Benefit Plans

Subsidiaries of Altria Group, Inc. sponsor noncontributory defined benefit pension plans covering the majority of all employees of Altria Group, Inc. However, employees hired on or after a date specific to their employee group are not eligible to participate in these noncontributory defined benefit pension plans but are instead eligible to participate in a defined contribution plan with enhanced benefits. This transition for new hires occurred from October 1, 2006 to January 1, 2008. In addition, effective January 1, 2010, certain employees of UST and Middleton who were participants in noncontributory defined benefit pension plans ceased to earn additional benefit service under those plans and became eligible to participate in a defined contribution plan with enhanced benefits. Altria Group, Inc. and its subsidiaries also provide postretirement health care and other benefits to the majority of retired employees.

The plan assets and benefit obligations of Altria Group, Inc.’s pension plans and the benefit obligations of Altria Group, Inc.’s postretirement plans are measured at December 31 of each year. Altria Group, Inc.’s postretirement plans are not funded.

The discount rates for Altria Group, Inc.’s plans were based on a yield curve developed from a model portfolio of high-quality corporate bonds with durations that match the expected future cash flows of the pension and postretirement benefit obligations.

At December 31, 2015, Altria Group, Inc. changed the approach used to estimate the service and interest cost components of net periodic benefit costs for Altria Group, Inc.’s pension and postretirement plans. In 2015 and prior years, Altria Group, Inc. estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the pension and postretirement plans benefit obligations. Beginning in 2016, Altria Group, Inc. will use a spot rate approach in the estimation of these components of net periodic benefit costs by applying the specific spot rates along the yield curve to the relevant projected cash flows, as Altria Group, Inc. believes that this approach provides a more precise estimate of service and interest costs. Altria Group, Inc. is accounting for this change prospectively as a change in accounting estimate. This change will not affect the measurement of Altria Group, Inc.’s pension and postretirement benefit obligations as the change in the service and interest costs will be offset by a corresponding change in actuarial gains/losses.


▪	Obligations and Funded Status: The benefit obligations, plan assets and funded status of Altria Group, Inc.’s pension and postretirement plans at December 31, 2015 and 2014 were as follows:



	Pension						Postretirement
(in millions)	2015			2014			2015			2014
Change in benefit obligation:
Benefit obligation at beginning of year	$	8,330		$	7,137		$	2,613		$	2,317
Service cost	86			68			18			15
Interest cost	337			345			100			107
Benefits paid	(431		)	(410		)	(141		)	(132		)
Actuarial losses (gains)	(317		)	1,190			(192		)	306
Other	6			—			(6		)	—
Benefit obligation at end of year	8,011			8,330			2,392			2,613
Change in plan assets:
Fair value of plan assets at beginning of year	7,297			7,077			—			—
Actual return on plan assets	(188		)	615			—			—
Employer contributions	28			15			—			—
Benefits paid	(431		)	(410		)	—			—
Fair value of plan assets at end of year	6,706			7,297			—			—
Funded status at December 31	$	(1,305	)	$	(1,033	)	$	(2,392	)	$	(2,613	)
Amounts recognized in Altria Group, Inc.’s consolidated balance sheets were as follows:
Other accrued liabilities	$	(28	)	$	(21	)	$	(147	)	$	(152	)
Accrued pension costs	(1,277		)	(1,012		)	—			—
Accrued postretirement health care costs	—			—			(2,245		)	(2,461		)
	$	(1,305	)	$	(1,033	)	$	(2,392	)	$	(2,613	)

The table above presents the projected benefit obligation for Altria Group, Inc.’s pension plans. The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $7.7 billion and $7.9 billion at December 31, 2015 and 2014, respectively.

At December 31, 2015 and 2014, the accumulated benefit obligations were in excess of plan assets for all pension plans.

The Patient Protection and Affordable Care Act (“PPACA”), as amended by the Health Care and Education Reconciliation Act of 2010, was signed into law in March 2010. The PPACA mandates health care reforms with staggered effective dates from 2010 to 2020, including the imposition of an excise tax on high cost health care plans effective in 2020. The additional accumulated postretirement liability resulting from the PPACA, which is not material to Altria Group, Inc., has been included in Altria Group, Inc.’s accumulated postretirement benefit obligation at December 31, 2015 and 2014. Given the complexity of the PPACA and the extended time period during which implementation is expected to occur, future adjustments to Altria Group, Inc.’s accumulated postretirement benefit obligation may be necessary.

The following assumptions were used to determine Altria Group, Inc.’s pension benefit obligations at December 31:



	2015		2014
Discount rate	4.4	%	4.1	%
Rate of compensation increase	4.0		4.0

The following assumptions were used to determine Altria Group, Inc.’s postretirement benefit obligations at December 31:



	2015		2014
Discount rate	4.4	%	4.0	%
Health care cost trend rate assumed for next year	6.5		7.0
Ultimate trend rate	5.0		5.0
Year that the rate reaches the ultimate trend rate	2019		2019


▪	Components of Net Periodic Benefit Cost: Net periodic benefit cost consisted of the following for the years ended December 31, 2015, 2014 and 2013:



	Pension									Postretirement
(in millions)	2015			2014			2013			2015			2014			2013
Service cost	$	86		$	68		$	86		$	18		$	15		$	18
Interest cost	337			345			314			100			107			99
Expected return on plan assets	(539		)	(518		)	(493		)	—			—			—
Amortization:
Net loss	234			147			271			43			22			51
Prior service cost (credit)	7			10			10			(39		)	(43		)	(45		)
Termination and settlement	8			—			7			—			—			—
Net periodic benefit cost	$	133		$	52		$	195		$	122		$	101		$	123

The amounts included in termination and settlement in the table above were comprised of the following changes:



(in millions)	2015		2013
Benefit obligation	$	—	$	1
Other comprehensive earnings/losses:
Net loss	8		6
	$	8	$	7

At December 31, 2014, Altria Group, Inc. updated its mortality assumptions to reflect longer life expectancy for its pension plan and postretirement plan participants,

resulting in an increase of approximately $60 million and $10 million to its 2015 pre-tax pension and postretirement net periodic benefit cost, respectively.

The estimated net loss and prior service cost (credit) that are expected to be amortized from accumulated other comprehensive losses into net periodic benefit cost during 2016 is as follows:



(in millions)	Pension		Postretirement
Net loss	$	183	$	30
Prior service cost (credit)	5		(40		)

The following assumptions were used to determine Altria Group, Inc.’s net periodic benefit cost for the years ended December 31:



	Pension						Postretirement
	2015		2014		2013		2015		2014		2013
Discount rate	4.1	%	4.9	%	4.0	%	4.0	%	4.8	%	3.9	%
Expected rate of return on plan assets	8.0		8.0		8.0		—		—		—
Rate of compensation increase	4.0		4.0		4.0		—		—		—
Health care cost trend rate	—		—		—		7.0		7.0		7.5

Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plans. A one-percentage-point change in assumed health care cost trend rates would have had the following effects as of December 31, 2015:



	One-Percentage-Point Increase		One-Percentage-Point Decrease
Effect on total of postretirement service and interest cost	6.8	%	(5.8	)%
Effect on postretirement benefit obligation	7.5	%	(6.1	)%

▪Defined Contribution Plans: Altria Group, Inc. sponsors deferred profit-sharing plans covering certain salaried, non-union and union employees. Contributions and costs are determined generally as a percentage of earnings, as defined by the plans. Amounts charged to expense for these defined contribution plans totaled $85 million, $82 million and $80 million in 2015, 2014 and 2013, respectively.

▪Pension Plan Assets: Altria Group, Inc.’s pension plans investment strategy is based on an expectation that equity securities will outperform debt securities over the long term. Altria Group, Inc. believes that it implements the investment strategy in a prudent and risk-controlled manner, consistent with the fiduciary requirements of the Employee Retirement Income Security Act of 1974, by investing retirement plan assets in a well-diversified mix of equities, fixed income and other securities that reflects the impact of the demographic mix of plan participants on the benefit obligation using a target asset allocation between equity securities and fixed income investments of 55%/45%. The composition of Altria Group, Inc.’s plan assets at December 31, 2015 was broadly characterized as an allocation between equity securities (56%), corporate bonds (32%), U.S. Treasury and foreign government securities (8%) and all other types of investments (4%). Virtually all pension assets can be used to make monthly benefit payments.

Altria Group, Inc.’s pension plans investment objective is accomplished by investing in U.S. and international equity index strategies that are intended to mirror indices such as the Standard & Poor’s 500 Index, Russell Small Cap Completeness Index, Research Affiliates Fundamental Index (“RAFI”) Low Volatility U.S. Index, and Morgan Stanley Capital International (“MSCI”) Europe, Australasia, and the Far East (“EAFE”) Index. Altria Group, Inc.’s pension plans also invest in actively managed international equity securities of large, mid and small cap companies located in developed and emerging markets, as well as long duration fixed income securities that primarily include corporate bonds of companies from diversified industries. The allocation to below investment grade securities represented 18% of the fixed income holdings or 8% of total plan assets at December 31, 2015. The allocation to emerging markets represented 4% of the equity holdings or 2% of total plan assets at December 31, 2015. The allocation to real estate and private equity investments was immaterial at December 31, 2015.

Altria Group, Inc.’s pension plans risk management practices include ongoing monitoring of asset allocation, investment performance and investment managers’ compliance with their investment guidelines, periodic rebalancing between equity and debt asset classes and annual actuarial re-measurement of plan liabilities.

Altria Group, Inc.’s expected rate of return on pension plan assets is determined by the plan assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class. The forward-looking estimates are consistent with the overall long-term averages exhibited by returns on equity and fixed income securities.

The fair values of Altria Group, Inc.’s pension plan assets by asset category at December 31, 2015 and 2014 were as follows:



	2015								2014
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Common/collective trusts:
U.S. large cap	$	—	$	1,762	$	—	$	1,762	$	—	$	1,870	$	—	$	1,870
U.S. small cap	—		360		—		360		—		442		—		442
International developed markets	—		78		—		78		—		79		—		79
U.S. and foreign government securities or their agencies:
U.S. government and agencies	—		331		—		331		—		296		—		296
U.S. municipal bonds	—		102		—		102		—		124		—		124
Foreign government and agencies	—		252		—		252		—		281		—		281
Corporate debt instruments:
Above investment grade	—		1,660		—		1,660		—		1,765		—		1,765
Below investment grade and no rating	—		502		—		502		—		527		—		527
Common stock:
International equities	907		—		2		909		1,000		—		1		1,001
U.S. equities	605		—		—		605		556		—		—		556
Registered investment companies	58		—		—		58		63		113		—		176
Other, net	16		58		13		87		74		91		15		180
Total investments at fair value, net	$	1,586	$	5,105	$	15	$	6,706	$	1,693	$	5,588	$	16	$	7,297

Level 3 holdings and transactions were immaterial to total plan assets at December 31, 2015 and 2014.

For a description of the fair value hierarchy and the three levels of inputs used to measure fair value, see Note 2. Summary of Significant Accounting Policies.

Following is a description of the valuation methodologies used for investments measured at fair value.

▪

Common/Collective Trusts: Common/collective trusts consist of funds that are intended to mirror indices such as Standard & Poor’s 500 Index, Russell Small Cap Completeness Index and MSCI EAFE Index. They are valued on the basis of the relative interest of each participating investor in the fair value of the underlying assets of each of the respective common/collective trusts. The underlying assets are valued based on the net asset value (“NAV”), which is provided by the investment account manager as a practical expedient to estimate fair value.

▪

U.S. and Foreign Government Securities: U.S. and foreign government securities consist of investments in Treasury Nominal Bonds and Inflation Protected Securities and municipal securities. Government securities are valued at a price that is based on a compilation of primarily observable market information, such as broker quotes. Matrix pricing, yield curves and indices are used when broker quotes are not available.


▪	Corporate Debt Instruments: Corporate debt instruments are valued at a price that is based on a compilation of primarily observable market information, such as broker quotes. Matrix pricing, yield curves and indices are used when broker quotes are not available.


▪	Common Stock: Common stocks are valued based on the price of the security as listed on an open active exchange on last trade date.

▪

Registered Investment Companies: Investments in mutual funds sponsored by a registered investment company are valued based on exchange listed prices and are classified in Level 1. Registered investment company funds that are designed specifically to meet Altria Group, Inc.’s pension plans investment strategies, but are not traded on an active market, are valued based on the NAV of the underlying securities and are classified in Level 2. The NAV is provided by the investment account manager as a practical expedient to estimate fair value.

▪Cash Flows: Altria Group, Inc. makes contributions to the pension plans to the extent that the contributions are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under IRS regulations. Currently, Altria Group, Inc. anticipates making employer contributions to its pension plans of approximately $30 million to $75 million in 2016 based on current tax law. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest rates.

Estimated future benefit payments at December 31, 2015 were as follows:



(in millions)	Pension		Postretirement
2016	$	436	$	147
2017	440		149
2018	442		149
2019	437		148
2020	446		144
2021-2025	2,348		686

Comprehensive Earnings/Losses

The amounts recorded in accumulated other comprehensive losses at December 31, 2015 consisted of the following:



(in millions)	Pension			Post- retirement			Post- employment			Total
Net loss	$	(2,805	)	$	(588	)	$	(108	)	$	(3,501	)
Prior service (cost) credit	(22		)	231			—			209
Deferred income taxes	1,101			141			40			1,282
Amounts recorded in accumulated other comprehensive losses	$	(1,726	)	$	(216	)	$	(68	)	$	(2,010	)

The amounts recorded in accumulated other comprehensive losses at December 31, 2014 consisted of the following:



(in millions)	Pension			Post- retirement			Post- employment			Total
Net loss	$	(2,637	)	$	(823	)	$	(122	)	$	(3,582	)
Prior service (cost) credit	(23		)	264			—			241
Deferred income taxes	1,037			218			46			1,301
Amounts recorded in accumulated other comprehensive losses	$	(1,623	)	$	(341	)	$	(76	)	$	(2,040	)

The movements in other comprehensive earnings/losses during the year ended December 31, 2015 were as follows:



(in millions)	Pension			Post- retirement			Post- employment			Total
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Net loss	$	234		$	43		$	19		$	296
Prior service cost/credit	7			(39		)	—			(32		)
Other expense:
Net loss	8			—			—			8
Deferred income taxes	(96		)	(2		)	(7		)	(105		)
	153			2			12			167
Other movements during the year:
Net loss	(410		)	192			(5		)	(223		)
Prior service cost/credit	(6		)	6			—			—
Deferred income taxes	160			(75		)	1			86
	(256		)	123			(4		)	(137		)
Total movements in other comprehensive earnings/losses	$	(103	)	$	125		$	8		$	30

The movements in other comprehensive earnings/losses during the year ended December 31, 2014 were as follows:



(in millions)	Pension			Post- retirement			Post- employment			Total
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Net loss	$	147		$	22		$	18		$	187
Prior service cost/credit	10			(43		)	—			(33		)
Deferred income taxes	(61		)	8			(7		)	(60		)
	96			(13		)	11			94
Other movements during the year:
Net loss	(1,093		)	(306		)	(12		)	(1,411		)
Deferred income taxes	425			120			5			550
	(668		)	(186		)	(7		)	(861		)
Total movements in other comprehensive earnings/losses	$	(572	)	$	(199	)	$	4		$	(767	)

The movements in other comprehensive earnings/losses during the year ended December 31, 2013 were as follows:



(in millions)	Pension			Post- retirement			Post- employment			Total
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Net loss	$	271		$	51		$	18		$	340
Prior service cost/credit	10			(45		)	—			(35		)
Other expense:
Net loss	6			—			—			6
Deferred income taxes	(111		)	(2		)	(7		)	(120		)
	176			4			11			191
Other movements during the year:
Net loss	1,218			327			23			1,568
Prior service cost/credit	(7		)	(2		)	—			(9		)
Deferred income taxes	(470		)	(129		)	(10		)	(609		)
	741			196			13			950
Total movements in other comprehensive earnings/losses	$	917		$	200		$	24		$	1,141