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. Effective January 1, 2016, the plan was amended to better align Company contributions to Company performance and now includes two components, a variable annual contribution based on a rate of return on invested capital and an automatic contribution equal to 3% of total eligible compensation to a 401(k) plan. In addition, employees covered by the plan are also able to make personal contributions to the 401(k) plan. The total Company contribution will be maintained at a minimum of 8% and a maximum of 18% of total eligible compensation paid to eligible employees. The total profit-sharing plan expense was $84 million, $121 million and $175 million for 2016, 2015 and 2014, respectively.

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 $12 million, $11 million and $15 million for 2016, 2015 and 2014, respectively.

Defined Benefit Plans and Other Retirement Plans

The Company sponsors defined benefit plans available 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.

Postretirement Benefits

The Company has a postretirement healthcare benefits plan that provides coverage for a majority of its U.S. 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,
	2016			2015			2014
Service cost	$	8,238		$	10,128		$	9,005
Interest cost	9,855			9,649			10,549
Expected return on assets	(10,113		)	(10,375		)	(8,237		)
Amortization of prior service credit	(6,688		)	(6,801		)	(7,254		)
Amortization of transition asset	—			—			(143		)
Amortization of unrecognized losses	129			1,512			779
Net periodic benefits costs	$	1,421		$	4,113		$	4,699

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



	2016			2015
Benefit obligation at beginning of year	$	239,348		$	282,917
Service cost	8,238			10,128
Interest cost	9,855			9,649
Plan participants' contributions	2,943			2,754
Actuarial losses (gains)	13,218			(58,251		)
Benefits paid	(9,439		)	(8,739		)
Prescription drug rebates	865			890
Benefit obligation at end of year	265,028			239,348

Plan assets available for benefits at beginning of year	155,611			156,015
Actual returns on plan assets	13,557			1,635
Employer's contributions	—			2,747
Plan participants' contributions	2,774			2,754
Benefits paid	(9,262		)	(8,430		)
Prescription drug rebates	865			890
Plan assets available for benefits at end of year	163,545			155,611

Noncurrent postretirement benefit obligation	$	101,483		$	83,737

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



	As of December 31,
	2016			2015
Prior service credit	$	53,814		$	60,502
Unrecognized losses	(12,656		)	(3,015		)
Deferred tax (liability)	(15,861		)	(22,134		)
Net accumulated gains	$	25,297		$	35,353

The $10 million increase in unrecognized losses was primarily driven by a decrease in the discount rate and revised healthcare cost trends, partially offset by a change in the mortality improvement tables used and a change in per capita costs.

The components of AOCE related to the postretirement benefit costs that will be amortized into net periodic postretirement benefit costs in 2017 are estimated as follows (in thousands of dollars):



	2017
Amortization of prior service credit	$	(6,492	)
Amortization of unrecognized losses	937
Estimated amount to be amortized from AOCE into net periodic postretirement benefit costs	$	(5,555	)

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 13.5 years for 2016.

The benefit obligation was determined by applying the terms of the plan and actuarial models. These models include various actuarial assumptions, including discount rates, long-term 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,
	2016		2015		2014
Discount rate	4.20	%	3.89	%	4.90	%
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 following assumptions were used to determine benefit obligations at December 31:



	2016		2015		2014
Discount rate	4.00	%	4.20	%	3.89	%
Expected long-term rate of return on plan assets, net of tax	7.13	%	6.65	%	6.65	%
Initial healthcare cost trend rate	6.81	%	7.00	%	7.25	%
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, 2016, the Company decreased the discount rate from 4.20% to 4.00% to reflect the decrease in the market interest rates, which contributed to the unrealized actuarial loss at December 31, 2016. As of December 31, 2016, 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 2015 to Mortality Table RPH-2014 with Mortality Improvement Scale MP 2016, 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, 2016, Grainger adopted a new healthcare trend rate to include a pre and post age 65 trend rates. Post age 65, prescription drug costs, primarily specialty drugs, are expected to increase the cost of healthcare more significantly than medical expenses. The alternative trend rates allow for a better estimate of expected costs for this plan. As of December 31, 2016, the initial healthcare cost trend rate was 6.81% for pre age 65 and 9.36% for post age 65. The healthcare costs trend rates decline each year until reaching the ultimate trend rate of 4.50%. 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 2016 results (in thousands of dollars):



	1 Percentage Point
	Increase		(Decrease)
Effect on total service and interest cost	$	1,411	$	(1,162	)
Effect on postretirement benefit obligation	27,542		(22,748		)

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). The plan assets available for benefits are net of Trust liabilities, primarily related to deferred income taxes and taxes payable at December 31 (in thousands of dollars):



	2016			2015
Registered investment companies:
Fidelity Spartan U.S. Equity Index Fund	$	70,950		$	70,973
Vanguard 500 Index Fund	87,587			78,254
Vanguard Total International Stock	24,056			22,976
Plan Assets	182,593			172,203
Trust liabilities	(19,048		)	(16,592		)
Plan assets available for benefits	$	163,545		$	155,611

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. The Company increased the after-tax expected long-term rates of return on plan assets from 6.65% to 7.13% at December 31, 2016, based on the historical average of long-term rates of return and a lower estimated tax rate. This change was due to the nature of the taxable income earned on Trust investments. 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 related to postretirement (which include a projection for expected future employee service) for the next ten years (in thousands of dollars):



Year	Estimated Gross Benefit Payments
2017	$	8,211
2018	9,236
2019	10,212
2020	11,428
2021	12,692
2022-2026	78,216