EMPLOYEE BENEFITS

The Company provides various retirement benefits to eligible employees, including contributions to defined contribution plans, pension benefits associated with defined benefit plans, postretirement medical benefits and other benefits. Eligibility requirements and benefit levels vary depending on employee location. Various foreign benefit plans cover employees in accordance with local legal requirements.

Defined Contribution Plans

A majority of the Company's U.S. employees are covered by a noncontributory profit sharing plan. This plan provides for annual employer contributions based upon a formula related primarily to earnings before federal income taxes and a minimum return on invested capital, limited to a percentage of the total eligible compensation paid to eligible employees. In 2015, the plan was amended to better align Company contributions to Company performance. The required rate of return on invested capital was increased while maintaining the minimum of 8% and a maximum of 18% of total eligible compensation paid to eligible employees. The profit sharing plan expense was $121 million, $175 million and $173 million for 2015, 2014 and 2013, respectively. Effective January 1, 2016, employees covered by the profit sharing plan will be able to make contributions to a 401(k) plan.

The Company sponsors additional defined contribution plans available to certain U.S. and foreign employees for which contributions are paid by the Company and participating employees. The expense associated with these defined contribution plans totaled $11 million for 2015, $15 million for 2014 and $12 million for 2013.

Defined Benefit Plans and Other Retirement Plans

During the second quarter of 2014, the Company adopted changes to the retirement plan offered to employees in the Netherlands. The plan was transitioned from a defined benefit plan to a defined contribution plan, and all existing and future obligations under the defined benefit plan have been transferred to a third party. As a result of the plan amendment and settlement, the Company reclassified the unrecognized losses from Accumulated Other Comprehensive Earnings (AOCE) to Warehousing, marketing and administrative expenses on the Statement of Earnings in an amount of $9 million, with a corresponding tax benefit to income taxes on the Statement of Earnings in an amount of $2 million. In addition, the Company recognized a $3 million write-off related to the plan’s assets and liabilities, net of tax. Effective January 1, 2014, the affected employees were given option to participate in the defined contribution plan sponsored by the Company for which contributions are made by the Company and participating employees.

The Company also sponsors additional defined benefit plans to certain foreign employees. The cost of these programs is not significant to the Company. In certain countries, pension contributions are made to government-sponsored social security pension plans in accordance with local legal requirements. For these plans, the Company has no continuing obligations other than the payment of contributions.

Executive Death Benefit Plan

The Executive Death Benefit Plan provides one of three potential benefits: a supplemental income benefit (SIB), an executive death benefit (EDB) or a postretirement payment. The SIB provides income continuation at 50% of total compensation, payable for ten years to the beneficiary of a participant if that participant dies while employed by the Company. The EDB provides an after-tax lump sum payment of one-time final total compensation to the beneficiary of a participant who dies after retirement. In addition, pre-2008 participants may elect to receive a reduced postretirement payment instead of the EDB. Effective January 1, 2010, the plan is not available to new participants.

The net periodic benefits costs charged to operating expenses were $0.5 million in 2015, $0.7 million in 2014 and $0.8 million in 2013. The net gain recognized in AOCE was $2 million and $1 million as of December 31, 2015 and 2014, respectively. The plan benefits are paid as they come due from the general assets of the Company. The plan benefit obligation was $15 million as of December 31, 2015, and $16 million as of December 31, 2014.

Postretirement Benefits

The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its United States employees hired prior to January 1, 2013, and their dependents should they elect to maintain such coverage upon retirement. Covered employees become eligible for participation when they qualify for retirement while working for the Company. Participation in the plan is voluntary and requires participants to make contributions toward the cost of the plan, as determined by the Company.

The net periodic benefits costs charged to operating expenses, which were valued with a measurement date of January 1 for each year, consisted of the following components (in thousands of dollars):



	For the Years Ended December 31,
	2015			2014			2013
Service cost	$	10,128		$	9,005		$	10,589
Interest cost	9,649			10,549			8,938
Expected return on assets	(10,375		)	(8,237		)	(7,076		)
Amortization of prior service credit	(6,801		)	(7,254		)	(7,412		)
Amortization of transition asset	—			(143		)	(143		)
Amortization of unrecognized losses	1,512			779			3,724
Net periodic benefits costs	$	4,113		$	4,699		$	8,620

Reconciliations of the beginning and ending balances of the postretirement benefit obligation, which is calculated using a December 31 measurement date, the fair value of plan assets and the funded status of the benefit obligation follow (in thousands of dollars):



	2015			2014
Benefit obligation at beginning of year	$	282,917		$	223,488
Service cost	10,128			9,005
Interest cost	9,649			10,549
Plan participants' contributions	2,754			2,487
Actuarial (gains) losses	(58,251		)	42,300
Benefits paid	(8,739		)	(5,609		)
Prescription Drug Rebates	890			702
Medicare Part D Subsidy received	—			(5		)
Benefit obligation at end of year	239,348			282,917

Plan assets available for benefits at beginning of year	156,015			144,514
Actual returns on plan assets	1,635			13,730
Employer's contributions	2,747			191
Plan participants' contributions	2,754			2,487
Prescription Drug Rebates	890			702
Benefits paid	(8,430		)	(5,609		)
Plan assets available for benefits at end of year	155,611			156,015

Noncurrent postretirement benefit obligation	$	83,737		$	126,902

The amounts recognized in AOCE consisted of the following components (in thousands of dollars):



	As of December 31,
	2015			2014
Prior service credit	$	60,502		$	67,303
Unrecognized losses	(3,015		)	(54,034		)
Deferred tax (liability)	(22,134		)	(5,121		)
Net gains	$	35,353		$	8,148

The $51 million decrease in unrecognized losses was primarily driven by an increase in the discount rate, a change in the mortality improvement tables used and a change in per capita costs and coverage election.

The components of AOCE related to the postretirement benefit costs that will be amortized into net periodic postretirement benefit costs in 2016 are estimated as follows (in thousands of dollars):



	2016
Amortization of prior service credit	$	(6,688	)
Amortization of unrecognized losses	207
Estimated amount to be amortized from AOCE into net periodic postretirement benefit costs	$	(6,481	)

The Company has elected to amortize the amount of net unrecognized gains (losses) over a period equal to the average remaining service period for active plan participants expected to retire and receive benefits of approximately 14.6 years for 2015.

The benefit obligation was determined by applying the terms of the plan and actuarial models. These models include various actuarial assumptions, including discount rates, assumed rates of return on plan assets, healthcare cost trend rate and cost-sharing between the Company and the retirees. The Company evaluates its actuarial assumptions on an annual basis and considers changes in these long-term factors based upon market conditions and historical experience.

The following assumptions were used to determine net periodic benefit costs at January 1:



	For the Years Ended December 31,
	2015		2014		2013
Discount rate	3.89	%	4.90	%	4.00	%
Expected long-term rate of return on plan assets, net of tax	6.65	%	5.70	%	6.00	%
Initial healthcare cost trend rate	7.25	%	7.50	%	8.00	%
Ultimate healthcare cost trend rate	4.50	%	4.50	%	5.00	%
Year ultimate healthcare cost trend rate reached	2026		2026		2019

The following assumptions were used to determine benefit obligations at December 31:



	2015		2014		2013
Discount rate	4.20	%	3.89	%	4.90	%
Expected long-term rate of return on plan assets, net of tax	6.65	%	6.65	%	5.70	%
Initial healthcare cost trend rate	7.00	%	7.25	%	7.50	%
Ultimate healthcare cost trend rate	4.50	%	4.50	%	4.50	%
Year ultimate healthcare cost trend rate reached	2026		2026		2026

The discount rate assumptions reflect the rates available on high-quality fixed income debt instruments as of December 31, the measurement date of each year. These rates have been selected due to their similarity to the duration of the projected cash flows of the postretirement healthcare benefit plan. As of December 31, 2015, the Company increased the discount rate from 3.89% to 4.20% to reflect the increase in the market interest rates, which contributed to the unrealized actuarial gain at December 31, 2015. As of December 31, 2015, the Company changed the mortality improvement table used to project mortality rates into the future from Mortality Table RP-2014 with Mortality Improvement Scale MB 2014 to Mortality Table RPH-2014 with Mortality Improvement Scale MP 2015, which was published by the Society of Actuaries and reflects the most recent updates to life expectancies. RPH-2014 Table is a headcount weighted table, which is also more appropriate for a postretirement healthcare benefit plan. The Company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates. As of December 31, 2013, Grainger changed the duration and rate of the healthcare trend decline to 25 basis points a year until reaching the ultimate trend rate of 4.50%. Prior to this change, the healthcare trend assumed a 50 basis point decline. As of December 31, 2015, the healthcare cost trend rate was 7.00%, declining 25 basis points a year until reaching the ultimate trend rate. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A 1 percentage point change in assumed healthcare cost trend rates would have the following effects on 2015 results (in thousands of dollars):



	1 Percentage Point
	Increase		(Decrease)
Effect on total service and interest cost	$	2,071	$	(1,667	)
Effect on postretirement benefit obligation	28,450		(23,280		)

The Company has established a Group Benefit Trust (Trust) to fund the plan obligations and process benefit payments. All assets of the Trust are invested in equity funds designed to track to either the Standard & Poor's 500 Index (S&P 500) or the Total International Composite Index. The Total International Composite Index tracks non-U.S. stocks within developed and emerging market economies. This investment strategy reflects the long-term nature of the plan obligation and seeks to take advantage of the earnings potential of equity securities in the global markets and intends to reach a balanced allocation between U.S. and non-U.S. equities. The plan's assets are stated at fair value, which represents the net asset value of shares held by the plan in the registered investment companies at the quoted market prices (Level 1 input) as of December 31 (in thousands of dollars):



	2015		2014
Registered investment companies
Fidelity Spartan U.S. Equity Index Fund	70,973		73,071
Vanguard 500 Index Fund	78,254		77,202
Vanguard Total International Stock	22,976		23,994
Total Assets	$	172,203	$	174,267

The Company uses the long-term historical return on the plan assets and the historical performance of the S&P 500 and the Total International Composite Index to develop its expected return on plan assets. In 2014, the Company increased the after-tax expected long-term rates of return on plan assets from 5.70% to 6.65% based on the historical average of long-term rates of return due to a change in the estimated tax rate. This change was due to the nature of the taxable income earned on the investments in the Trust and the applicable tax rates. In 2015, the after-tax expected long-term rate of return on plan assets was maintained. The required use of an expected long-term rate of return on plan assets may result in recognition of income that is greater or less than the actual return on plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns and, therefore, result in a pattern of income recognition that more closely matches the pattern of the services provided by the employees.

The Company's investment policies include periodic reviews by management and trustees at least annually concerning: (1) the allocation of assets among various asset classes (e.g., domestic stocks, international stocks, short-term bonds, long-term bonds, etc.); (2) the investment performance of the assets, including performance comparisons with appropriate benchmarks; (3) investment guidelines and other matters of investment policy and (4) the hiring, dismissal or retention of investment managers.

The funding of the Trust is an estimated amount that is intended to allow the maximum deductible contribution under the Internal Revenue Code of 1986 (IRC), as amended. There are zero minimum funding requirements and the Company intends to follow its practice of funding the maximum deductible contribution under the IRC.

The Company forecasts the following benefit payments (which include a projection for expected future employee service) for the next ten years (in thousands of dollars):



Year	Estimated Gross Benefit Payments
2016	$	6,405
2017	7,269
2018	8,259
2019	9,330
2020	10,502
2021-2025	69,724