Employee Benefits and Stock-Based Compensation

We record non-cash compensation expense for our performance restricted stock units, restricted stock units, 401(k) matching contributions and prior to October 1, 2016, outperform stock appreciation rights.

The following table summarizes non-cash compensation expense and capitalized non-cash compensation for each of the three years ended December 31, 2016, 2015 and 2014 (dollars in millions):



	2016			2015			2014
Outperform Stock Appreciation Rights	$	1		$	6		$	8
Restricted Stock Units	76			65			34
Performance Restricted Stock Units	43			35			14
401(k) Match Expense	37			36			23
Restricted Stock Unit Bonus Grant	—			—			(5		)
	157			142			74
Capitalized Non-Cash Compensation	(1		)	(1		)	(1		)
	$	156		$	141		$	73

We capitalize non-cash compensation for those employees directly involved in the construction of the network, installation of services for customers or the development of business support systems.

OSOs and restricted stock units are granted under the Level 3 Communications, Inc. Stock Incentive Plan, as amended (the "Stock Plan"), which term extends through May 21, 2025. The Stock Plan provides for accelerated vesting of stock awards upon retirement if an employee meets certain age and years of service requirements and certain other requirements. Under the Stock Compensation guidance, if an employee meets the age and years of service requirements under the accelerated vesting provision, the award would be expensed at grant or expensed over the period from the grant date to the date the employee meets the requirements, even if the employee has not actually retired. We recognized non-cash compensation expense for employees that met the age and years of service requirements for accelerated vesting at retirement of $8 million, $14 million and $4 million in 2016, 2015 and 2014, respectively.

Outperform Stock Appreciation Rights

OSOs were awarded through the end of 2013, and were outstanding through October 2016. Our OSO program was designed so that our stockholders would receive a market return on their investment before OSO holders receive any return on their OSOs. We believe that the OSO program directly aligned management's and stockholders' interests by basing stock option value on our ability to outperform the market in general, as measured by the Standard & Poor's ("S&P") 500® Index. Participants in the OSO program did not realize any value from awards unless our common stock price outperformed the S&P 500® Index during the life of the grant. When the stock price gain was greater than the corresponding gain on the S&P 500® Index, the value received for awards under the OSO plan was based on a formula involving a multiplier related to the level by which our common stock outperformed the S&P 500® Index. To the extent that Level 3's common stock outperformed the S&P 500® Index, the value of OSO units to a holder exceeded the value of non-qualified stock options.

The initial strike price, as determined on the day prior to the OSO grant date, was adjusted over time (the "Adjusted Strike Price"), until the settlement date. The adjustment was an amount equal to the percentage appreciation or depreciation in the value of the S&P 500® Index from the date of grant to the date of settlement. The value of the OSO increased for increasing levels of outperformance. OSO units had a multiplier range from zero to four depending upon the performance of Level 3 common stock relative to the S&P 500® Index as shown in the following table.



If Level 3 Stock Outperforms the S&P 500® Index by:		Then the Pre-multiplier Gain Multiplied by a Success Multiplier of:
0% or Less		—
More than 0% but Less than 11%		Outperformance percentage multiplied by 4/11
11% or More		4.00

The Pre-multiplier Gain was the Level 3 common stock price minus the Adjusted Strike Price on the date of settlement.

Upon settlement of an OSO, we delivered to the grantee the difference between the fair market value of a share of Level 3 common stock as of the day prior to the settlement date, less the Adjusted Strike Price (the "Exercise Consideration"). The Exercise Consideration may be paid in cash, Level 3 common stock or any combination of cash or Level 3 common stock at our discretion. The number of shares of Level 3 common stock delivered to the grantee was determined by dividing the Exercise Consideration to be paid in Level 3 common stock by the fair market value of a share of Level 3 common stock as of the date prior to the settlement date. Fair market value was defined in the OSO agreement as the closing price per share of Level 3 common stock on the national securities exchange on which the common stock is traded. Settlement of the OSO units did not require any cash outlay by the employee.

OSO units had a three year life and settled 100% on the third anniversary of the date of the award. Recipients had no discretion on the timing to exercise OSO units, thus the expected life of all such OSO units was three years.

Transactions involving OSO units awarded are summarized in the table below. The Option Price Per Unit identified in the table below represents the initial strike price, as determined on the day prior to the OSO grant date for those grants.



	Units		Initial Strike Price Per Unit				Weighted Average Initial Strike Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Term (years)
									(in millions)
Balance January 1, 2014	2,148,865		$	14.10	$	36.60	$	23.99	$	31.6	1.46
OSOs granted	—		$	—	$	—	$	—
OSOs forfeited	(52,901	)	$	16.99	$	27.53	$	22.99
OSOs expired	(106,844	)	$	36.60	$	36.60	$	36.60
OSOs exercised	(771,251	)	$	14.70	$	27.53	$	24.26
Balance December 31, 2014	1,217,869		$	16.99	$	27.53	$	22.76	$	88.0	0.90
OSOs granted	—		$	—	$	—	$	—
OSOs forfeited	(12,945	)	$	20.29	$	26.69	$	22.81
OSOs expired	—		$	—	$	—	$	—
OSOs exercised	(589,944	)	$	22.15	$	22.97	$	22.32
Balance December 31, 2015	614,980		$	20.29	$	26.69	$	22.77	$	48.5	0.37
OSOs granted	—		$	—	$	—	$	—
OSOs forfeited	(6,875	)	$	20.29	$	26.69	$	26.03
OSOs expired	—		$	—	$	—	$	—
OSOs exercised	(608,105	)	$	20.29	$	26.69	$	22.73
Balance December 31, 2016	—

In the table above, the weighted average initial strike price represents the values used to calculate the theoretical value of OSO units on the grant date and the intrinsic value represents the value of OSO units that outperformed the S&P 500® Index as of December 31, 2015 and 2014, respectively.

The total realized value of OSO units settled was $14 million, $13 million and $19 million for the years ended December 31, 2016, 2015 and 2014, respectively. We issued 992,446, 622,755 and 732,593 shares of Level 3 common stock upon the exercise of OSO units for the years ended December 31, 2016, 2015 and 2014, respectively. The number of shares of Level 3 common stock issued upon settlement of an OSO unit varied based upon the relative performance of the Level 3 common stock price and the S&P 500® Index between the initial grant date and settlement date of the OSO.

Restricted Stock Units and Performance Restricted Stock Units

Restricted stock units are generally granted annually on July 1 to certain eligible recipients, including the Board of Directors, at no cost. Restrictions on transfer lapse over one to four year periods.

In April 2014, we began granting Performance Restricted Stock Units ("PRSUs"). PRSUs are designed to provide participants with a long-term stake in our success with both retention and performance components. Under these awards, a participant becomes vested in a number of PRSUs based on our achievement of specified levels of financial performance during the performance period set forth in the applicable award letter issued pursuant to the award agreement, so long as the participant remains continuously employed by us until the applicable scheduled vesting date, subject to certain change in control provisions as outlined in the award agreement. The performance objective is based on our financial performance measures. Participants will be entitled to an award within a range of 50% at a minimum achievement level and 200% at a maximum achievement level.

PRSUs use a two-year performance measurement period and vest 50% on the second anniversary of the grant date (after the relevant performance has been measured) and the second 50% vest in February of the following year.

The weighted-average grant-date fair value of restricted stock units awarded totaled $80 million, $106 million and $72 million for the years ended December 31, 2016, 2015 and 2014, respectively. The fair value of these awards was calculated using the value of Level 3 common stock on the grant date and these awards are being amortized over the periods in which the restrictions lapse. As of December 31, 2016, unamortized compensation cost related to restricted stock units was $77 million and the weighted average period over which this cost will be recognized is 2.45 years.

The changes in restricted stock units are shown in the following table:



	Number		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2014	2,924,350		$	22.77
Stock and units granted	1,650,772		$	43.48
Lapse of restrictions	(1,150,080	)	$	22.92
Stock and units forfeited	(206,305	)	$	27.14
Nonvested at December 31, 2014	3,218,737		$	32.95
Stock and units granted	2,087,942		$	50.60
Lapse of restrictions	(1,194,519	)	$	31.70
Stock and units forfeited	(358,227	)	$	44.25
Nonvested at December 31, 2015	3,753,933		$	42.09
Stock and units granted	1,547,229		$	51.45
Lapse of restrictions	(1,342,027	)	$	36.95
Stock and units forfeited	(254,712	)	$	47.45
Nonvested at December 31, 2016	3,704,423		$	47.49

The changes in performance restricted stock units are shown in the following table:



	Number		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2014	—		$	—
Units granted	605,111		$	39.30
Lapse of restrictions	(1,750	)	$	39.14
Units forfeited	(35,480	)	$	39.14
Nonvested at December 31, 2014	567,881		$	39.31
Units granted	713,657		$	53.82
Lapse of restrictions	—		$	—
Units forfeited	(53,073	)	$	49.25
Nonvested at December 31, 2015	1,228,465		$	47.31
Units granted	498,184		$	52.84
Lapse of restrictions	(297,940	)	$	39.43
Units forfeited	(97,298	)	$	52.02
Nonvested at December 31, 2016	1,331,411		$	50.80

The weighted-average grant-date fair value of performance restricted stock units awarded totaled $26 million, $38 million and $24 million for the years ended December 31, 2016, 2015 and 2014, respectively. The fair value of these awards was calculated using the value of Level 3 common stock on the grant date and these awards are being amortized over the periods in which the restrictions lapse. As of December 31, 2016, unamortized compensation cost related to PRSUs was $32 million and the weighted average period over which this cost will be recognized is 1.59 years.

The total fair value of restricted stock units and PRSUs whose restrictions lapsed in the years ended December 31, 2016, 2015 and 2014 was $61 million, $38 million and $27 million, respectively.

Defined Contribution Plans

We sponsor a number of defined contribution plans. The principal defined contribution plans are discussed individually below. Other defined contribution plans are not individually significant and therefore have been summarized in aggregate below.

We offer our qualified employees the opportunity to participate in a defined contribution retirement plan qualifying under the provisions of Section 401(k) of the Internal Revenue Code ("401(k) Plan"). Each employee is eligible to contribute, on a tax deferred basis, a portion of annual earnings generally not to exceed $18,000 in 2016 and $18,000 in 2015. We match 100% of employee contributions up to 4% of eligible earnings or applicable regulatory limits.

Our matching contributions are made with Level 3 common stock based on the closing stock price on each pay date. Our matching contributions are made through units in the Level 3 Stock Fund, which represent shares of Level 3 common stock. The Level 3 Stock Fund is the mechanism that is used for Level 3 to make employer matching and other contributions to employees through the Level 3 401(k) Plan. Prior to January 2016, employees were not able to purchase units in the Level 3 Stock Fund but effective January 2016, employees may allocate account balances to the Level 3 Stock Fund subject to a limitation on the total percentage of the employee's 401(K) account balances maintained in the Level 3 Stock Fund. Employees are able to diversify our matching contribution as soon as it is made, even if they are not fully vested, subject to insider trading rules and regulations. Our matching contributions vest ratably over the first three years of service or over such shorter period until the employee has completed three years of service at such time the employee is then 100% vested in all our matching contributions, including future contributions. We made 401(k) Plan matching contributions of $37 million, $36 million and $23 million for the years ended December 31, 2016, 2015 and 2014, respectively. Our matching contributions are recorded as non-cash compensation and included in network related expenses of $5 million, $5 million and $4 million for the years ended December 31, 2016, 2015 and 2014, respectively, and in selling, general and administrative expenses of $32 million, $31 million and $19 million for the years ended December 31, 2016, 2015 and 2014, respectively. Former tw telecom employees became eligible to participate in our 401(k) Plan starting January 1, 2015.

The tw telecom 401(k) Plan ("tw telecom 401(k) Plan") provided 100% matching cash contributions up to a maximum 5% of eligible compensation. Our contributions to the tw telecom 401(k) Plan vest immediately. Expenses recorded relating to the tw telecom 401(k) Plan for the two months in 2014 subsequent to the completion of the tw telecom acquisition were approximately $2 million.

Other defined contribution plans we sponsored are individually not significant. On an aggregate basis the expenses we recorded relating to these plans were approximately $6 million, $6 million and $6 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Defined Benefit Plans

We have certain contributory and non-contributory employee pension plans, which are not significant to our financial position or operating results. We recognize in our balance sheet the funded status of our defined benefit post-retirement plans, which is measured as the difference between the fair value of the plan assets and the plan benefit obligations. We are also required to recognize changes in the funded status within accumulated other comprehensive income, net of tax to the extent such changes are not recognized in earnings as components of periodic net benefit cost. The fair value of the plan assets was $136 million and $142 million as of December 31, 2016 and 2015, respectively. The total plan benefit obligations were $158 million and $158 million as of December 31, 2016 and 2015, respectively. Therefore, the total funded status was an obligation of $22 million and $16 million as of December 31, 2016 and 2015, respectively.

Annual Discretionary Bonus Grant

Our annual discretionary bonus program is intended to motivate employees to achieve our financial and business goals. Each participant is provided a target award expressed as a percentage of base salary. Actual awards under the program are based on corporate results as well as achievement of specific individual performance criteria during the bonus program period, and may be paid in cash, restricted stock units, or a combination of the two, at the sole discretion of the Compensation Committee of the Board of Directors. The annual discretionary bonus will be paid in cash for the 2016 bonus program, and was paid in cash for the 2015 and 2014 bonus programs. We paid out 1.4 million immediately-vested restricted stock units in 2014 for the 2013 bonus plan.