Note I – Retirement Benefit Plans

The Company has non-contributory defined benefit pension plans covering certain U.S. employees. Plan benefits are generally based upon age at retirement, years of service and, for its salaried plan, the level of compensation. The Company also sponsors unfunded nonqualified supplemental retirement plans that provide certain current and former officers with benefits in excess of limits imposed by federal tax law.

The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements.

On April 5, 2016 the Board of Directors passed a resolution freezing the benefits of The Salaried Employees Retirement Plan of The Eastern Company (the “Salaried Plan”) effective as of May 31, 2016. Under ASC 715, the Company is required to remeasure plan assets and obligations during an interim period whenever a significant event occurs that results in a material change in the net periodic pension cost. The determination of significance is based on judgment and consideration of events and circumstances impacting the pension costs. After consulting with our actuary the freezing of benefits under the Salaried Plan is considered a significant event pursuant to such standard.

The Company uses April 30, 2016 as the remeasurement date. Assumptions used to determine the projected benefits obligations for the Salaried Plan for the measurement date indicated follows:

Measurement Date	April 30, 2016			December 31, 2015
Discount rate		3.69	%		4.24	%
Expected rate of return		8.0	%		8.0	%
Rate of compensation increase		--			3.25	%

As a result of the remeasurement, pension benefit obligations increased $3,022,291. The major components of this change are as follows:

	April 30, 2016
Discount rate	$	4,383,159
Service cost		770,361
Interest cost		818,565
Actuarial loss		611,693
Benefits paid		(1,026,898	)
Additional recognition due to significant event		(2,534,589	)
Net increase in pension benefit obligation	$	3,022,291

In accordance with ASC 715, the Company performed curtailment accounting procedures in relation to the freezing of benefits of the Salaried Plan. As a result of the fact that there were no unrecognized prior service costs for the plan, and that the calculated $2.5 million gain from the reduction of accumulated plan benefits was more than offset by other actuarial losses in Other Comprehensive Income.

Significant disclosures relating to these benefit plans for the second quarter and first six months of fiscal 2016 and 2015 follow:

	Pension Benefits
	Six Months Ended						Three Months Ended
	July 2, 2016			July 4, 2015			July 2, 2016			July 4, 2015
Service cost	$	1,341,557		$	1,929,975		$	528,552		$	964,988
Interest cost		1,774,343			1,718,476			1,007,763			859,217
Expected return on plan assets		(2,482,172	)		(2,575,828	)		(1,238,231	)		(1,287,914	)
Amortization of prior service cost		100,284			109,293			50,141			54,646
Amortization of the net loss		1,042,148			945,456			415,093			472,728
Net periodic benefit cost	$	1,776,160		$	2,127,372		$	763,318		$	1,063,665

	Postretirement Benefits
	Six Months Ended						Three Months Ended
	July 2, 2016			July 4, 2015			July 2, 2016			July 4, 2015
Service cost	$	14,650		$	108,785		$	3,900		$	54,393
Interest cost		47,436			77,458			26,936			38,729
Expected return on plan assets		(23,766	)		(45,968	)		(12,016	)		(22,984	)
Amortization of prior service cost		(11,945	)		(11,944	)		(5,945	)		(5,972	)
Amortization of the net loss		(46,961	)		9,402			(33,461	)		4,701
Net periodic benefit cost	$	(20,586	)	$	137,733		$	(20,586	)	$	68,867

The Company reduced pension expense as a result of the significant event. Pension expense for the second quarter and first six months of 2016 were reduced by approximately $612,000 related to the significant event.

Prior to April 30, 2016, the Company used a corridor approach to amortize actuarial gains and losses. We are applying the 10% threshold set forth in ASC 715. In addition, since all accrued benefits under the Salaried Plan are frozen, we are amortizing the unrecognized gains and losses outside of the corridor by the average life expectancy of the plan participants. Our defined pension plans for hourly rated employees will continue to amortize the unrecognized gains and losses outside the corridor by the average remaining service of the active employees.

The Company’s funding policy with respect to its qualified plans is to contribute at least the minimum amount required by applicable laws and regulations. In 2016, the minimum contribution is $594,000. For the past several years, the Company has also made discretionary contributions in order to improve funding ratios. As of July 2, 2016, the Company has made contributions totaling $266,000, of which $181,250 was required.

The Company expects to contribute approximately $118,000 into its post-retirement plan. As of July 2, 2016 the Company has contributed $79,000.

The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code covering substantially all U.S. non-union employees. The plan allows participants to make voluntary contributions of up to 100% of their annual compensation on a pretax basis, subject to IRS limitations. The plan provides for contributions by the Company at its discretion.

In December 2015, the Company approved a 50% match on the first 4% of employee contributions. The Company amended the Eastern Company Savings and Investment Plan (“401(k) Plan Amendment”) effective June 1, 2016. The 401(k) Plan Amendment increased this match to 50% of the first 6% of contributions for the remainder of Fiscal 2016. The 401(k) Plan Amendment also provided for an additional non-discretionary contribution for certain non-union U.S. employees who were eligible to participate in the Salaried Plan. The amount of this non-discretionary contribution ranges from 0% to 4% of wages, based on the age of the individual on June 1, 2016.

The Company made contributions of $117,365 and $173,596 in the second quarter and first six months of 2016, respectively and $55,660 and $107,926 in the second quarter and first six months of 2015, respectively. The matching contribution increased approximately $60,000 in the second quarter of 2016 as a result of the 401(k) Plan Amendment.

Also in December 2015, the Company approved a non-discretionary contribution of 2.5% for the benefit of all non-union U.S. employees who were not eligible for the Company’s Salaried Plan. The 401(k) Plan Amendment increased the non-discretionary contribution to 3%, and changed the eligibility to all non-union U.S. employees. This contribution is payable in January 2017. The Company has accrued approximately $80,000 for this non-discretionary contribution as of July 2, 2016.