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. In addition, employees covered by the plan are also able to make personal contributions. 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 $120 million, $84 million and $121 million for 2017, 2016 and 2015, 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 $18 million, $12 million and $11 million for 2017, 2016 and 2015, 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 Healthcare Benefits Plans

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.

During the third quarter of 2017, the Company implemented plan design changes effective January 1, 2018, for the post-65 age group. This plan change will move all post-65 Medicare eligible retirees to healthcare exchanges and provide them a subsidy to purchase insurance. The amount of the subsidy will be based on years of service. As of August 31, 2017, as a result of the plan change, the plan obligation was remeasured. The remeasurement resulted in a decrease in the postretirement benefit obligation of $75.7 million and a corresponding unrecognized gain recorded in Other comprehensive earnings net of tax of $29.2 million.

The net periodic benefits costs charged to operating expenses, which were valued with a measurement date of January 1 for each year and August 31, 2017 remeasurement date, consisted of the following components (in thousands of dollars):



	For the Years Ended December 31,
	2017			2016			2015
Service cost	$	7,423		$	8,238		$	10,128
Interest cost	8,103			9,855			9,649
Expected return on assets	(11,826		)	(10,113		)	(10,375		)
Amortization of prior service credit	(7,570		)	(6,688		)	(6,801		)
Amortization of unrecognized (gains) losses	(2,437		)	129			1,512
Net periodic (benefits) costs	$	(6,307	)	$	1,421		$	4,113

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):



	2017			2016
Benefit obligation at beginning of year	$	265,028		$	239,348
Service cost	7,423			8,238
Interest cost	8,103			9,855
Plan participants' contributions	3,346			2,943
Actuarial (gains) losses	(34,236		)	13,218
Plan amendment	(34,182		)	—
Benefits paid	(8,631		)	(9,439		)
Prescription drug rebates	1,499			865
Benefit obligation at end of year	208,350			265,028

Plan assets available for benefits at beginning of year	163,545			155,611
Actual returns on plan assets	29,477			13,557
Plan participants' contributions	3,266			2,774
Benefits paid	(8,295		)	(9,262		)
Prescription drug rebates	1,499			865
Plan assets available for benefits at end of year	189,492			163,545
Noncurrent postretirement benefit obligation	$	18,858		$	101,483

The amounts recognized in Accumulated other comprehensive earnings (AOCE) consisted of the following (in thousands of dollars):



	As of December 31,
	2017			2016
Prior service credit	$	80,426		$	53,814
Unrecognized gains (losses)	36,794			(12,656		)
Deferred tax (liability)	(43,793		)	(15,861		)
Net accumulated gains	$	73,427		$	25,297

The $49 million increase in unrecognized gain was primarily driven by the plan amendment and a change in census, claims costs and other actuarial assumptions offset by a decrease in the discount rate.

The components of AOCE related to unrecognized gains that will be amortized into net periodic postretirement benefit costs in 2018 are estimated as follows (in thousands of dollars):



	2018
Amortization of prior service credit	$	(9,696	)
Amortization of unrecognized gains	(2,787		)
Estimated amount to be amortized from AOCE into net periodic postretirement benefit costs	$	(12,483	)

The Company has elected to amortize the amount of net unrecognized gains over a period equal to the average remaining service period for active plan participants expected to retire and receive benefits of approximately 13.2 years for 2017.

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 of each year (excluding the August 31, 2017 remeasurement date):



	For the Years Ended December 31,
	2017		2016		2015
Discount rate	4.00	%	4.20	%	3.89	%
Long-term rate of return on plan assets, net of tax	7.13	%	6.65	%	6.65	%
Initial healthcare cost trend rate - pre age 65	6.81	%	7.00	%	7.25	%
Initial healthcare cost trend rate - post age 65	9.36	%	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 following assumptions were used to determine benefit obligations at December 31:



	2017		2016		2015
Discount rate	3.44	%	4.00	%	4.20	%
Expected long-term rate of return on plan assets, net of tax	7.13	%	7.13	%	6.65	%
Initial healthcare cost trend rate - pre age 65	6.56	%	6.81	%	7.00	%
Initial healthcare cost trend rate - post age 65	N/A		9.36	%	7.00	%
Catastrophic drug benefit	12.50	%	N/A		N/A
Ultimate healthcare cost trend rate	4.50	%	4.50	%	4.50	%
Year ultimate healthcare cost trend rate reached	2026		2026		2026
HRA credit inflation index for grandfathered retirees	2.50	%	N/A		N/A

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, 2017, the Company decreased the discount rate from 4.00% to 3.44% to reflect the decrease in the market interest rates, which offset the unrealized actuarial gain at December 31, 2017. As of December 31, 2017, the Company changed the mortality improvement table used to project mortality rates into the future from Mortality Table RPH-2014 with Mortality Improvement Scale MP 2016 to Mortality Table RPH-2014 with Mortality Improvement Scale MP 2017, 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, 2017, the initial healthcare cost trend rate was 6.56% for pre age 65. The healthcare costs trend rates decline each year until reaching the ultimate trend rate of 4.50%. The plan amendment adopted in 2017 moves all post age 65 Medicare eligible retirees to an exchange and provides a subsidy to those retirees to purchase insurance. The amount of the subsidy is based on years of service and is indexed at 2.50% for grandfathered employees. 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 2017 results (in thousands of dollars):



	1 Percentage Point
	Increase		(Decrease)
Effect on total service and interest cost	$	1,269	$	(1,053	)
Effect on postretirement benefit obligation	5,516		(5,095		)

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):



	2017			2016
Registered investment companies:
Fidelity Spartan U.S. Equity Index Fund	$	83,238		$	70,950
Vanguard 500 Index Fund	103,706			87,587
Vanguard Total International Stock	30,684			24,056
Plan Assets	217,628			182,593
Trust liabilities	(28,136		)	(19,048		)
Plan assets available for benefits	$	189,492		$	163,545

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 after-tax expected long-term rates of return on plan assets of 7.13% at December 31, 2017 is based on the historical average of long-term rates of return and an estimated tax rate. 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 no 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
2018	$	7,365
2019	8,956
2020	10,029
2021	11,025
2022	12,077
2023-2027	67,760