EMPLOYEE RETIREMENT PLANS

Defined contribution plans

Southwest has defined contribution plans covering substantially all of its Employees. Contributions under all defined contribution plans are primarily based on Employee compensation and performance of the Company. The Company sponsors Employee savings plans under section 401(k) of the Internal Revenue Code, which include Company matching contributions. In addition, the Southwest Airlines Co. ProfitSharing Plan (ProfitSharing Plan) is a defined contribution plan to which the Company may contribute a percentage of its eligible pre-tax profits, as defined, on an annual basis. No Employee contributions to the ProfitSharing Plan are allowed. AirTran Employees became eligible to participate in Southwest’s ProfitSharing Plan beginning January 1, 2012.

Company contributions to all defined contribution plans expensed in 2014, 2013, and 2012, reflected as a component of Salaries, wages, and benefits, were $644 million, $497 million, and $370 million, respectively.

Postretirement benefit plans

The Company provides postretirement benefits to qualified retirees in the form of medical and dental coverage. Employees must meet minimum levels of service and age requirements as set forth by the Company, or as specified in collective bargaining agreements with specific workgroups. Employees meeting these requirements, as defined, may use accrued unused sick time to pay for medical and dental premiums from the age of retirement until age 65.

The following table shows the change in the accumulated postretirement benefit obligation (APBO) for the years ended December 31, 2014 and 2013:



(in millions)	2014			2013
APBO at beginning of period	$	138		$	148
Service cost	10			30
Interest cost	7			4
Benefits paid	(4		)	(3		)
Actuarial (gain)/loss	21			(41		)
Settlements	$	(3	)	$	—
APBO at end of period	$	169		$	138

All plans are unfunded, and benefits are paid as they become due. Estimated future benefit payments expected to be paid are $5 million in 2015, $6 million in 2016, $7 million in 2017, $7 million in 2018, $8 million in 2019, and $55 million for the next five years thereafter.

The funded status (the difference between the fair value of plan assets and the projected benefit obligations) of the Company’s consolidated benefit plans are recognized in the Consolidated Balance Sheet, with a corresponding adjustment to AOCI. The following table reconciles the funded status of the plans to the accrued postretirement benefit cost recognized in Other non-current liabilities on the Company’s Consolidated Balance Sheet at December 31, 2014 and 2013.



(in millions)	2014			2013
Funded status	$	(169	)	$	(138	)
Unrecognized net actuarial gain	(53		)	(80		)
Unrecognized prior service cost	12			15
Accumulated other comprehensive income	41			65
Cost recognized on Consolidated Balance Sheet	$	(169	)	$	(138	)

The consolidated periodic postretirement benefit cost for the years ended December 31, 2014, 2013, and 2012, included the following:



(in millions)	2014			2013			2012
Service cost	$	10		$	30		$	20
Interest cost	7			4			4
Amortization of prior service cost	3			3			—
Recognized actuarial gain	(4		)	(4		)	(5		)
Settlements	$	(1	)	$	—		$	—
Net periodic postretirement benefit cost	$	15		$	33		$	19

Unrecognized prior service cost is expensed using a straight-line amortization of the cost over the average future service of Employees expected to receive benefits under the plans. Actuarial gains are amortized utilizing the minimum amortization method. The following actuarial assumptions were used to account for the Company’s postretirement benefit plans at December 31, 2014, 2013, and 2012:



	2014		2013		2012
Weighted-average discount rate	4.10	%	5.05	%	2.90	%
Assumed healthcare cost trend rate (1)	6.88	%	7.50	%	8.00	%


(1)	The assumed healthcare cost trend rate is assumed to remain at 6.88% for 2015, then decline gradually to 5.00% by 2025 and remain level thereafter.

The assumed healthcare cost trend rates have a significant effect on the amounts reported for the consolidated postretirement plans. A one percent change in all healthcare cost trend rates used in measuring the APBO at December 31, 2014, would have the following effects:



(in millions)	1% increase		1% decrease
Increase (decrease) in total service and interest costs	$	3	$	(2	)
Increase (decrease) in the APBO	$	24	$	(20	)

The selection of a discount rate is made annually and is selected by the Company based upon comparison of the expected future cash flows associated with the Company’s future payments under its consolidated postretirement obligations to a yield curve created using high quality bonds that closely match those expected future cash flows. This rate decreased during 2014 due to market conditions. The assumed healthcare trend rate is also reviewed at least annually and is determined based upon both historical experience with the Company’s healthcare benefits paid and expectations of how those trends may or may not change in future years.