NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 2017 AND 2016
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1.
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DESCRIPTION OF THE PLAN
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General
- The UPS 401(k) Savings Plan (the “Plan”) is an employee voluntary and plan sponsor contributory defined contribution plan established for employees of United Parcel Service of America, Inc. ("UPS") who are not members of a collective bargaining unit and who satisfy the participation requirements of the Plan, which are described below. The Plan is subject to the provisions of the Employee Retirement Income Security Act (ERISA) of 1974, as amended. Participants should refer to the Plan document for more complete information.
The Plan became effective July 1, 1988, and has been amended periodically. The Plan allows participants to defer a portion of their compensation, subject to the
2017
Internal Revenue Service (IRS) yearly limit of $18,000, on a pretax and/or Roth basis under the rules of Section 401(k) of the Internal Revenue Code (IRC). The Plan includes an auto-enrollment provision whereby certain newly eligible employees are automatically enrolled in the Plan unless they affirmatively elect not to participate in the Plan. Automatically enrolled participants have their deferral rate set at 6% of eligible compensation and their contributions invested in an age appropriate Target Date Fund until changed by the participant. The contribution percentage will be increased 1% annually, as provided in the Plan document, until it reaches 10% of eligible compensation. The Plan also allows for contributions to be made on an after-tax basis.
Transfers
- UPS acquired Coyote Logistics LLC on August 18, 2015. On July 1, 2016, the Coyote 401(k) Plan was legally merged with the UPS 401(k) Savings Plan and Coyote Logistics LLC employees became eligible to participate in the Plan. On November 1, 2016, the assets of the Coyote 401(k) Savings Plan were merged with assets of the UPS 401(k) Savings Plan. The amount transferred of $34.757 million is shown in the Transfers due to plan merger line of the statements of changes in net assets available for benefits.
Employer Contributions
- For employees hired and eligible to participate in the Plan on or before December 31, 2007, UPS makes “SavingsPlus” (as defined in the Plan document) matching contributions to each participant’s account equal to 50% of pre-tax and/or Roth 401(k) contributions made to the Plan up to 5% of eligible compensation (excludes employees of UPS Freight). For UPS Freight employees, UPS makes SavingsPlus matching contributions to each participant’s account equal to 50% of pre-tax and/or Roth 401(k) contributions made to the Plan up to 2% of eligible compensation.
For employees hired, rehired or transferred from ineligible status who became eligible to participate in the Plan on or after January 1, 2008, but before July 1, 2016, UPS makes SavingsPlus matching contributions to each participant's account equal to 100% of pre-tax and/or Roth 401(k) contributions made to the Plan up to 3.5% of eligible compensation (excludes employees of UPS Freight). For UPS Freight employees, UPS makes SavingsPlus matching contributions to each participant's account equal to 100% of pre-tax and/or Roth 401(k) contributions made to the Plan up to 1% of eligible compensation.
For employees hired, rehired or transferred from ineligible status who became eligible to participate in the Plan on or after July 1, 2016, UPS makes SavingsPlus matching contributions to each participant's account equal to 50% of pre-tax and/or Roth 401(k) contributions made to the Plan up to 6% of eligible compensation (excludes employees of UPS Freight). For UPS Freight employees, UPS makes SavingsPlus matching contributions to each participant's account equal to 100% of pre-tax and/or Roth 401(k) contributions made to the Plan up to 1% of eligible compensation.
All SavingsPlus matching contributions are automatically invested in UPS class A common stock. Employer matching contributions were $114.322 and $108.110 million for 2017 and 2016, respectively.
The UPS Retirement Plan (a defined benefit pension plan sponsored by UPS) was closed to new non-union participants effective July 1, 2016. The Company amended the UPS 401(k) Savings Plan so that employees who do not participate in the UPS Retirement Plan receive a “UPS Retirement Contribution” (as defined in the Plan document) in addition to the SavingsPlus matching contribution. For employees eligible to receive the UPS Retirement Contribution, UPS contributes 3% to 8% of eligible pay to the UPS 401(k) Savings Plan based on years of vesting service and business unit. Contributions are made annually in cash to the accounts of participants who are employed on December 31st of each calendar year. Employer contribution amounts associated with this amendment of $17.153 million for 2017 and $2.744 million for 2016 were remitted on March 6, 2018 and March 8, 2017, respectively. These amounts are included in Receivables: Employer Contributions in the statements of net assets available for benefits.
On June 23, 2017, the Company amended the UPS 401(k) Savings Plan so that non-union employees who currently participate in the UPS Retirement Plan will, in addition to current benefits under the UPS 401(k) Savings Plan, earn a UPS Retirement Contribution beginning January 1, 2023. UPS will contribute 5% to 8% of eligible compensation to the UPS 401(k) Savings Plan based on years of vesting service and business unit. The amendment also provides for transition contributions for certain participants.
Contributions and Vesting
- Eligible employees may participate in the Plan immediately upon hire. The provisions of the Plan provide that a participant's contributions and SavingsPlus match are 100% vested at all times. Employees become 100% vested in the UPS Retirement Contribution after three complete years of service. Participants may make voluntary contributions in one of three ways: pretax, after-tax, or to the Roth 401(k) feature. Limits to these contributions are as follows:
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Participants may elect to contribute up to 50% of their eligible compensation on a pretax basis or as a Roth 401(k), or any combination of the two, to the Plan.
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Participants may defer up to 100% on a pretax basis of a Management Incentive Program (MIP)/International Management Incentive Program (IMIP) cash award. MIP/IMIP is part of the UPS Incentive Compensation Plan and participants are determined annually by the Compensation Committee of the UPS Board of Directors.
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Participants may elect to defer up to 100% of their discretionary day payout on a pretax basis, to the Roth 401(k), or any combination of the two.
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Participants may defer up to 100% of eligible compensation attributable to the Sales Incentive Program (SIP) bonus program on a pretax basis or to the Roth 401(k).
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Participants who are employed by Coyote Logistics, LLC may defer up to 100% of eligible compensation attributable to certain bonuses on a pre-tax basis or to the Roth 401(k).
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Participants may contribute an additional 5% of their eligible compensation on an after-tax basis to the Plan.
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Participants age 50 and older or who will turn 50 during the Plan year are allowed to make pre-tax or Roth 401(k) catch-up contributions, up to an additional 35% of their eligible compensation subject to a maximum of $6,000 for
2017
. The maximum catch-up contribution may be indexed each year for inflation.
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Participants can contribute to the Plan an amount consisting of an eligible rollover distribution or transfer from a conduit individual retirement account. Rollover contributions are at all times fully vested and nonforfeitable. Participants may not rollover participant loans to Plan account balances from other qualified retirement plans, annuity contracts, or individual retirement accounts.
Investments
- Participants may choose from various investment options including UPS Class A common stock, short-term investments and common and collective trust funds. Within the self‑managed account, participants can purchase mutual funds and individual securities listed on major U.S. securities exchanges. Participants should refer to the Plan document for more complete information concerning the Plan's investment options.
Participant Accounts
- Individual accounts are maintained for each plan participant. Each participant's account is credited with the participant's contribution and related matching and nonelective contributions and investment gains and losses. Withdrawals and administrative expenses are deducted from the participant's account.
Payment of Benefits
- The Plan does not permit withdrawals or distributions except in the case of hardship, at attainment of age 59 1/2, termination of employment, or upon the death or total and permanent disability of the participant. In order to qualify for a hardship withdrawal, the participant must satisfy the legal requirements of a financial hardship as defined by IRC regulations. There are no penalties on approved withdrawals or distributions as stated above. Participants should refer to the Plan document for more complete information concerning the Plan's benefit payment options.
Forfeited Amounts -
When certain terminations of participation in the Plan occur, the nonvested portion of the participant’s account, as defined by the Plan, represents a forfeiture. The Plan document permits the use of forfeitures to either reduce future employer contributions or plan administrative expenses for the plan year. However, if a participant is reemployed and fulfills certain requirements, as defined in the Plan document, the account will be reinstated. There were $0.541 million in forfeitures of nonvested amounts during 2017.
Notes Receivable from Participants
- The Plan provides for loans only in cases of hardship or residential purchases. Participants may borrow from their accounts a minimum of $1,000 up to a maximum of the lesser of $50,000 or 50% of their account balances (across all UPS-sponsored plans in which they participate). Loan terms shall not exceed five years on general loans and fifteen years on residential loans. Interest rates on outstanding loans ranged from 4.00% to 9.50% as of
December 31, 2017
. The loans are collateralized by the participant's account and bear interest at a fixed rate equal to one percentage point above the prime rate on the last business day of the month prior to the month in which the participant makes application for the loan. Principal and interest are paid ratably through regular payroll deductions.
Plan Termination
- Although it has not expressed any intent to do so, UPS has the right under the Plan to terminate the Plan subject to the provisions of ERISA. In the event of a termination, the trustee has been instructed to maintain separate Plan accounts for each participant to accumulate earnings until the final terminating distribution.
Plan Administration
- Voya Financial provides recordkeeping and administrative services to the Plan. State Street Bank and Trust Company serves as the trustee for all assets of the Plan, with the exception of the UPS Stock Fund. Bank of New York Mellon is the trustee for Class A shares of UPS Stock in the UPS Stock Fund.
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2.
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SIGNIFICANT ACCOUNTING POLICIES
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Basis of Accounting
- The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).
Use of Estimates and Risks and Uncertainties
- The preparation of financial statements in conformity with GAAP requires Plan management to make estimates and assumptions that affect the reported amounts of net assets available for benefits and changes therein and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The Plan utilizes various investment instruments, including short-term investments, common and collective trust funds, registered investment companies, and certain individual securities listed on major U.S. securities exchanges. Investment securities, in general, are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and such changes could materially affect the amounts reported in the financial statements.
Investment Valuation and Income Recognition
- The Plan's investments are 100% participant directed and stated at fair value. Fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Quoted market prices are used to value all readily available marketable securities. The value of each share of UPS Class A common stock held by the Plan at
December 31, 2017 and 2016
, is equal to the price of a share of UPS Class B common stock as reported by the New York Stock Exchange as the Class A common stock is readily convertible on a 1:1 basis to Class B common stock. Investments in common and collective trust funds are valued based upon the redemption price of units held by the Plan, which is based on the current fair value of the common and collective trust funds' underlying assets. Unit values are determined by the financial institution sponsoring such funds by dividing the fund’s net assets at fair value by its units outstanding at the valuation dates. The Plan holds the right to liquidate its positions in these common and collective trust funds at any time, subject to a reasonable notification period. No unfunded commitment existed with respect to these common and collective trust funds at
December 31, 2017
and 2016.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Net appreciation (depreciation) includes the Plan's gains and losses on investments bought and sold, as well as held during the year.
The Plan also offers a self-managed account option. Within the self-managed account, participants can purchase registered investment companies and individual securities listed on major U.S. securities exchanges. These investments are stated at fair value based upon quoted market prices.
Administrative Expenses
- Administrative expenses of the Plan are paid by the Plan and UPS as provided in the Plan document. UPS provides certain accounting and other administrative services to the Plan free of charge. Management fees and operating expenses charged to the Plan for investments are deducted from income earned on a daily basis and are not separately reflected. Consequently, management fees and operating expenses are reflected as a reduction of investment return for such investments. Personal advisor services are made available as an option for plan participants seeking professional investment advice within their plan accounts. Personal advisor fees of the Plan are paid by the Plan as provided in the Plan document. Administrative fees for
2017
and
2016
were as follows (in thousands):
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2017
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2016
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Investment advisory and management fees
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$
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1,888
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$
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1,532
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Plan administrator fees
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3,443
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3,576
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Personal advisor fees
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3,899
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3,238
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Total administrative expenses
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$
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9,230
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$
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8,346
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Payment of Benefits
- Benefit payments to participants are recorded upon distribution.
Notes Receivable from Participants
- Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Delinquent participant loans are recorded as distributions based on the terms of the Plan document.
Excess Contributions Payable
- The Plan is required to return contributions to participants in the event certain non‑discrimination tests defined under the IRC are not satisfied. During 2017, the Plan did not pass the non-discrimination requirements of the IRC Section 402(g) (participants exceeded annual deferral limit) as well as the Plan Limits Test (after-tax limits exceeded). As a result, for the year ended December 31, 2017, a de minimis amount of contributions were refundable to certain participants. For
2016
, the Plan passed the non-discrimination tests.
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3.
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FAIR VALUE MEASUREMENTS
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ASC 820,
Fair Value Measurements and Disclosures
, provides a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value, as follows: Level 1, which refers to securities valued using unadjusted quoted prices from active markets for identical assets; Level 2, which refers to securities not traded on an active market but for which observable market inputs are readily available; and Level 3, which refers to securities valued based on significant unobservable inputs. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The following tables set forth by level within the fair value hierarchy a summary of the Plan’s investments measured at fair value on a recurring basis at
December 31, 2017 and 2016
(in thousands):
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Fair Value Measurements at December 31, 2017
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Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
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Significant
Other
Observable
Inputs
(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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Total
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Self-managed accounts*:
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Common stock
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$
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307,372
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$
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—
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$
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—
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$
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307,372
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Mutual funds
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53,320
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—
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—
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53,320
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Interest-bearing cash
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2,084
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—
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—
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2,084
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Common and collective trusts:
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Equity funds
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—
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4,224,811
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—
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4,224,811
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Fixed-income funds
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—
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715,765
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—
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715,765
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Lifestyle funds
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—
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1,265,475
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—
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1,265,475
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Multi-asset funds
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—
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343,142
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—
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343,142
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U.S. government securities
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—
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301,060
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—
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301,060
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UPS Stock Fund
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1,627,236
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—
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—
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1,627,236
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Total investments — at fair value
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$
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1,990,012
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$
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6,850,253
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$
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—
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$
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8,840,265
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Fair Value Measurements at December 31, 2016
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Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
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Significant
Other
Observable
Inputs
(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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Total
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Self-managed accounts*:
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Common stock
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$
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252,301
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$
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—
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$
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—
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$
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252,301
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Mutual funds
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42,456
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—
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—
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42,456
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Interest-bearing cash
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389
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—
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—
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389
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Common and collective trusts:
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Equity funds
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—
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3,521,718
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—
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3,521,718
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Fixed-income funds
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—
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628,525
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—
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628,525
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Lifestyle funds
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—
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1,015,741
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—
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1,015,741
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Multi-asset funds
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—
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331,570
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—
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331,570
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U.S. government securities
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—
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313,767
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—
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313,767
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UPS Stock Fund
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1,590,579
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—
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—
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1,590,579
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Total investments — at fair value
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$
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1,885,725
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$
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5,811,321
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$
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—
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$
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7,697,046
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* The investments within the self-managed accounts include a variety of categories of common stock and mutual funds.
The availability of observable market data is monitored to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
We evaluate the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total net assets available for benefits. For the years ended,
December 31, 2017 and 2016
, there were no transfers between levels.
The fair value of the Plan's investments in collective trust funds is readily determinable as the net asset value per share as provided by the trustee is published daily to the Plan's participants and forms the basis for transactions in the collective trust funds. There are no unfunded commitments for these funds, the redemption frequency is immediate and there are no other redemption restrictions.
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4.
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FEDERAL INCOME TAX STATUS
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The IRS has determined and informed UPS by a letter dated February 22, 2016, that the Plan and related trust were designed in accordance with the applicable regulations of the IRC. Therefore, no provision for income taxes has been included in the Plan's financial statements.
GAAP requires Plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken positions that more likely than not would not be sustained upon examination by the IRS. The Plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of
December 31, 2017
, there are no positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions, but there are currently no audits for any tax periods in progress. The Plan administrator believes it is no longer subject to income tax examinations for years prior to 2014.
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5.
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PARTY-IN-INTEREST TRANSACTIONS
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Certain Plan investments are managed by State Street Global Advisors or the BlackRock Institutional Trust Company. State Street Bank and Trust Company, Voya Financial, and TD Ameritrade are the trustee, recordkeeper, and self-managed account service provider respectively, as defined by the Plan, and therefore, fees paid to these institutions qualify as exempt party-in-interest transactions. Fees paid by the Plan for recordkeeping and trustee fees were $3.443 and $3.576 million for the years ended
December 31, 2017 and 2016
, respectively. Fees paid by the Plan for investment management services were $1.888 and $1.532 million for the years ended
December 31, 2017 and 2016
, respectively. Fees paid by the Plan for personal advisor services were $3.899 and $3.238 million for the years ended December 31, 2017 and 2016, respectively.
UPS is the Plan sponsor and all transactions in its common stock qualify as exempt party-in-interest transactions. As of
December 31, 2017 and 2016
, the Plan held 13,657,035 and 13,874,552 shares of UPS common stock with a fair value of $1,627.236 and $1,590.579 million and a cost basis of $1,138.210 and $1,085.244 million, respectively. During the years ended
December 31, 2017 and 2016
, the Plan recorded dividend income on UPS common stock of $46.411 and $43.641 million, respectively.
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6.
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RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
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A reconciliation of net assets available for benefits per the financial statements to Form 5500 as of
December 31, 2017 and 2016
, is as follows (in thousands):
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2017
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2016
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Net assets available for benefits per the financial statements
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$
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8,944,760
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|
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$
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7,770,309
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Adjustment for deemed distributions from participant loans
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(1,023
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)
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(1,089
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)
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Net assets available for benefits per Form 5500
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$
|
8,943,737
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$
|
7,769,220
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Net increase in plan assets per the financial statements
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$
|
1,174,451
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$
|
904,333
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Adjustment for deemed distribution income from participant loans
|
65
|
|
|
4
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Total income per Form 5500
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$
|
1,174,516
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$
|
904,337
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SUPPLEMENTAL SCHEDULE