Employment Benefit Plans

BNSF provides a funded, noncontributory qualified pension plan (BNSF Retirement Plan), which covers most non-union employees, and an unfunded non-tax-qualified pension plan (BNSF Supplemental Retirement Plan), which covers certain officers and other employees. The benefits under these pension plans are based on years of credited service and the highest consecutive sixty months of compensation for the last ten years of salaried employment with the Company. BNSF also provides two funded, noncontributory qualified pension plans which cover certain union employees of the former The Atchison, Topeka and Santa Fe Railway Company (Union Plans). The benefits under these pension plans are based on elections made at the time the plans were implemented. With respect to the funded plans, the Company's funding policy is to contribute annually not less than the regulatory minimum and not more than the maximum amount deductible for income tax purposes. The BNSF Retirement Plan, the BNSF Supplemental Retirement Plan, and the Union Plans are collectively referred to herein as the Pension Plans.

During the first quarter of 2019, the Company amended the BNSF Retirement Plan and the BNSF Supplemental Retirement Plan. Non-union employees hired on or after April 1, 2019 are not eligible to participate in these retirement plans and instead receive an additional employer contribution as part of the qualified 401(k) plan based on the employees’ age and years of service. Current employees will be transitioned away from the retirement plans within the next ten years, beginning October 1, 2019, and upon transition will be eligible for the additional employer contribution. As a result of the plan amendments, the Company recognized a curtailment gain of $120 million in the first quarter of 2019 consisting of $117 million for the reduction in projected benefit obligation and $3 million for the recognition of prior service credits.

Components of the net (benefit) cost for the Pension Plans were as follows (in millions):



	Pension Benefits
	Years ended December 31,
	2019			2018			2017
Service cost	$	32		$	46		$	42
Interest cost	81			82			88
Expected return on plan assets	(160		)	(157		)	(149		)
Amortization of net loss	—			1			—
Amortization of prior service credits	(3		)	(1		)	—
Curtailment gain	(117		)	—			—
Settlement loss (gain)	5			(1		)	—
Net (benefit) cost recognized	$	(162	)	$	(30	)	$	(19	)

The projected benefit obligation is the present value of benefits earned to date by plan participants, including the effect of assumed future salary increases. The following tables show the change in projected benefit obligation for the Pension Plans (in millions):



	Pension Benefits
Change in Benefit Obligation	December 31, 2019			December 31, 2018
Projected benefit obligation at beginning of period	$	2,198		$	2,387
Service cost	32			46
Interest cost	81			82
Actuarial loss (gain)	279			(158		)
Benefits paid	(142		)	(149		)
Curtailments	(117		)	—
Settlements	(36		)	(10		)
Projected benefit obligation at end of period	2,295			2,198
Component representing future salary increases	(44		)	(136		)
Accumulated benefit obligation at end of period	$	2,251		$	2,062

The following tables show the change in plan assets of the Pension Plans (in millions):



	Pension Benefits
Change in Plan Assets	December 31, 2019			December 31, 2018
Fair value of plan assets at beginning of period	$	2,336		$	2,669
Actual return (loss) on plan assets	482			(189		)
Employer contributions^a	—			3
Benefits paid	(134		)	(137		)
Settlements	(12		)	(10		)
Fair value of plan assets at measurement date	$	2,672		$	2,336

^aEmployer contributions were classified as Other, Net under Operating Activities in the Company’s Consolidated Statements of Cash Flows.

The following table shows the funded status of the Pension Plans, defined as plan assets less the projected benefit obligation (in millions):



	Pension Benefits
	December 31, 2019		December 31, 2018
Funded status (plan assets less projected benefit obligations)	$	377	$	138

Of the net pension assets of $377 million and $138 million recognized as of December 31, 2019 and December 31, 2018, respectively, $9 million and $3 million were included in other current liabilities as of December 31, 2019 and 2018, respectively, and $465 million and $240 million were included in other assets as of December 31, 2019 and 2018, respectively.

The BNSF Supplemental Retirement Plan and the Union Plans have accumulated and projected benefit obligations in excess of plan assets. The following table shows the projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the plans (in millions):



	December 31, 2019		December 31, 2018
Projected benefit obligation	$	113	$	138
Accumulated benefit obligation	$	113	$	138
Fair value of plan assets	$	25	$	36

Actuarial gains and losses and prior service credits are recognized in the Consolidated Balance Sheets through an adjustment to accumulated other comprehensive income (loss) (AOCI). The following tables show the pre-tax change in AOCI attributable to the components of the net cost and the change in benefit obligation (in millions):



	Pension Benefits
	Years ended December 31,
Change in AOCI	2019			2018			2017
Beginning balance	$	182		$	371		$	207
Amortization of net loss	—			1			—
Amortization of prior service credits	(3		)	(1		)	—
Actuarial gain (loss)	44			(188		)	164
Settlements	5			(1		)	—
Ending balance	$	228		$	182		$	371

Approximately $1 million, net of tax, of the actuarial gains from defined benefit pension plans in AOCI are required to be amortized into net periodic benefit cost over the next fiscal year. Pre-tax amounts currently recognized in AOCI consist of the following (in millions):



	Pension Benefits
	Years ended December 31,
	2019		2018
Net gain (loss)	$	227	$	183
Prior service credits	—		3
Settlements	1		(4		)
Pre-tax amount recognized in AOCI at December 31,	$	228	$	182

The assumptions used in accounting for the Pension Plans were as follows:



	Pension Benefits
	Years ended December 31,
Assumptions Used to Determine Net Cost	2019		2018		2017
Discount rate	4.2	%	3.6	%	4.1	%
Expected long-term rate of return on plan assets	6.7	%	6.6	%	6.6	%
Rate of compensation increase	3.5	%	3.6	%	3.3	%



	Pension Benefits
Assumptions Used to Determine Benefit Obligations	December 31, 2019		December 31, 2018
Discount rate	3.2	%	4.2	%
Rate of compensation increase	3.1	%	3.5	%

The Company determined the discount rate based on a yield curve that utilized year-end market yields of high-quality corporate bonds to develop spot rates that are matched against the plans’ expected benefit payments. The discount rate used for the 2020 calculation of net benefit cost decreased to 3.2 percent for pension and 3.1 percent for retiree health and welfare benefits, which reflects market conditions at the December 31, 2019 measurement date.

Various other assumptions including retirement and withdrawal rates, compensation increases, payment form and benefit commencement age are based upon a five-year experience study. In 2016, the Company obtained an updated study which had an immaterial impact on its pension and retiree health and welfare projected benefit obligation.

The Company utilizes actuary-produced mortality tables and an improvement scale derived from the most recently available data, which were used in the calculation of its December 31, 2019 and 2018 liabilities.

Pension plan assets are generally invested with the long-term objective of earning sufficient amounts to cover expected benefit obligations while assuming a prudent level of risk. Allocations may change as a result of changing market conditions and investment opportunities.

The expected rates of return on plan assets reflect subjective assessments of expected invested asset returns over a period of several years. Actual experience may differ from the assumed rates. The expected rate of return on pension plan assets was 6.7 percent for 2019 and will be 6.7 percent for 2020.

The following table is an estimate of the impact on future net benefit cost that could result from hypothetical changes to the most sensitive assumptions, the discount rate and expected rate of return on plan assets:



Sensitivity Analysis
	Change in 2020 Net Benefit Cost
Hypothetical Discount Rate Change	Pension
50 basis point decrease	$	5	million	decrease
50 basis point increase	$	2	million	increase
Hypothetical Expected Rate of Return on Plan Assets Change	Pension
50 basis point decrease	$	13	million	increase
50 basis point increase	$	13	million	decrease

Investments are stated at fair value. The various types of investments are valued as follows:

(i) Equity securities are valued at the last trade price at primary exchange close time on the last business day of the year (Level 1 input). If the last trade price is not available, values are based on bid, ask/offer quotes from contracted pricing vendors, brokers, or investment managers (Level 3 input or Level 2 if corroborated).

(ii) Highly liquid government obligations, such as U.S. Treasury securities, are valued based on quoted prices in active markets for identical assets (Level 1 input). Other fixed maturity securities and government obligations are valued based on institutional bid evaluations from contracted vendors. Where available, vendors use observable market-based data to evaluate prices (Level 2 input). If observable market-based data is not available, unobservable inputs such as extrapolated data, proprietary models, and indicative quotes are used to arrive at estimated prices representing the price a dealer would pay for the security (Level 3 input).

(iii) Investment funds / other are valued at the daily net asset value of shares held at year end. Net asset value is considered a Level 1 input if net asset value is computed daily and redemptions at this value are available to all shareholders without restriction. Net asset value is considered a Level 2 input if the fund may restrict share redemptions under limited circumstances or if net asset value is not computed daily. Net asset value is considered a Level 3 input if shares could not be redeemed on the reporting date and net asset value cannot be corroborated by trading activity.

The following table summarizes the investments of the funded pension plans as of December 31, 2019, based on the inputs used to value them (in millions):



	Total as of
Asset Category	December 31, 2019		Level 1 Inputs ^a		Level 2 Inputs ^a		Level 3 Inputs ^a
Cash and equivalents	$	32	$	2	$	30	$	—
Equity securities^b	2,518		2,518		—		—
Government obligations	111		111		—		—
Other fixed maturity securities	11		—		11		—
Investment funds and other	—		—		—		—
Total^c	$	2,672	$	2,631	$	41	$	—

^aSee Note 2 to the Consolidated Financial Statements under the heading “Fair Value Measurements” for a definition of each of these levels of inputs.

^bAs of December 31, 2019, three equity securities each exceeded 10 percent of total plan assets. These investments represent approximately 58 percent of total plan assets.

^c Excludes less than $1 million accrued for dividend and interest receivable.

Comparative Prior Year Information

The following table summarizes the investments of the funded pension plans as of December 31, 2018, based on the inputs used to value them (in millions):



	Total as of
Asset Category	December 31, 2018		Level 1 Inputs ^a		Level 2 Inputs^a		Level 3 Inputs ^a
Cash and equivalents	$	21	$	1	$	20	$	—
Equity securities^b	1,895		1,895		—		—
Government obligations	403		403		—		—
Other fixed maturity securities	14		—		14		—
Investment funds and other	3		3		—		—
Total ^c	$	2,336	$	2,302	$	34	$	—

^aSee Note 2 to the Consolidated Financial Statements under the heading “Fair Value Measurements” for a definition of each of these levels of inputs.

^bAs of December 31, 2018, three equity securities each exceeded 10 percent of total plan assets. These investments represented approximately 51 percent of total plan assets.

^cExcludes less than $1 million accrued for dividend and interest receivable.

The Company is not required to make contributions to its funded pension plans in 2020.

The following table shows expected benefit payments from the Pension Plans for the next five fiscal years and the aggregate five years thereafter (in millions):



Fiscal year	Expected Pension Plan Benefit Payments^a
2020	$	156
2021	$	144
2022	$	140
2023	$	136
2024	$	132
2025-2029	$	620

^aPrimarily consists of the BNSF Retirement Plan payments, which are made from the plan trust and do not represent an immediate cash outflow to the Company.

Other Benefit Plans

BNSF sponsors qualified 401(k) plans that cover substantially all employees and a non-qualified defined contribution plan that covers certain officers and other employees. BNSF matches contributions made by non-union employees and a limited number of union employees subject to certain percentage limits of the employees’ earnings. Non-union employees hired on or after April 1, 2019, and employees hired before that date who have transitioned from the BNSF Retirement Plan are also eligible for an additional employer contribution based on the employee’s age and years of service. The Company's 401(k) expense was $41 million, $36 million, and $35 million during the years ended December 31, 2019, 2018, and 2017, respectively.

Certain salaried employees of BNSF who met age and years of service requirements and who began salaried employment prior to September 22, 1995 are eligible for medical benefits, including prescription drug coverage, during retirement. For pre-Medicare participants, the postretirement medical and prescription drug benefit is contributory and provides benefits to retirees and their covered dependents. For Medicare eligible participants, a yearly stipend is recorded in a Health Reimbursement Account (HRA) established on their behalf. Retirees can use these HRAs to reimburse themselves for eligible out-of-pocket expenses, as well as premiums for personal supplemental insurance policies. HRAs are unfunded, so no funds are expended by the Company until the reimbursements are paid to participants. As of December 31, 2019, the projected benefit obligation associated with the retiree health and welfare plans was $224 million. For the year ended December 31, 2019, the service cost associated with the health and welfare plans was less than $1 million.

Under collective bargaining agreements, BNSF participates in multi-employer benefit plans that provide certain postretirement health care and life insurance benefits for eligible union employees. Health care claim payments and life insurance premiums paid attributable to retirees, which are generally expensed as incurred, were $59 million, $64 million and $75 million during the years ended December 31, 2019, 2018 and 2017, respectively. The average number of employees covered under these plans was 37,000, 37,000, and 35,000 during the years ended December 31, 2019, 2018, and 2017, respectively.