Employee Benefit Plans

12 Months Ended

Dec. 31, 2022

Employee Benefit Plans.

Employee Benefit Plans

5.    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 ESOP are determinded annually by the Company according to ESOP 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, 2022.

Since inception of the ESOP, 374,786 shares have been allocated, exclusive of shares distributed to ESOP participants. At December 31, 2022 and 2021, 41,270 and 56,635 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 2022 and 2021. 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 two former executives of the Company (the Plan). Upon ceasing employment with the Company, the Company pays the annual cost of health insurance coverage and provide life insurance at the same level of coverage at the time of terminating employment with the Company. The Plan also provides a benefit to reimburse the participants for certain out-of-pocket medical or health related expenses. The retirees’ insurance benefits

cease upon the death of the former executives. The Plan is unfunded and the actuarially determined future projected postretirement benefit obligation at December 31, 2022 and 2021 was approximately $4,062,000 and $5,865,000, respectively.

Amounts recognized in the consolidated balance sheets at December 31, 2022 and 2021 consist of the following:

	December 31,		December 31,
	2022		2021
Current portion - retirement benefits and other	$	87,000	$	136,000
Long-term liabilities - retirement benefits and other		3,975,000		5,729,000
	$	4,062,000	$	5,865,000
Accumulated other comprehensive loss, before income taxes:
Net actuarial loss	$	2,958,000	$	4,947,000

The estimated net loss to be amortized from AOCI to benefit cost during 2023 is approximately $87,000. Among other changes in actuarial estimates, a significant portion of the decrease in actuarial loss in 2022 was due to a change in the discount rate.  The actuarial loss is being amortized based on the expected lifetimes of the former executives.

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

	December 31,		December 31,
	2022		2021
Accumulated postretirement benefit obligations at the beginning of the year	$	5,865,000	$	2,529,000
Service Cost		—		46,000
Interest Cost		157,000		65,000
Actuarial (gain)/loss		(1,838,000)		3,308,000
Benefits paid		(122,000)		(83,000)
Accumulated postretirement benefit obligations at the end of the year	$	4,062,000	$	5,865,000

Financial information for this Plan for the years ended December 31, 2022 and 2021 are as follows:

	December 31,		December 31,
	2022		2021
Service Cost	$	—	$	46,000
Interest Cost		157,000		65,000
Recognized actuarial loss		151,000		77,000
Pension cost	$	308,000	$	188,000
Company contribution and benefits paid	$	122,000	$	83,000

As actuarially determined the Company estimates it will make contributions to the Plan to fund the payments of benefits of approximately $129,000 in 2023.

Assumptions used as of and for the years ended December 31, 2022 and 2021 are as follows:

	December 31,		December 31,
	2022		2021
Discount rate used in determining
Benefit obligation	4.875	%	2.750	%
Pension cost	2.750	%	2.625	%

Assumed healthcare cost trend 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 2022 (for 2021 the MP 2021 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,
	2022		2021
Effect of 1% increase in health care trend rates:
Benefit obligation	$	636,000	$	1,078,000
Aggregate of service and interest cost	$	30,000	$	29,000
Effect of 1% decrease of health care trend rates:
Benefit obligation	$	(515,000)	$	(853,000)
Aggregate of service and interest cost	$	(23,000)	$	(21,000)

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

Years ending December 31,
2023	$	129,000
2024		141,000
2025		152,000
2026		162,000
2027		173,000
2028 - 2032	$	1,014,000