as well as the matching contribution to the 401(k), are made at the discretion of the Board of Directors. Total contributions, including Cintas' matching contributions, which approximate cost, were $47.5 million, $43.1 million and $38.4 million for the fiscal years ended May 31, 2017, 2016 and 2015, respectively.

Cintas has a non-contributory deferred profit sharing plan (DPSP), which covers substantially all Canadian employee-partners. In addition, a registered retirement savings plan (RRSP) is offered to those employees. The amounts of contributions to the DPSP, as well as the matching contribution to the RRSP, are made at the discretion of the Board of Directors. Total contributions, which approximate cost, were $1.8 million, $1.6 million and $1.5 million for the fiscal years ended May 31, 2017, 2016 and 2015, respectively.

Cintas has a supplemental executive retirement plan (SERP) subject to Section 409A of the Internal Revenue Code for the benefit of certain highly compensated Cintas employee-partners. The SERP allows participants to defer the receipt of compensation which would otherwise become payable to them. Matching contributions are made at the discretion of the Board of Directors. Total matching contributions were $6.9 million, $6.6 million and $6.1 million for the fiscal years ended May 31, 2017, 2016 and 2015, respectively.