EMPLOYEE BENEFIT PLANS

Four qualified defined-benefit plans, one non-qualified defined-benefit plan, and seven defined-contribution retirement plans cover various employee groups of Alaska, Virgin America, McGee Air Services and Horizon.

The defined-benefit plans provide benefits based on an employee’s term of service and average compensation for a specified period of time before retirement. The qualified defined-benefit pension plans are closed to new entrants.

Accounting standards require recognition of the overfunded or underfunded status of an entity’s defined-benefit pension and other postretirement plan as an asset or liability in the consolidated financial statements and requires recognition of the funded status in AOCL.

Qualified Defined-Benefit Pension Plans

The Company’s four qualified defined-benefit pension plans are funded as required by the Employee Retirement Income Security Act of 1974. The defined-benefit plan assets consist primarily of marketable equity and fixed-income securities. The work groups covered by qualified defined-benefit pension plans include salaried employees, pilots, clerical, office, and passenger service employees, and mechanics and related craft employees. The Company uses a December 31 measurement date for these plans.

Weighted average assumptions used to determine benefit obligations:

The rates below vary by plan and related work group.



	2017	2016
Discount rates	3.69% to 3.78%	4.29% to 4.50%
Rate of compensation increases	2.11% to 3.00%	2.12% to 2.59%

Weighted average assumptions used to determine net periodic benefit cost:

The rates below vary by plan and related work group.



	2017	2016	2015
Discount rates	4.29% to 4.50%	4.55% to 4.69%	4.20%
Expected return on plan assets	5.50% to 6.00%	6.00% to 6.50%	6.50%
Rate of compensation increases	2.12% to 2.59%	2.06% to 2.65%	2.85% to 3.91%

The discount rates are determined using current interest rates earned on high-quality, long-term bonds with maturities that correspond with the estimated cash distributions from the pension plans. At December 31, 2017, the Company selected discount rates for each of the plans using a pool of higher-yielding bonds estimated to be more reflective of settlement rates, as management has taken steps to ultimately terminate or settle plans that are frozen and move toward freezing benefits in active plans in the future. In determining the expected return on plan assets, the Company assesses the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class is then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio.

Plan assets are invested in common commingled trust funds invested in equity and fixed income securities and in certain real estate assets. The target and actual asset allocation of the funds in the qualified defined-benefit plans, by asset category, are as follows:



	Target	2017		2016
Asset category:
Domestic equity securities	5% - 33%	25	%	30	%
Non-U.S. equity securities	1% - 16%	11	%	12	%
Fixed income securities	48% - 95%	59	%	53	%
Real estate	2% - 8%	4	%	5	%
Cash equivalents	0%	1	%	—	%
Plan assets		100	%	100	%

The Company’s investment policy focuses on achieving maximum returns at a reasonable risk for pension assets over a full market cycle. The Company determines the strategic allocation between equities, fixed income and real estate based on current funded status and other characteristics of the plans. As the funded status improves, the Company increases the fixed income allocation of the portfolio and decreases the equity allocation. Actual asset allocations are reviewed regularly and periodically rebalanced as appropriate.

Plan assets invested in common commingled trust funds are fair valued using the net asset values of these funds to determine fair value as allowed using the practical expediency method outlined in the accounting standards. Fair value estimates for real estate are calculated using the present value of expected future cash flows based on independent appraisals, local market conditions and current and projected operating performance.

Plan asset by fund category (in millions):



	2017		2016		Fair Value Hierarchy
Fund type:
U.S. equity market fund	$	515	$	545	1
Non-U.S. equity fund	226		218		1
Credit bond index fund	1,232		989		1
Plan assets in common commingled trusts	$	1,973	$	1,752
Real estate	97		91		(a)
Cash equivalents	13		3		1
Total plan assets	$	2,083	$	1,846


(a)	In accordance with Subtopic 820-10, certain investments that are measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy.

The following table sets forth the status of the qualified defined-benefit pension plans (in millions):



	2017			2016
Projected benefit obligation (PBO)
Beginning of year	$	2,043		$	1,898
Service cost	39			37
Interest cost	74			73
Actuarial loss	300			104
Benefits paid	(69		)	(69		)
End of year	$	2,387		$	2,043

Plan assets at fair value
Beginning of year	$	1,846		$	1,737
Actual return on plan assets	291			178
Employer contributions	15			—
Benefits paid	(69		)	(69		)
End of year	$	2,083		$	1,846
Unfunded status	$	(304	)	$	(197	)

Percent funded	87		%	90		%

The accumulated benefit obligation for the combined qualified defined-benefit pension plans was $2.2 billion and $1.9 billion at December 31, 2017 and 2016.

The amounts recognized in the consolidated balance sheets (in millions):



	2017			2016
Accrued benefit liability-long term	$	335		$	225
Plan assets-long term (within Other noncurrent assets)	(31		)	(28		)
Total liability recognized	$	304		$	197

The amounts not yet reflected in net periodic benefit cost and included in AOCL (in millions):



	2017			2016
Prior service credit	$	(9	)	$	(10	)
Net loss	597			509
Amount recognized in AOCL (pretax)	$	588		$	499

The expected amortization of prior service credit and net loss from AOCL in 2018 is $1 million and $31 million, respectively, for the qualified defined-benefit pension plans.

Net pension expense for the qualified defined-benefit plans included the following components (in millions):



	2017			2016			2015
Service cost	$	39		$	37		$	41
Interest cost	74			73			84
Expected return on assets	(106		)	(108		)	(122		)
Amortization of prior service credit	(1		)	(1		)	(1		)
Recognized actuarial loss	26			25			26
Settlement expense (special item)	—			—			14
Net pension expense	$	32		$	26		$	42

In 2015, the Company recognized a settlement charge of $14 million related to lump sum settlements offered to terminated, vested plan participants. The result was a reduction in the projected benefit obligation of $62 million. The settlement charge reflects the remaining unamortized actuarial loss in AOCL associated with the settled obligation.

There are no current statutory funding requirements for the Company’s plans in 2018.

Future benefits expected to be paid over the next ten years under the qualified defined-benefit pension plans from the assets of those plans (in millions):



	Total
2018	$	97
2019	101
2020	116
2021	116
2022	130
2023– 2027	723

Nonqualified Defined-Benefit Pension Plan

Alaska also maintains an unfunded, noncontributory defined-benefit plan for certain elected officers. This plan uses a December 31 measurement date. The assumptions used to determine benefit obligations and the net period benefit cost for the nonqualified defined-benefit pension plan are similar to those used to calculate the qualified defined-benefit pension plan. The plan's unfunded status, PBO and accumulated benefit obligation are immaterial. The net pension expense in prior year and expected future expense is also immaterial.

Postretirement Medical Benefits

The Company allows certain retirees to continue their medical, dental and vision benefits by paying all or a portion of the active employee plan premium until eligible for Medicare, currently age 65. This results in a subsidy to retirees, because the premiums received by the Company are less than the actual cost of the retirees’ claims. The accumulated postretirement benefit obligation for this subsidy is unfunded. The accumulated postretirement benefit obligation was $85 million and $76 million at December 31, 2017 and 2016, respectively. The net periodic benefit cost was not material in 2017 or 2016.

Defined-Contribution Plans

The seven defined-contribution plans are deferred compensation plans under section 401(k) of the Internal Revenue Code. All of these plans require Company contributions. Total expense for the defined-contribution plans was $103 million, $67 million and $60 million in 2017, 2016, and 2015, respectively.

The Company also has a noncontributory, unfunded defined-contribution plan for certain elected officers of the Company who are ineligible for the nonqualified defined-benefit pension plan. Amounts recorded as liabilities under the plan are not material to the consolidated balance sheets at December 31, 2017 and 2016.

Pilot Long-term Disability Benefits

Alaska maintains a long-term disability plan for its pilots. The long-term disability plan does not have a service requirement. Therefore, the liability is calculated based on estimated future benefit payments associated with pilots that were assumed to be disabled on a long-term basis as of December 31, 2017 and does not include any assumptions for future disability. The liability includes the discounted expected future benefit payments and medical costs. The total liability was $28 million and $25 million, which was recorded net of a prefunded trust account of $3 million and $3 million, and included in long-term other liabilities on the consolidated balance sheets as of December 31, 2017 and December 31, 2016, respectively.

Employee Incentive-Pay Plans

The Company has employee incentive plans that pay employees based on certain financial and operational metrics. These metrics are set and approved annually by the Compensation Committee of the Board of Directors. The aggregate expense under these plans in 2017, 2016 and 2015 was $135 million, $127 million and $120 million. The Air Group plans are summarized below.


•	Performance-Based Pay (PBP) is a program that rewards the majority of Air Group employees. The program is based on six separate metrics related to Air Group profitability, safety, loyalty Mileage Plan™ and credit card growth, achievement of unit-cost goals and employee engagement as measured by customer satisfaction.


•	The Operational Performance Rewards Program entitles the majority of Air Group employees to quarterly payouts of up to $300 per person if certain operational and customer service objectives are met.