RETIREMENT PLANS

As described in more detail below, Eastman offers various postretirement benefits to its employees.

Defined Contribution Plans

The Company sponsors a defined contribution employee stock ownership plan (the "ESOP"), which is a component of the Eastman Investment Plan and Employee Stock Ownership Plan ("EIP/ESOP"), a plan under Section 401(a) of the Internal Revenue Code. Eastman made a contribution in February 2017 to the EIP/ESOP for substantially all U.S. employees equal to 5 percent of their eligible compensation for the 2016 plan year. Employees may allocate contributions to other investment funds within the EIP from the ESOP at any time without restrictions. Allocated shares in the ESOP totaled 2,183,950; 2,199,000; and 2,197,740 shares as of December 31, 2016, 2015, and 2014, respectively. Dividends on shares held by the EIP/ESOP are charged to retained earnings. All shares held by the EIP/ESOP are treated as outstanding in computing earnings per share.

In 2006, the Company amended its EIP/ESOP to provide a Company match of 50 percent of the first 7 percent of an employee's compensation contributed to the plan for employees who are hired on or after January 1, 2007. Employees who are hired on or after January 1, 2007, are also eligible for the contribution to the ESOP as described above.

Charges for domestic contributions to the EIP/ESOP were $63 million, $62 million, and $56 million for 2016, 2015, and 2014, respectively.

Defined Benefit Pension Plans and Other Postretirement Benefit Plans

Pension Plans

Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits.

Effective January 1, 2000, the Company's Eastman Retirement Assistance Plan, a U.S. defined benefit pension plan, was amended. Employees' accrued pension benefits earned prior to January 1, 2000 are calculated based on previous plan provisions using the employee's age, years of service, and final average compensation as defined in the plans. The amended plan uses a pension equity formula to calculate an employee's retirement benefits from January 1, 2000 forward. Benefits payable will be the combined pre-2000 and post-1999 benefits. Employees hired on or after January 1, 2007 are not eligible to participate in Eastman's U.S. defined benefit pension plans.

In December 2014, as part of its acquisition of Taminco, the Company assumed Taminco's non-U.S. defined benefit pension plans in Belgium and Finland. For more information on this acquisition, see Note 2, "Acquisitions".

Benefits are paid to employees from trust funds. Contributions to the trust funds are made as permitted by laws and regulations. The pension trust funds do not directly own any of the Company's common stock.

Pension coverage for employees of Eastman's non-U.S. operations is provided, to the extent deemed appropriate, through separate plans. The Company systematically provides for obligations under such plans by depositing funds with trustees, under insurance policies, or by book reserves.

Other Postretirement Benefit Plans

Under its other postretirement benefit plans, Eastman provides a subsidy for life insurance, health care, and dental benefits to eligible retirees hired prior to January 1, 2007, and a subsidy for health care and dental benefits to retirees' eligible survivors. In general, Eastman provides those benefits to retirees eligible under the Company's U.S. plans. Similar benefits are also made available to retirees of Holston Defense Corporation, a wholly-owned subsidiary of the Company that, prior to January 1, 1999, operated a government-owned ammunition plant.

Employees in the U.S. hired on or after January 1, 2007 do not have access to postretirement health care benefits. A few of the Company's non-U.S. operations have supplemental health benefit plans for certain retirees, the cost of which is not significant to the Company.

In December 2014, as part of its acquisition of Taminco, the Company assumed Taminco's U.S. postretirement benefit plan. For more information on this acquisition, see Note 2, "Acquisitions".

Below is a summary balance sheet of the change in plan assets during 2016 and 2015, the funded status of the plans, amounts recognized in the Consolidated Statements of Financial Position, and a summary of amounts recognized in accumulated other comprehensive income.

Summary of Changes



	Pension Plans												Postretirement Benefit Plans
	2016						2015						2016			2015
(Dollars in millions)	U.S.			Non-U.S.			U.S.			Non-U.S.
Change in projected benefit obligation:
Benefit obligation, beginning of year	$	2,262		$	763		$	2,356		$	867		$	853		$	1,014
Service cost	39			12			39			15			5			8
Interest cost	74			23			87			26			27			39
Actuarial (gain) loss	38			123			(31		)	(50		)	12			(13		)
Curtailment gain	—			—			—			(4		)	—			(2		)
Settlement	(54		)	—			—			—			—			—
Acquisitions	—			—			—			(10		)	—			—
Plan amendments and other	2			—			—			—			(106		)	(140		)
Plan participants' contributions	—			1			—			2			14			15
Effect of currency exchange	—			(100		)	—			(61		)	—			(2		)
Federal subsidy on benefits paid	—			—			—			—			1			1
Benefits paid	(220		)	(21		)	(189		)	(22		)	(69		)	(67		)
Benefit obligation, end of year	$	2,141		$	801		$	2,262		$	763		$	737		$	853
Change in plan assets:
Fair value of plan assets, beginning of year	$	1,887		$	650		$	1,968		$	699		$	157		$	176
Actual return on plan assets	142			103			(23		)	7			12			(1		)
Effect of currency exchange	—			(84		)	—			(48		)	—			—
Company contributions	204			18			131			21			39			34
Reserve for third party contributions	—			—			—			—			(5		)	(1		)
Plan participants' contributions	—			1			—			2			14			15
Benefits paid	(220		)	(21		)	(189		)	(22		)	(69		)	(67		)
Federal subsidy on benefits paid	—			—			—			—			1			1
Settlements	(54		)	—			—			—			—			—
Acquisitions	—			—			—			(9		)	—			—
Fair value of plan assets, end of year	$	1,959		$	667		$	1,887		$	650		$	149		$	157
Funded status at end of year	$	(182	)	$	(134	)	$	(375	)	$	(113	)	$	(588	)	$	(696	)
Amounts recognized in the Consolidated Statements of Financial Position consist of:
Other noncurrent assets	$	3		$	—		$	—		$	7		$	30		$	19
Current liabilities	(7		)	(1		)	(3		)	—			(42		)	(43		)
Post-employment obligations	(178		)	(133		)	(372		)	(120		)	(576		)	(672		)
Net amount recognized, end of year	$	(182	)	$	(134	)	$	(375	)	$	(113	)	$	(588	)	$	(696	)
Accumulated benefit obligation	$	2,030		$	753		$	2,146		$	721
Amounts recognized in accumulated other comprehensive income consist of:
Prior service (credit) cost	$	(3	)	$	2		$	(10	)	$	2		$	(262	)	$	(200	)

Information for pension plans with projected benefit obligations in excess of plan assets:



(Dollars in millions)	2016				2015
	U.S.		Non-U.S.		U.S.		Non-U.S.
Projected benefit obligation	$	1,865	$	801	$	2,262	$	622
Fair value of plan assets	1,680		667		1,887		501

Information for pension plans with accumulated benefit obligations in excess of plan assets:



(Dollars in millions)	2016				2015
	U.S.		Non-U.S.		U.S.		Non-U.S.
Projected benefit obligation	$	1,865	$	557	$	2,262	$	622
Accumulated benefit obligation	1,754		535		2,146		584
Fair value of plan assets	1,680		434		1,887		501

Components of net periodic benefit (credit) cost were as follows:

Summary of Benefit Costs and Other Amounts Recognized in Other Comprehensive Income



	Pension Plans																		Postretirement Benefit Plans
	2016						2015						2014						2016			2015			2014
(Dollars in millions)	U.S.			Non-U.S.			U.S.			Non-U.S.			U.S.			Non-U.S.
Components of net periodic benefit (credit) cost:
Service cost	$	39		$	12		$	39		$	15		$	40		$	14		$	5		$	8		$	8
Interest cost	74			23			87			26			100			31			27			39			45
Expected return on plan assets	(138		)	(32		)	(148		)	(37		)	(143		)	(38		)	(6		)	(6		)	(7		)
Curtailment gain ⁽¹⁾	—			—			—			(7		)	—			—			—			(2		)	—
Amortization of:
Prior service cost (credit)	(4		)	—			(4		)	1			(4		)	—			(44		)	(24		)	(24		)
Mark-to-market pension and other postretirement benefits (gain) loss, net	34			52			140			(20		)	166			95			11			(5		)	43
Net periodic benefit (credit) cost	$	5		$	55		$	114		$	(22	)	$	159		$	102		$	(7	)	$	10		$	65
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Curtailment gain	$	—		$	—		$	—		$	(3	)	$	—		$	—		$	—		$	—		$	—
Current year prior service credit (cost)	(3		)	—			—			—			—			—			106			140			—
Amortization of:
Prior service cost (credit)	(4		)	—			(4		)	1			(4		)	—			(44		)	(24		)	(24		)
Total	$	(7	)	$	—		$	(4	)	$	(2	)	$	(4	)	$	—		$	62		$	116		$	(24	)


⁽¹⁾	Gain of $7 million in 2015 in the Fibers segment related to the remeasurement of the Workington, UK pension plan, triggered by the closure of the Workington, UK acetate tow manufacturing facility.

In fourth quarter 2016, the Company changed benefits provided to retirees by an Eastman other postretirement benefit plan which triggered a remeasurement of the plan's obligation. The remeasurement resulted in a pre-tax reduction in the accumulated postretirement benefit obligation of approximately $106 million which will be amortized as a prior service credit from accumulated other comprehensive income over approximately eight years. The remeasurement was included in the 2016 year end remeasurement process.

In third quarter 2016, the Company announced a change to a UK defined benefit pension plan which triggered an interim remeasurement of the plan obligation resulting in a MTM loss of $30 million. The MTM loss was primarily due to a lower discount rate at the third quarter 2016 remeasurement date compared to December 31, 2015. The lower discount rate was reflective of changes in global market conditions and interest rates on high-grade corporate bonds. The plan was remeasured in fourth quarter 2016 as part of the annual MTM remeasurement process.

In first quarter 2016, the Company changed the approach used to calculate service and interest cost components of net periodic benefit costs for its significant defined benefit pension and other postretirement benefit plans. The Company elected to calculate service and interest costs by applying the specific spot rates along the yield curve to the plans' projected cash flows. The change does not affect the measurement of the total benefit obligation or the annual net periodic benefit cost or credit of the plans because the change in the service and interest costs will be offset in the MTM actuarial gain or loss which typically is recognized in the fourth quarter of each year or in any other quarters in which an interim remeasurement is triggered. The change in the approach for full-year 2016 pre-tax expense was an increase to service cost of approximately $2 million and a reduction in interest cost of approximately $22 million compared to the previous method. The net reduction of approximately $20 million was offset by a MTM loss as part of the annual remeasurement of the plans in fourth quarter 2016.

In fourth quarter 2015, the Company changed benefits provided to retirees by the Eastman other postretirement benefit plan which triggered a remeasurement of the plan's obligation. The remeasurement resulted in a reduction in the accumulated postretirement benefit obligation of approximately $140 million which will be amortized as a prior service credit from accumulated other comprehensive income over approximately eight years. The remeasurement was included in the 2015 year end remeasurement process.

The estimated prior service credit for the U.S. pension and other postretirement benefit plans that will be amortized from accumulated other comprehensive income into net periodic cost in 2017 is $4 million and $40 million, respectively.

The assumptions used to develop the projected benefit obligation for the Company's significant U.S. and non-U.S. defined benefit pension plans and U.S. postretirement benefit plans are provided in the following tables.



	Pension Plans												Postretirement Benefit Plans
Weighted-average assumptions used to determine benefit obligations for years ended December 31:	2016				2015				2014				2016		2015		2014
	U.S.		Non-U.S.		U.S.		Non-U.S.		U.S.		Non-U.S.
Discount rate	3.89	%	2.33	%	4.13	%	3.26	%	3.80	%	3.10	%	3.91	%	4.17	%	3.91	%
Rate of compensation increase	3.25	%	2.94	%	3.50	%	3.00	%	3.50	%	3.24	%	3.25	%	3.50	%	3.50	%
Health care cost trend
Initial													7.00	%	7.50	%	7.50	%
Decreasing to ultimate trend of													5.00	%	5.00	%	5.00	%
in year													2021		2021		2020
Weighted-average assumptions used to determine net periodic cost for years ended December 31:	2016				2015				2014				2016		2015		2014
	U.S.		Non-U.S.		U.S.		Non-U.S.		U.S.		Non-U.S.
Discount rate	4.13	%	3.26	%	3.80	%	3.10	%	4.59	%	4.18	%	4.17	%	3.91	%	4.75	%
Discount rate for service cost	4.13	%	3.26	%	3.80	%	3.10	%	4.59	%	4.18	%	4.57	%	3.91	%	4.75	%
Discount rate for interest cost	3.33	%	3.26	%	3.80	%	3.10	%	4.59	%	4.18	%	3.42	%	3.91	%	4.75	%
Expected return on assets	7.60	%	5.11	%	7.78	%	5.50	%	7.83	%	5.78	%	3.75	%	3.75	%	3.75	%
Rate of compensation increase	3.50	%	3.00	%	3.50	%	3.24	%	3.50	%	3.49	%	3.50	%	3.50	%	3.50	%
Health care cost trend
Initial													7.50	%	7.50	%	8.00	%
Decreasing to ultimate trend of													5.00	%	5.00	%	5.00	%
in year													2021		2020		2020

A seven percent rate of increase in per capita cost of covered health care benefits is assumed for 2017. The rate is assumed to decrease gradually to five percent in 2021 and remain at that level thereafter. A one percent increase or decrease in health care cost trend would have had no material impact on the 2016 service and interest costs or the 2016 benefit obligation, because the Company's contributions for benefits are fixed.

The Company performed a five year experience study on assumptions for the U.S. plans in 2014 which included a review of the mortality tables. As a result of the study, the Company continues to use the RP-2000 table with scale AA static improvement scale and no collar adjustment as it most closely aligns with the Company's experience.

The fair value of plan assets for the U.S. pension plans at December 31, 2016 and 2015 was $2.0 billion and $1.9 billion, respectively, while the fair value of plan assets at December 31, 2016 and 2015 for non-U.S. pension plans was $667 million and $650 million, respectively. At December 31, 2016 and 2015, the expected weighted-average long-term rate of return on U.S. pension plan assets was 7.49 percent and 7.60 percent, respectively. The expected weighted-average long-term rate of return on non-U.S. pension plans assets was 5.02 percent and 5.11 percent at December 31, 2016 and 2015, respectively.

The following charts reflect the fair value of the defined benefit pension plans assets as of December 31, 2016 and 2015.



(Dollars in millions)					Fair Value Measurements at December 31, 2016
Description	December 31, 2016				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Pension Assets:	U.S.		Non-U.S.		U.S.		Non-U.S.		U.S.		Non-U.S.		U.S.		Non-U.S.
Cash & Cash Equivalents ⁽¹⁾	$	41	$	25	$	41	$	25	$	—	$	—	$	—	$	—
Public Equity - United States ⁽²⁾	4		—		4		—		—		—		—		—
Other Investments ⁽³⁾	—		44		—		—		—		—		—		44
Total Assets at Fair Value	$	45	$	69	$	45	$	25	$	—	$	—	$	—	$	44
Investments Measured at Net Asset Value ⁽⁴⁾	1,914		598
Total Assets	$	1,959	$	667



(Dollars in millions)					Fair Value Measurements at December 31, 2015
Description	December 31, 2015				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Pension Assets:	U.S.		Non-U.S.		U.S.		Non-U.S.		U.S.		Non-U.S.		U.S.		Non-U.S.
Cash & Cash Equivalents ⁽¹⁾	$	66	$	7	$	66	$	7	$	—	$	—	$	—	$	—
Other Investments ⁽³⁾	—		42		—		—		—		—		—		42
Total Assets at Fair Value	$	66	$	49	$	66	$	7	$	—	$	—	$	—	$	42
Investments Measured at Net Asset Value ⁽⁴⁾	1,821		601
Total Assets	$	1,887	$	650


⁽¹⁾	Cash & Cash Equivalents: Amounts are generally invested in actively managed collective trust funds or interest bearing accounts.


⁽²⁾	Public Equity - United States: Amount for common stock equity securities which are primarily valued using a market approach based on the quoted market prices.


⁽³⁾	Other Investments: Primarily consist of insurance contract which are generally valued using a crediting rate that approximates market returns and invest in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques.

⁽⁴⁾

Investments Measured at Net Asset Value: The underlying debt and public equity investments in this category are generally held in common trust funds, which are either actively or passively managed investment vehicles, that are valued at the net asset value per unit/share multiplied by the number of units/shares held as of the measurement date. The other alternative investments in this category are valued under the practical expedient method which is based on the most recently reported net asset value provided by the management of each private investment fund, adjusted as appropriate, for any lag between the date of the financial reports and the measurement date. The disclosure of investments measured at net asset value, as a practical expedient for fair value, have been conformed to the disclosure provisions under updates to fair value measurement issued in 2015.

The following charts reflect the fair value of the postretirement benefit plan assets as of December 31, 2016 and 2015. The postretirement benefit plan is for the voluntary employees' beneficiary association ("VEBA") trust the Company assumed as part of the Solutia acquisition.



(Dollars in millions)			Fair Value Measurements at December 31, 2016
Description	December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Postretirement Benefit Plan Assets:
Cash & Cash Equivalents ⁽¹⁾	$	3	$	3	$	—	$	—
Debt ⁽²⁾:
Fixed Income (U.S.)	82		—		82		—
Fixed Income (Non-U.S.)	30		—		30		—
Total	$	115	$	3	$	112	$	—



(Dollars in millions)			Fair Value Measurements at December 31, 2015
Description	December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Postretirement Benefit Plan Assets:
Debt ⁽²⁾:
Fixed Income (U.S.)	$	86	$	—	$	86	$	—
Fixed Income (Non-U.S.)	34		—		34		—
Total	$	120	$	—	$	120	$	—


⁽¹⁾	Cash & Cash Equivalents: Amounts are generally invested in actively managed collective trust funds or interest bearing accounts.

⁽²⁾

Debt: The fixed income securities are primarily valued upon a market approach, using matrix pricing and considering a security’s relationship to other securities for which quoted prices in an active market may be available, or an income approach, converting future cash flows to a single present value amount. Inputs used in developing fair value estimates include reported trades, broker quotes, benchmark yields, and base spreads

The Company valued assets with unobservable inputs (Level 3), primarily insurance contracts, using a crediting rate that approximates market returns and invest in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques.



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Other Investments⁽¹⁾
(Dollars in millions)	U.S. Pension Plans			Non-U.S. Pension Plans
Balance at December 31, 2014	$	4		$	55
Distributions	(4		)	—
Unrealized gains	—			(5		)
Purchases, contributions, and other	—			(8		)
Balance at December 31, 2015	—			42
Distributions	—			—
Unrealized gains	—			2
Purchases, contributions, and other	—			—
Balance at December 31, 2016	$	—		$	44


⁽¹⁾	Primarily consists of insurance contracts.

The following chart reflects the target allocation for the Company's U.S. and non-U.S. pension and postretirement benefit plans assets for 2017 and the asset allocation at December 31, 2016 and 2015, by asset category. The postretirement benefit plan is for the VEBA trust the Company assumed as part of the Solutia acquisition.



	U.S. Pension Plans			Non-U.S. Pension Plans			Postretirement Benefit Plan
	Target Allocation	Plan Assets at December 31, 2016	Plan Assets at December 31, 2015	Target Allocation	Plan Assets at December 31, 2016	Plan Assets at December 31, 2015	Target Allocation	Plan Assets at December 31, 2016	Plan Assets at December 31, 2015
Asset category
Equity securities	45%	47%	44%	33%	30%	36%	—%	—%	—%
Debt securities	39%	41%	41%	47%	52%	46%	100%	100%	100%
Real estate	3%	2%	4%	2%	2%	2%	—%	—%	—%
Other investments ⁽¹⁾	13%	10%	11%	18%	16%	16%	—%	—%	—%
Total	100%	100%	100%	100%	100%	100%	100%	100%	100%


⁽¹⁾	U.S. primarily consists of private equity and natural resource and energy related limited partnership investments. Non-U.S. primarily consists of annuity contracts and alternative investments.

The Company's investment strategy for its defined benefit pension plans is to maximize the long-term rate of return on plan assets within an acceptable level of risk in order to meet or exceed the plan's actuarially assumed long-term rate of return and to minimize the cost of providing pension benefits. A periodic asset/liability study is conducted in order to assist in the determination and, if necessary, modification of the appropriate long-term investment policy for the plan. The investment policy establishes a target allocation range for each asset class and the fund is managed within those ranges. The plans use a number of investment approaches including investments in equity, real estate, and fixed income funds in which the underlying securities are marketable in order to achieve this target allocation. The plans also invest in private equity and other funds. Diversification is created through investment across various asset classes, geographies, fund managers, and individual securities. This investment process is designed to provide for a well-diversified portfolio with no significant concentration of risk. The investment process is monitored by an investment committee comprised of various senior executives from within Eastman.

In December 2014, as part of its acquisition of Taminco, the Company assumed Taminco's non-U.S. defined benefit pension plans in Belgium and Finland. The pension plans' assets consist of guaranteed investment contracts with an insurance company. The Company also assumed Taminco's U.S. postretirement benefit plan which has no plan assets.

In July 2012, as part of its acquisition of Solutia, the Company assumed Solutia's defined benefit pension and other postretirement benefit plans. The Solutia defined benefit pension plans adhere to the Company's defined benefit plan investment strategy. The Solutia defined benefit pension plans also utilize a dynamic de-risking strategy to shift from growth assets to liability matching assets as the plan's funded status improves. The investment strategy with respect to Solutia's other postretirement benefits plan is to invest in an intermediate-term, well diversified, high quality investment instruments, with a primary objective of capital preservation.

The expected rate of return for all plans was determined primarily by modeling the expected long-term rates of return for the categories of investments held by the plans and the targeted allocation percentage against various potential economic scenarios.

The Company funded its U.S. defined benefit pension plans in the amount of $200 million in 2016 and $125 million in 2015. For 2017, there are no minimum required cash contributions for the U.S. defined benefit pension plans under the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended.

The estimated future benefit payments, reflecting expected future service, as appropriate, are as follows:



	Pension Plans				Postretirement Benefit Plans
(Dollars in millions)	U.S.		Non-U.S.
2017	$	236	$	21	$	57
2018	191		21		56
2019	188		21		57
2020	186		22		57
2021	179		24		56
2022-2026	803		139		232