|Notes to Consolidated Financial Statements|
NOTE >5 > BENEFIT PLANS
Expenses for retirement and savings-related benefit plans were as follows:
Sears 401(k) Profit
The Plan includes an Employee Stock Ownership Plan ("the ESOP") to prefund a portion of the Company's anticipated contribution. The Company provided the ESOP with a loan that was used to purchase Sears common shares in 1989. In June 1998, the ESOP refinanced the loan and extended its maturity to 2024. The purchased shares represent deferred compensation expense, which is presented as a reduction of shareholders' equity and recognized as expense when the shares are allocated to employees to fund the Company contribution. The per share cost of Sears common shares purchased by the ESOP in 1989 was $15.27. The Company uses the ESOP shares to fund the Company contribution, which thereby reduces expense.
The ESOP loan bears interest at 6.1% (9.2% prior to refinancing) and is repaid from dividends on the ESOP shares and additional cash payments provided by the Company. The Company has contributed cash to the ESOP annually in the amount equal to the ESOP's required interest and principal payments on the loan, less dividends received on the ESOP shares. The cash payments amounted to $57, $24 and $23 million in 1999, 1998 and 1997, respectively. The balance of the ESOP loan was $210 and $267 million at January 1, 2000 and January 2, 1999, respectively. Cash on hand in the ESOP at January 1, 2000 was $4 million.
The reported expense is determined as follows:
At December 31, 1999, total committed to be released, allocated and remaining unallocated ESOP shares were 2.7, 14.4 and 8.8 million, respectively. All ESOP shares are considered outstanding in the calculation of earnings per share.
In addition to providing pension benefits, the Company provides certain medical and life insurance benefits for retired employees. Employees may become eligible for medical benefits if they retire in accordance with the Company's established retirement policy and are continuously insured under the Company's group medical plans or other approved plans for 10 or more years immediately prior to retirement. The Company shares the cost of the retiree medical benefits with retirees based on years of service. Generally, the Company's share of these benefit costs will be capped at the Company contribution calculated during the first year of retirement. The Company's postretirement benefit plans are not funded. The Company has the right to modify or terminate these plans.
The change in benefit obligation, change in plan assets, funded status, reconciliation to amounts recognized in the consolidated balance sheets and weighted average assumptions are as follows:
The components of net periodic benefit cost are as follows:
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $2,236, $2,110 and $1,866 million, respectively, at January 1, 2000, and $2,309, $2,210 and $1,845 million, respectively, at January 2, 1999. The provisions of SFAS No. 87, "Employers' Accounting for Pensions," require the recognition of a minimum pension liability for each defined benefit plan for which the accumulated benefit obligation exceeds plan assets. The minimum pension liability, net of tax, was $195 million at January 1, 2000 and $299 million at January 2, 1999, and is included in accumulated other comprehensive income as a reduction of shareholders' equity.
In 1997, the Company announced changes to its postretirement life insurance benefit plan. Retiree life insurance benefits were eliminated for all active associates not retired by December 31, 1997. This plan change resulted in a one-time pretax gain of $61 million. In connection with the elimination of retirement life insurance benefits for all active associates, the Company also announced the reduction in life insurance over a 10-year period to a maximum coverage of $5,000 for all post-1977 retirees.
The weighted average health care cost trend rate used in measuring the postretirement benefit expense in 2000 is 6.0% for pre-65 retirees and 7.5% for post-65 retirees. For 2001 and beyond, the trend rates are 5.0% for pre-65 retirees and 6.5% for post-65 retirees. A one percentage point change in the assumed health care cost trend rate would have the following effects:
Annual Report 1999