Note 1 DESCRIPTION OF THE PLAN

The following description of the Telephone and Data Systems, Inc. Tax-Deferred Savings Plan (the Plan) provides only general information.  Participants should refer to the Telephone and Data Systems, Inc. Tax-Deferred Savings Plan official plan document or summary plan description for a more complete description of the Plan's provisions.

General

The Plan is a contributory tax-qualified profit sharing plan established by Telephone and Data Systems, Inc.  (TDS or the Company) and is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA).  The Company is the administrator and sponsor of the Plan and The Northern Trust Company (Northern Trust) is the directed trustee and asset custodian of the Plan.  Northern Trust also provides record keeping and reporting services to the Plan in conjunction with Alight Solutions (Alight), formerly known as Aon Hewitt, the Plan's third party administrator.  All employees of TDS and its subsidiaries which have adopted the Plan (the Company and such subsidiaries being referred to as “employers”) whom are age twenty-one or older generally are eligible to participate.  The Plan allows eligible employees to enter the Plan upon the latter of 30 days of continuous service with the employers or their twenty-first birthday.  Participation in the Plan is voluntary, however, any eligible employee who does not enroll on his or her own, or opt out of automatic enrollment, will be automatically enrolled in the Plan starting on his or her eligibility date (or as soon as practicable thereafter). 

The Plan's assets are overseen by the Investment Management Committee.  The Investment Management Committee is authorized to select investment options and to invest Plan assets as directed by the participants (or in the absence of such a direction, as determined by the Investment Management Committee).

Contributions

Participants may contribute to the Plan on a pre-tax basis (before-tax contributions) or on a designated Roth basis (after-tax contributions).  The combined pre-tax and designated Roth contributions may not exceed 60% of the Participant’s compensation, as defined in the Plan and in accordance with Internal Revenue Code (IRC) limits.  Participants may also contribute amounts representing eligible distributions from other qualified plans or individual retirement accounts (rollover contributions).

Newly eligible employees with 30 days of continuous service are automatically enrolled in the Plan on a pre-tax basis at a 6% deferral rate with the rate increasing by 1% annually until it reaches 10%, unless the employees elect otherwise.  The Vanguard Target Date Retirement Funds are used as the Qualified Default Investment Alternative for automatic enrollment. 

The employer matching contribution is 100% of the first 3% of a participant’s before-tax and designated Roth contributions and 40% on the next 2% of before-tax and designated Roth contributions.

Participants' Accounts and Investment Options

Each participant's account is credited with the participant's before-tax and designated Roth contributions, rollover contributions, employer matching contributions and investment income or loss and fees.  The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account.

Contributions are invested in accordance with the employee’s investment elections.  Participants may invest their accounts in a variety of investment options as more fully described in the Plan's literature.  Participants may change their investment elections via telephone or internet.  Additionally, participants can direct no more than 20% of their contributions into the TDS Common Stock Fund and the U.S. Cellular Common Stock Fund, on a combined basis. 

Vesting

Participants are always 100% vested in their before-tax, designated Roth and rollover contributions plus actual earnings thereon.  Vesting in employer matching contributions plus actual earnings thereon is based on years of vesting service.  Employer matching contributions vest 34% after the participant completes one year of vesting service; and 100% after the participant completes two years of vesting service.

A participant also becomes 100% vested in employer matching contributions plus actual earnings thereon upon termination of employment after attaining age 65 or due to death or total and permanent disability (as defined in the Plan). 

Forfeited Accounts

For the year ended December 31, 2017, forfeited non-vested accounts used to reduce employer contributions were $642,611. 

Payment of Benefits

Vested benefits may be paid to the participant upon termination of employment in the form of a lump sum payment, partial distribution (of not less than $500) or installments.  Alternatively, a terminated participant may rollover the eligible portion of his or her vested benefits to an eligible retirement plan or individual retirement account.  Participants experiencing a qualified financial hardship, on a qualified military leave or who have attained age 59½ may withdraw a portion of their vested account balance as defined in the Plan while employed by the Company.

Notes Receivable from Participants

Participants may borrow from their Plan accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of their account balance (excluding employer matching contributions and related earnings).  These notes are secured by the remaining balance in the participant's account.  The notes bear interest at the prime rate plus 1% as published in the Wall Street Journal on the fifteenth day of the month prior to the quarter in which the note is processed.  Principal and interest are generally paid ratably through after-tax payroll deductions.  The repayment period on the note generally ranges from one to five years.  Notes are considered delinquent if no note payment is received during two consecutive pay periods.  If the delinquency is not cured, the loan will be considered in default and taxation will occur.

Termination of Plan

Although it has not expressed any intent to do so, the Company has the right under the Plan to terminate the Plan at any time subject to the provisions of ERISA.  In the event of Plan termination, participants become 100% vested in their accounts.

Plan Expenses

Certain administrative, recordkeeping and Trustee fees are paid by Plan participants.  Auditing and investment consulting fees are paid by TDS.  Investment option expenses and loan origination fees are paid by Plan participants.  Plan participants also pay participant-initiated transaction fees (distribution, withdrawal, Qualified Domestic Relations Order, etc.). 

Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Basis of Accounting and Use of Estimates

The accompanying financial statements have been prepared on the accrual basis of accounting.  The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires the Plan's management to use estimates and assumptions that affect the accompanying financial statements and disclosures.  Actual results could differ from these estimates and assumptions.  Certain prior year amounts have been reclassified to conform to the 2017 presentation with no change to the net assets available for plan benefits.

Investment Valuation and Income Recognition

Investments are reported at fair value.  See Note 3 – Fair Value Measurements for further information on the fair value of the Plan’s assets.  The Plan’s Investment Management Committee determines the Plan’s valuation policies utilizing information provided by the investment advisers and custodians. 

Net appreciation in fair value of investments included in the accompanying Statement of Changes in Net Assets Available for Benefits includes realized gains or losses from the sale of investments and unrealized appreciation or depreciation in the fair value of investments.  The net realized gains or losses on the sale of investments represent the difference between the sale proceeds and the fair value of the investment as of the beginning of the period or the cost of the investment if purchased during the year.  Net unrealized appreciation or depreciation in the fair value of investments represents the net change in the fair value of the investments held during the period.

Purchases and sales of securities are recorded on a trade date basis.  Interest income is recorded on the accrual basis, and dividends are recorded on the ex-dividend date.

Notes Receivable from Participants

Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest.  Interest income is recorded on the accrual basis.  Delinquent participant notes are reclassified as distributions in accordance with the terms of the Plan document.  Notes receivable from participants have been classified as an investment asset for Form 5500 reporting purposes and, accordingly, have been included as an investment in the supplemental schedule, Schedule H, Line 4i – Schedule of Assets (Held at End of Year).

Payment of Benefits

Benefit payments are recorded when paid.

Accounting for Uncertainty in Income Taxes

Management evaluated the Plan’s tax positions and concluded that the Plan had maintained its tax-exempt status and had taken no uncertain tax positions that require adjustment to the financial statements.  Therefore, no provision or liability for income taxes has been included in the financial statements at December 31, 2017 or 2016.  With few exceptions, the Plan is no longer subject to income tax examinations by the U.S. federal, state, or local tax authorities for years before 2014.

Investment Risk

Investments, in general, are subject to various risks, including credit, interest, and overall market volatility risks.  Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in values of investment securities will occur in the near term, and such changes could materially affect participants’ account balances and the amounts reported in the December 31, 2017 Statement of Net Assets Available for Benefits.

Note 3 FAIR VALUE MEASUREMENTS

Fair value is a market based measurement and not an entity specific measurement, based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price) in an orderly transaction between market participants.  The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  U.S. GAAP establishes a fair value hierarchy that contains three levels for inputs used in fair value measurements.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The three levels of the fair value hierarchy are described below:

Level 1 - Quoted market prices for identical assets or liabilities in active markets;

Level 2 - Quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets and liabilities in inactive markets;

Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs.  A financial instrument’s level within the fair value hierarchy is not representative of its expected performance or its overall risk profile, and therefore Level 3 assets are not necessarily higher risk than Level 2 assets or Level 1 assets.  At December 31, 2017 and 2016, the Plan held no Level 2 or Level 3 assets.  The following is a description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.

The Plan values shares of TDS Common Stock and Common Stock of United States Cellular Corporation (U.S. Cellular), a TDS subsidiary, based on the closing price reported on the active market in which the securities are traded.  These securities are classified as Common Stock of the Plan Sponsor and Subsidiary.  The Plan also values Mutual Funds based on the closing price reported on the active market in which the individual securities are traded.  Common Stock of the Plan Sponsor and Subsidiary and Mutual Funds are classified within Level 1 of the valuation hierarchy.

Note 4 PARTIES-IN-INTEREST

Certain Plan assets are invested in the Northern Institutional Funds U.S. Government Select Portfolio.  Northern Trust is the directed trustee of the Plan and, therefore, these transactions qualify as party-in-interest transactions.  Alight provides certain reporting and administrative services to the Plan and is the third party administrator of the Plan, therefore, these transactions qualify as party-in-interest transactions.  The total cost of administrative charges to the Plan by Northern Trust and Alight was $1,383,596 for the year ended December 31, 2017.

Notes receivable from participants also qualify as party-in-interest transactions.

The Plan invests in common stock of U.S. Cellular and TDS.  Transactions in shares of U.S. Cellular and TDS common stock qualify as party-in-interest transactions under the provisions of ERISA.  During the year ended December 31, 2017, the Plan made participant-directed purchases of $2,180,425 and sales of $4,487,516 of TDS and U.S. Cellular common stock on an aggregate basis.

Note 5 TAX STATUS

The Plan obtained its latest determination letter on February 25, 2015 in which the Internal Revenue Service stated that the Plan, as designed, complied with the applicable requirements of the IRC, and the related trust was exempt from taxation.  The Plan has been amended since the receipt of the determination letter.  The Plan Administrator believes that the Plan is designed and being operated in material compliance with the applicable requirements of the IRC.  Therefore, the Plan Administrator believes that the Plan was qualified and the related trust was tax-exempt at December 31, 2017.

Note 6 RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500

Note 7 SUBSEQUENT EVENTS

The Plan’s management evaluated subsequent events from December 31, 2017 through May 23, 2018, the date and time these financial statements were issued.  There have been no significant subsequent events during this period that require adjustments to or disclosure in the financial statements as of December 31, 2017 and for the year then ended.

Exhibits

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, Telephone and Data Systems, Inc., the Plan Administrator, has duly caused this Annual Report on Form 11-K to be signed on its behalf by the undersigned hereunto duly authorized.