6. Employee Benefit Plans

Employee Stock Ownership Plan (ESOP)

In 1985, the Company established an employee stock ownership plan (ESOP) for the benefit of employees who meet certain minimum age and service requirements. Upon inception of the ESOP, the Company borrowed $2,000,000 from a bank and lent the proceeds to the trust established under the ESOP to purchase shares of the Company’s common stock. The Company’s loan to the trust is at an interest rate approximating the prime rate and is repayable to the Company over a 40‑year term ending in December 2024. During 1987 and 1988, the Company loaned an additional $1,942,000 to the trust under terms similar to those under the Company’s original loan.

ESOP shares are held by the plan trustees in a suspense account until allocated to participant accounts. Contributions to the employee stock ownership plan are determined annually by the Company according to plan formula. Each year the Company makes contributions to the trust sufficient to enable the trust to repay the principal and interest due to the Company under the trust loans. As the loans are repaid, shares are released from the suspense account pro rata based on the portion of the aggregate loan payments that are paid during the year. The ESOP plan allows dividends on unallocated shares to be distributed to participants in cash, unless otherwise directed. ESOP shares released from the suspense account are allocated to participants on the basis of their relative taxable compensation in the year of allocation and/or on the participant’s account balance.

If Servotronics shares are not readily tradeable on an established securities market at the times of an ESOP participant’s termination of employment or retirement and if such ESOP participant requests that his/her ESOP distributed shares be repurchased by the Company, the Company is obligated to do so. The Company’s shares currently trade on NYSE American. There were no outstanding shares subject to the repurchase obligation at December 31, 2020.

Since inception of the ESOP, 398,283 shares have been allocated, exclusive of shares distributed to ESOP participants. At December 31, 2020 and 2019, 71,744 and 87,426 shares, respectively, remain unallocated.

Related compensation expense associated with the Company’s ESOP, which is equal to the principal reduction on the loans receivable from the trust, amounted to approximately $101,000 in both 2020 and 2019. Included as a reduction to shareholders’ equity is the ESOP trust commitment which represents the remaining indebtedness of the trust to the Company. Employees are entitled to vote allocated shares and the ESOP trustees are entitled to vote unallocated shares and those allocated shares not voted by the employees.

Other Postretirement Benefit Plans

The Company provides certain postretirement health and life insurance benefits for the Company’s Chief Executive Officer and President, and a former executive of the Company (the Plan). Upon retirement and after attaining at least the age of 65, the Company will pay the annual cost of health insurance coverage and provide life insurance offered at the time of retirement. The Plan also provides a benefit to reimburse the participants of certain out-of-pocket medical or health related expenses. The retirees’ insurance benefits cease upon the death of the retired executive. The Plan is unfunded and the actuarially determined future accumulated postretirement benefit obligation at December 31, 2020 and 2019 was approximately $2,529,000 and $2,126,000, respectively.

Amounts recognized in the balances sheets at December 31, 2020 and 2019 consist of the following:


	December 31,		December 31,
	2020		2019
Long-term liabilities - retirement benefits and other	$	2,529,000	$	2,126,000

Accumulated other comprehensive loss, before income taxes:
Net actuarial loss	$	1,716,000	$	1,419,000

The estimated net loss to be amortized from AOCI to benefit cost during 2021 is approximately $77,000.

A reconciliation of the beginning and ending balances of accumulated postretirement benefit obligations is as follows:


	December 31,		December 31,
	2020		2019
Accumulated postretirement benefit obligations at the beginning of the year	$	2,126,000	$	1,730,000
Service Cost		38,000		30,000
Interest Cost		70,000		71,000
Actuarial loss		357,000		390,000
Benefits paid		(62,000)		(95,000)
Accumulated postretirement benefit obligations at the end of the year	$	2,529,000	$	2,126,000

Financial information for this Plan for the year ended December 31, 2020 and 2019 is as follows:


	December 31,		December 31,
	2020		2019
Pension cost	$	168,000	$	144,000
Company contribution and benefits paid	$	62,000	$	95,000

Assumptions used as of and for the years ended December 31, 2020 and 2019 are as follows:


	December 31,		December 31,
	2020		2019
Discount rate used in determining
Benefit obligation	2.625	%	3.375	%
Pension cost	3.375	%	4.250	%

Medical inflation rate is estimated at 10% for the first year and then grading down by 0.5% for each year subsequent until a floor of 5% is reached. The assumption for mortality uses the PriH – 2012 with an improvement scale of MP 2020 (for 2019 the MP 2019 improvement scale was used).

The effect of a one-percentage-point increase and a one-percentage-point decrease in the assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic postretirement health care benefit costs and the accumulated postretirement benefit obligation for health care benefits are as follows:


	December 31,		December 31,
	2020		2019
Effect of 1% increase in health care trend rates:
Benefit obligation	$	465,000	$	399,000
Aggregate of service and interest cost	$	28,000	$	26,000

Effect of 1% decrease of health care trend rates:
Benefit obligation	$	(356,000)	$	(305,000)
Aggregate of service and interest cost	$	(20,000)	$	(19,000)

The Company is expected to make benefit payments as of December 31, 2020:


Years ending December 31,
2022	$	69,000
2023		71,000
2024		73,000
2025		75,000
2026 - 2030	$	403,000