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EMPLOYEE BENEFIT PLANS
 12 Months Ended
Dec. 31, 2020
Retirement Benefits [Abstract]  
EMPLOYEE BENEFIT PLANS 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, Horizon and McGee Air Services.

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, passenger service employees, mechanics and related craft employees. The Company uses a December 31 measurement date for these plans. All plans are closed to new entrants.

Weighted average assumptions used to determine benefit obligations:

The rates below vary by plan and related work group.
 20202019
Discount rates2.43% to 2.58%3.33% to 3.47%
Rate of compensation increases2.02% to 2.43%2.11% to 5.44%
Weighted average assumptions used to determine net periodic benefit cost:

The rates below vary by plan and related work group.
 202020192018
Discount rates3.33% to 3.47%4.37% to 4.46%3.69% to 3.78%
Expected return on plan assets3.25% to 5.50%4.25% to 5.50%4.25% to 5.50%
Rate of compensation increases2.11% to 5.44%2.11% to 3.50%2.11% to 16.51%


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, 2020, 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: 
Salaried Plan(a)
All other plans
 Target20202019Target20202019
Asset category:  
Domestic equity securities2% - 12%7 %7 %36% - 46%44 %41 %
Non-U.S. equity securities0% - 8%3 %3 %13% - 23%18 %18 %
Fixed income securities85% - 95%90 %90 %31% - 41%33 %35 %
Real estate— %— %— %0% - 10%5 %6 %
Plan assets100 %100 %100 %100 %
(a)As our Salaried Plan is frozen and fully funded, our investment strategies differ significantly from that of our other outstanding plans. Investments are in lower-risk securities, with earnings designed to maintain a fully-funded status.

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 expedient 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 assets by fund category (in millions):
 20202019Fair Value Hierarchy
Fund type:  
U.S. equity market fund$914 $773 1
Non-U.S. equity fund384 344 1
Credit bond index fund1,088 1,009 1
Plan assets in common commingled trusts$2,386 $2,126 
Real estate96 102 (a)
Cash equivalents6 11 1
Total plan assets$2,488 $2,239 

(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):
 20202019
Projected benefit obligation (PBO)  
Beginning of year$2,602 $2,225 
Service cost52 42 
Interest cost75 89 
Actuarial (gain)/loss339 359 
Benefits paid(134)(113)
End of year$2,934 $2,602 
Plan assets at fair value  
Beginning of year$2,239 $1,858 
Actual return on plan assets383 429 
Employer contributions— 65 
Benefits paid(134)(113)
End of year$2,488 $2,239 
Unfunded status$(446)$(363)
Percent funded85 %86 %
 
The accumulated benefit obligation for the combined qualified defined-benefit pension plans was $2.8 billion and $2.4 billion at December 31, 2020 and 2019. During 2020 and 2019 actuarial losses increased the benefit obligation primarily due to the decrease in discount rates.

The amounts recognized in the consolidated balance sheets (in millions): 
 20202019
Accrued benefit liability-long term$502 $412 
Plan assets-long term (within Other noncurrent assets)(51)(49)
Total liability recognized$451 $363 
 
The amounts not yet reflected in net periodic benefit cost and included in AOCL (in millions):
 20202019
Prior service credit$(5)$(6)
Net loss626 595 
Amount recognized in AOCL (pretax)$621 $589 
Defined benefit plans with projected benefit obligations exceeding fair value of plan assets are as follows (in millions):
 20202019
Projected benefit obligation$2,207 $1,957 
Fair value of plan assets1,710 1,545 

Defined benefit plans with accumulated benefit obligations exceeding fair value of plan assets are as follows (in millions):
 20202019
Projected benefit obligation$2,207 $1,957 
Accumulated benefit obligation2,057 1,539 
Fair value of plan assets1,710 1,545 

Net pension expense for the qualified defined-benefit plans included the following components (in millions): 
 202020192018
Service cost$46 $42 $48 
Interest cost75 89 79 
Restructuring charges(a)
11 — — 
Expected return on assets(110)(95)(107)
Amortization of prior service credit(1)(1)(1)
Recognized actuarial loss35 37 33 
Net pension expense$56 $72 $52 
(a)In conjunction with the workforce reductions stemming from the COVID-19 pandemic, the Company recorded additional expense for employees accepting incentive leaves of absence. Such expense is included in Special items - restructuring charges on the consolidated statement of operations for the year-ended December 31, 2020.

There are no current statutory funding requirements for the Company’s plans in 2021.
 
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
2021$123 
2022142 
2023143 
2024141 
2025157 
2026– 2030829 
 
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.
Post-retirement 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 post-retirement benefit obligation for this subsidy is unfunded. The accumulated post-retirement benefit obligation was $138 million and $129 million at December 31, 2020 and 2019. The net periodic benefit cost was not material in 2020 or 2019.

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 $126 million, $132 million and $126 million in 2020, 2019, and 2018.  

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, 2020 and 2019.

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, 2020 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 $61 million and $45 million, which was recorded net of a prefunded trust account of $7 million and $6 million, and included in long-term other liabilities on the consolidated balance sheets as of December 31, 2020 and December 31, 2019.

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 and Leadership Development Committee of the Board of Directors. The aggregate expense under these plans in 2020, 2019 and 2018 was $130 million, $163 million and $147 million. The incentive plans are summarized below.
 
•Performance-Based Pay (PBP) is a program that rewards the majority of Alaska and Horizon employees.  The program is based on various metrics that adjust periodically, including those related to Air Group profitability, achievement of unit-cost goals, safety, and guest preference and opinion of performance measured as brand strength.

•COVID Business Recovery Incentive Pay Plan (CBRP) is a supplemental program implemented in the third quarter of 2020, aimed at incentivizing employees as the Company manages recovery through the COVID-19 pandemic. The program was based on metrics related to cash preservation and COVID-related safety metrics.

•The Operational Performance Rewards Program (OPR) entitles the majority of Alaska and Horizon employees to quarterly payouts of up to $450 per person if certain monthly operational and customer service objectives are met.