INSPERITY, INC. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2020. Design and Evaluation of Internal Control over Financial Reporting Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of management’s assessment of the design and effectiveness of our internal controls as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Ernst & Young LLP, our independent registered public accounting firm, also audited our internal controls over financial reporting. Management’s report and the independent registered public accounting firm’s audit report are included in our 2020 Consolidated Financial Statements under the captions entitled “Management’s Report on Internal Control” and “Report of Independent Registered Public Accounting Firm,” and are incorporated herein by reference. There has been no change in our internal controls over financial reporting that occurred during the three months ended December 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. Item 9B. Other Information. None. Insperity 60 2020 Form 10-K MANAGEMENT AND CERTAIN SECURITY HOLDERS PART III Item 10. Directors, Executive Officers and Corporate Governance. Some of the information required by this item is incorporated by reference to the information set forth under the captions “Election of Directors” and “Delinquent Section 16(a) Reports” in our definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report (the “Insperity Proxy Statement”). Code of Business Conduct and Ethics Our Board adopted our Code of Business Conduct and Ethics (the “Code of Ethics”), which meets the requirements of Rule 303A.10 of the New York Stock Exchange Listed Company Manual and Item 406 of Regulation S-K. You can access our Code of Ethics on the Corporate Governance page of our website at insperity.com. Changes in and waivers to the Code of Ethics for our directors, executive officers and certain senior financial officers will be posted on our Internet website within five business days and maintained for at least 12 months. Item 11. Executive Compensation. The information required by this item is incorporated by reference to the information set forth under the captions “Director Compensation” and “Executive Compensation” in the Insperity Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item is incorporated by reference to the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Insperity Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item is incorporated by reference to the information set forth under the caption “Certain Relationships and Related Transactions” in the Insperity Proxy Statement. Item 14. Principal Accounting Fees and Services. The information required by this item is incorporated by reference to the information set forth under the caption “Ratification and Appointment of Independent Public Accountants – Fees of Ernst & Young LLP” and “—Finance, Risk Management and Audit Committee Pre-Approval Policy for Audit and Non-Audit Services” in the Insperity Proxy Statement. Insperity 61 2020 Form 10-K EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PART IV Item 15. Exhibits, Financial Statement Schedules. (a) 1. Financial Statements of the Company The Consolidated Financial Statements listed by the Registrant on the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report. (a) 2. Financial Statement Schedules The required information is included in the Consolidated Financial Statements or Notes thereto. (a) 3. List of Exhibits Exhibit No. Exhibit 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 29, 2018). 3.2 Amended and Restated Bylaws of Insperity, Inc. dated February 17, 2014 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on February 18, 2014). 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (No. 33-96952)). 4.2 Description of Registrant’s Common Stock (incorporated by reference to Ex hibit 4.2 to th e Registrant’s Form 10-K for the year ended December 31, 2019) . 4.3 Rights Agreement dated as of May 21, 2020 between Insperity, Inc. and Computershare Trust Company, N.A., as Rights Agent (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on May 22, 2020). 4.4 Certificate of Designations of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 22, 2020). 10.1 † Insperity, Inc. 2001 Incentive Plan, as amended and restated (incorporated by reference to Appendix A to the Registrant’s definitive proxy statement on Schedule 14A filed on March 18, 2009 (No. 1-13998)). 10.2 † Form of Director Stock Option Agreement (Annual Grant) (incorporated by reference to Exhibit 10.11 to the Registrant’s Form 10-K for the year ended December 31, 2004). 10.3 † Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2012). 10.4 † Form of Director Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended September 30, 2012). 10.5 † Form of Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended September 30, 2012). 10.6 † Form of Employee Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 22, 2013). 10.7 † Form of New Hire Employee Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on February 22, 2013). 10.8 † Form of Named Executive Officer Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on February 22, 2013). 10.9 † Form of Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on February 22, 2013). 10.10 † Form of Employee Award Notice and Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 2, 2015). 10.11 † Form of Executive Officer Restricted Stock Award Agreement for awards granted on or after March 29, 2016 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 1, 2016). 10.12 † Form of Employee Award Notice and Agreement under LTIP for awards granted on or after March 29, 2016 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on April 1, 2016). Insperity 62 2020 Form 10-K EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Exhibit No. Exhibit 10.13 † Form of Restricted Stock Award Agreement for awards granted to certain senior personnel on or after March 29, 2016 (incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-Q for the quarter ended March 31, 2016). 10.14 † Form of Restricted Stock Award Agreement for awards granted to other employees on or after March 29, 2016 (incorporated by reference to Exhibit 10.6 to the Registrant’s Form 10-Q for the quarter ended March 31, 2016). 10.15 † Form of Restricted Stock Award Agreement for awards granted to executive officers on or after November 10, 2017 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2017). 10.16 † Form of Restricted Stock Award Agreement for awards granted to certain senior personnel on or after November 10, 2017 (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended September 30, 2017). 10.17 † Form of Restricted Stock Award Agreement for awards granted to other employees on or after November 10, 2017 (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended September 30, 2017). 10.18 † Form of Restricted Stock Unit Agreement for awards granted to executive officers on or after December 30, 2019 (incorporated by referen ce to Exhibit 10.18 to the Registr ant ’ s Form 10-K for the year ended December 31, 2019) . 10.19 † Form of Restricted Stock Unit Agreement for awards granted to certain senior personnel on or after December 30, 2019 ( inc or por at ed by reference to Exhibit 10.19 to the Registrant ’ s F orm 10-K for the year ended Dece mber 31, 2019 ) . 10.20 † Form of Restricted Stock Unit Agreement for awards granted to other employees on or after December 30, 2019 (incorporated by reference to Exhibit 10. 20 to the Registrant’s Form 10-K for the year ended December 31, 2019) . 10.21 † Form of Employee Award Notice and Agreement under LTIP granted on or after November 10, 2017 (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended September 30, 2017). 10.22 † Form of Employee Award Notice and Agreement under LTIP granted on or after December 30, 2019 (incorporated by reference to Exhibit 10.2 2 to the Registrant’s Form 10-K for the year ended December 31, 2019) . 10.23 † Directors Compensation Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended September 30, 2012). 10.24 † Amendment to the Directors Compensation Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed on February 22, 2013). 10.25 † First Amendment and Appendix A to Directors Compensation Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 25, 2015). 10.26 † Board of Directors Compensation Arrangements (incorporated by reference to the Registrant’s Current Report on Form 8-K dated February 7, 2005). 10.27 † Directors Compensation Plan (as amended and restated April 1, 2017) (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended June 30, 2017). 10.28 Insperity, Inc. 2008 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 (No. 333-151275)). 10.29 Insperity, Inc. 2012 Incentive Plan (incorporated by reference to the Registrant’s definitive proxy statement on Schedule 14A filed on March 29, 2012 (No. 1-13998)). 10.30 First Amendment to the Insperity, Inc. 2012 Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 22, 2013). 10.31 Second Amendment to Insperity, Inc. 2012 Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 25, 2015). 10.32 Third Amendment to Insperity, Inc. 2012 Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 1, 2016). 10.33 Insperity, Inc. 2012 Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 21, 2017). 10.34 First Amendment to the Insperity Inc. 2012 Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10. 34 to the Registrant’s Form 10 -K filed for the ye ar ended December 31, 2019 ) . 10.35 Insperity, Inc. Long-Term Incentive Program (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 2, 2015). Insperity 63 2020 Form 10-K EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Exhibit No. Exhibit 10.36 † Insperity, Inc. Executive Severance Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on January 3, 2020 ). 10.37 † Form of Participant Agreement under the Insperity, Inc. Executive Severance Plan (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed on January 3, 2020 ). 10.38 (+) Minimum Premium Financial Agreement, amended and restated effective January 1, 2005, by and between Insperity Holdings, Inc. (fka Administaff of Texas, Inc.) and United Healthcare Insurance Company (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2005). 10.39 (+) Minimum Premium Administrative Services Agreement, amended and restated effective January 1, 2005, by and between Insperity Holdings, Inc. (fka Administaff of Texas, Inc.) and United Healthcare Insurance Company (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended June 30, 2005). 10.40 (+) Amendment to Minimum Premium Financial Agreement, as amended and restated effective January 1, 2005, by and between Insperity Holdings, Inc., and UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended June 30, 2007). 10.41 (+) Amendment to Minimum Premium Administrative Services Agreement, as amended and restated effective January 1, 2005, by and between Insperity Holdings, Inc., and UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2007). 10.42 (+) Amendment to Minimum Premium Financial Agreement, as amended effective January 1, 2009, by and between Insperity Holdings, Inc. (fka Administaff of Texas, Inc.) and United Healthcare Insurance Company (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2013). 10.43 (+) Amendment to Minimum Premium Financial Agreement, as amended effective January 1, 2013, by and between Insperity Holdings, Inc. and United Healthcare Insurance Company (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended September 30, 2015). 10.44 (+) Amendment to Minimum Premium Administrative Services Agreement, as amended effective January 1, 2008, by and between Insperity Holdings, Inc. (fka Administaff of Texas, Inc.) and UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended March 31, 2013). 10.45 (+) Amendment to Minimum Premium Administrative Services Agreement, as amended effective January 1, 2013, by and between Insperity Holdings, Inc. and UnitedHealthcare Insurance Company, effective as of January 1, 2015 (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended September 30, 2015). 10.46 (+) Amendment to Minimum Premium Financial Agreement, as amended effective January 1, 2011, by and between Insperity Holdings, Inc. (fka Administaff of Texas, Inc.) and UnitedHealthcare Insurance Company, effective as of January 1, 2013 (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended September 30, 2014). 10.47 (+) Amendment to Minimum Premium Administrative Services Agreement, as amended effective January1, 2011, by and between Insperity Holdings, Inc. (fka Administaff of Texas, Inc.) and UnitedHealthcare Insurance Company, effective as of January 1, 2013 (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended September 30, 2014). 10.48 (+) Amendment to the Minimum Premium Financial Agreement, as amended effective January 1, 2015, by and between Insperity Holdings, Inc. and UnitedHealthcare Insurance Company, effective as of January 1, 2016 (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended June 30, 2016). 10.49 (+) Amendment to the Minimum Premium Administrative Services Agreement, as amended effective January 1, 2015, by and between Insperity Holdings, Inc. and UnitedHealthcare Insurance Company, effective as of January 1, 2016 (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2016). 10.50 (+) Amendment to the Minimum Premium Financial Agreement, as amended effective January 1, 2016, by and between Insperity Holdings, Inc. and UnitedHealthcare Insurance Company, effective as of January 1, 2017 (incorporated by reference to Exhibit 10.39 to the Registrant’s Form 10-K for the year ended December 31, 2016). 10.51 (+) Letter of Agreement dated May 3, 2018 by and between Insperity Holdings, Inc. and UnitedHealthcare Insurance Company (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2018). Insperity 64 2020 Form 10-K EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Exhibit No. Exhibit 10.52 (+) Amendment to Minimum Premium Administrative Services Agreement (as previously amended effective January 1, 2016) by and between Insperity Holdings, Inc., and United Healthcare Insurance Company entered into as of January 1, 2019 (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended March 31, 2019). 10.53 (+) Amendment to Minimum Premium Financial Agreement (as previously amended effective January 1, 2017) by and between Insperity Holdings, Inc., and United Healthcare Insurance Company entered into as of January 1, 2019 (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended March 31, 2019). 10.54 Letter Agreement by and between Insperity Holdings, Inc. and United Healthcare Insurance company entered into as of February 7, 2020 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2020). 10.55 Amended and Restated Credit Agreement dated February 6, 2018 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 12, 2018). 10.56 First Amendment to Amended and Restated Credit Agreement dated September 13, 2019 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 17, 2019). 10.57 Standard Form of Agreement Between Owner and Contractor dated February 8, 2019 between Insperity Service, L.P. and David E. Harvey Builders, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2019). 21.1 * Subsidiaries of Insperity, Inc. 23.1 * Consent of Independent Registered Public Accounting Firm. 24.1 * Powers of Attorney. 31.1 * Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 * Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 ** Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 ** Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS * Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.CAL * Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF * Inline XBRL Extension Definition Linkbase Document. 101.LAB * Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (embedded with the Inline XBRL document). * Filed herewith. ** Furnished with this report. † Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. (+) Certain portions of the exhibit have been omitted pursuant to an order granting confidential treatment or Item 601(b)(10) of Regulation S-K. The omitted information is (i) not material and (ii) would likely cause competitive hard to the Company if publicly disclosed. ITEM 16. FORM 10-K SUMMARY. None. Insperity 65 2020 Form 10-K SIGNATURES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Insperity, Inc. has duly caused this report to be signed in its behalf by the undersigned, thereunto duly authorized, on February 11, 2021. INSPERITY, INC. By : /s/ Douglas S. Sharp Douglas S. Sharp Senior Vice President of Finance Chief Financial Officer and Treasurer Insperity 66 2020 Form 10-K SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Insperity, Inc. in the capacities indicated on February 11, 2021: Signature Title /s/ Paul J. Sarvadi Chairman of the Board, Chief Executive Officer Paul J. Sarvadi and Director (Principal Executive Officer) /s/ Douglas S. Sharp Senior Vice President of Finance Douglas S. Sharp Chief Financial Officer and Treasurer (Principal Financial Officer) * Director Timothy Clifford * Director Dr. Eli Jones * Director Carol R. Kaufman * Director John L. Lumelleau * Director Ellen H. Masterson * Director Randall Mehl * Director John Morphy * Director Latha Ramchand * Director Richard G. Rawson *By: /s/ Daniel D. Herink Daniel D. Herink, attorney-in-fact Insperity 67 2020 Form 10-K CONSOLIDATED FINANCIAL STATEMENTS INSPERITY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F- 2 Management’s Report on Internal Control F- 5 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting F- 6 Consolidated Balance Sheets F- 7 Consolidated Statements of Operations F- 8 Consolidated Statements of Comprehensive Income F- 9 Consolidated Statements of Stockholders’ Equity F- 10 Consolidated Statements of Cash Flows F- 11 Notes to Consolidated Financial Statements F- 13 Insperity F-1 2020 Form 10-K CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Insperity, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Insperity, Inc. (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “ consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 11, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Insperity F-2 2020 Form 10-K CONSOLIDATED FINANCIAL STATEMENTS Estimation of the Cost of Incurred Health Insurance Claims Description of the Matter As discussed in Note 1 of the consolidated financial statements under “Health Insurance Costs”, the Company provides the majority of its health insurance coverage to its worksite employees through a fully insured health insurance policy with UnitedHealthcare (“United”). While the policy with United is a fully-insured plan, as a result of certain contractual terms, the Company accounts for this plan using a partially self-funded insurance accounting model. Accordingly, the Company records the cost of the United plan, including an estimate of the incurred claims, taxes and administrative fees as benefits expense, which is a component of direct costs. The estimated incurred claims under the Company’s United insurance policy are based upon: (i) the level of claims processed during each quarter; (ii) estimated completion rates based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan, including both active and COBRA enrollees. Auditing management’s estimation of the cost of incurred health insurance claims was subjective and judgmental due to the significant estimation required in determining the medical and pharmacy completion rates. Estimating actual claims incurred is subjective due to the large number of plan participants and the possibility that the number, magnitude, nature, and the timing of processing of current period claims may not be comparable to historical results experienced by the Company. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the estimation process, including, among others, controls over the completeness and accuracy of the data used to estimate the cost of incurred health insurance claims and the review and approval processes that management has in place for the assumptions applied and the calculation of the cost of incurred health insurance claims. With the support of our actuarial specialists, we performed an independent assessment of the estimated cost of incurred health insurance claims. Our audit procedures included, among others, assessing (i) the Company’s health insurance cost estimation methodologies, (ii) significant assumptions used to develop the medical and pharmacy completion rates, which includes the incurred but not reported component, (iii) the accuracy and completeness of the claims processed and the number of plan participants used in the Company’s computation, as well as (iv) the historical accuracy of management’s estimates of the cost of incurred health insurance claims. Our testing of the medical and pharmacy completion rate assumptions included comparing the completion rate assumptions used by management to the completion rates experienced in historical periods and assessing whether contrary evidence exists with respect to the completion rate assumptions utilized by the Company to estimate the cost of incurred health insurance claims. We compared the Company’s estimate to a range developed by our actuarial specialists based on independently selected assumptions and historical data. Insperity F-3 2020 Form 10-K CONSOLIDATED FINANCIAL STATEMENTS Estimation of the Cost of Incurred Workers’ Compensation Claims and Related Liability Description of the Matter As discussed in Note 1 of the consolidated financial statements under “Workers’ Compensation Costs”, the Company provides workers’ compensation insurance, including ongoing health care and indemnity coverage, to its worksite employees whereby claims are paid over numerous years following the date of injury. Under the Company’s insurance program, the Company has financial responsibility for a significant portion of the workers’ compensation claims. Accordingly, the accrual related to incurred costs includes estimates that take into account the ongoing development of claims and therefore requires a significant level of judgment. The estimated accrued claims are based on (i) the loss development rate which is primarily based upon the nature of worksite employees’ job responsibilities, the location of worksite employees, the historical frequency and severity of workers’ compensation claims, (ii) an estimate of future cost trends, and (iii) discount rates which correspond to the weighted average estimated claim payout period. Auditing management’s estimation of the cost of incurred workers’ compensation claims was subjective due to the significant estimation required in determining the loss development rate and future cost trends. These assumptions have a significant effect on the valuation of the liability. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the estimation process, including, among others, controls over the completeness and accuracy of data used to estimate the cost of incurred workers’ compensation claims and the review and approval processes that management has in place for the assumptions applied and the calculation of the cost of incurred workers’ compensation claims. With the support of our actuarial specialists, we performed an independent assessment of the estimated cost of workers’ compensation claims incurred and the related liability. Our audit procedures included, among others, assessing (i) the Company’s workers’ compensation reserve methodologies, (ii) significant assumptions used to develop the loss development rate, as well as (iii) the historical accuracy of management’s estimates of the cost of incurred workers’ compensation claims. Our audit procedures included testing the completeness and accuracy of the underlying claims and payroll data provided to management's third-party actuaries and reviewing the Company's insurance contracts to assess the Company's self-insured retentions, deductibles, and coverage limits. Furthermore, we involved our actuarial specialists to assist in our evaluation of the methodologies utilized by management's third-party actuaries in developing the reserves recorded by the Company. We compared the Company's reserved amount to a range developed by our actuarial specialists based on historical loss data and independently selected assumptions. We have served as the Company’s auditor since 1991. /s/ Ernst & Young LLP Houston, Texas February 11, 2021 Insperity F-4 2020 Form 10-K CONSOLIDATED FINANCIAL STATEMENTS MANAGEMENT’S REPORT ON INTERNAL CONTROL The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013 framework). The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by the Company’s independent registered public accounting firm, as stated in their report that is included herein. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. The Company’s assessment of the effectiveness of its internal control over financial reporting included testing and evaluating the design and operating effectiveness of its internal controls. In management’s opinion, the Company has maintained effective internal control over financial reporting as of December 31, 2020, based on criteria established in the COSO 2013 framework . /s/ Paul J. Sarvadi /s/ Douglas S. Sharp Paul J. Sarvadi Douglas S. Sharp Chairman of the Board and Senior Vice President of Finance Chief Executive Officer Chief Financial Officer and Treasurer Insperity F-5 2020 Form 10-K CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Insperity, Inc. Opinion on Internal Control over Financial Reporting We have audited Insperity, Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Insperity, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Insperity, Inc. as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 11, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Houston, Texas February 11, 2021 Insperity F-6 2020 Form 10-K CONSOLIDATED FINANCIAL STATEMENTS INSPERITY, INC. — CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) December 31, 2020 December 31, 2019 Assets Cash and cash equivalents $ 554,846 $ 367,342 Restricted cash 45,522 49,295 Marketable securities 34,529 34,728 Accounts receivable, net 392,746 465,779 Prepaid insurance 10,164 10,418 Other current assets 39,461 43,493 Income taxes receivable — 3,691 Total current assets 1,077,268 974,746 Property and equipment, net 216,256 147,706 Right-of-use “ROU” leased assets 60,663 56,886 Deposits and prepaid health insurance 203,231 193,013 Goodwill and other intangible assets, net 12,707 12,714 Deferred income taxes, net 9,603 3,956 Other assets 4,548 5,975 Total assets $ 1,584,276 $ 1,394,996 Liabilities and stockholders’ equity Accounts payable $ 6,203 $ 4,565 Payroll taxes and other payroll deductions payable 377,960 277,248 Accrued worksite employee payroll cost 334,836 401,859 Accrued health insurance costs 32,685 21,180 Accrued workers’ compensation costs 48,186 52,868 Accrued corporate payroll and commissions 44,277 52,612 Other accrued liabilities 60,777 58,713 Total current liabilities 904,924 869,045 Accrued workers’ compensation costs 195,239 193,609 Long-term debt 369,400 269,400 Operating lease liabilities, net of current 64,289 58,863 Other accrued liabilities, net of current 6,292 — Total noncurrent liabilities 635,220 521,872 Commitments and contingencies Stockholders’ equity: Preferred stock ($ 0.01 per share par value; 20,000 shares authorized; no shares issued and outstanding) — — Common stock ($ 0.01 per share par value; 120,000 shares authorized; 55,489 shares issued and outstanding) 555 555 Additional paid-in capital 95,528 48,141 Treasury stock, at cost ( 17,236 and 16,117 shares held in treasury) ( 626,984 ) ( 544,102 ) Accumulated other comprehensive income, net of tax 5 12 Retained earnings 575,028 499,473 Total stockholders’ equity 44,132 4,079 Total liabilities and stockholders’ equity $ 1,584,276 $ 1,394,996 See accompanying notes. Insperity F-7 2020 Form 10-K CONSOLIDATED FINANCIAL STATEMENTS INSPERITY, INC. — CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, (in thousands, except per share amounts) 2020 2019 2018 Revenues (1) $ 4,287,004 $ 4,314,804 $ 3,828,549 Payroll taxes, benefits and workers’ compensation costs 3,480,150 3,581,870 3,146,640 Gross profit 806,854 732,934 681,909 Salaries, wages and payroll taxes 353,273 317,124 301,027 Stock-based compensation 60,145 23,993 20,425 Commissions 32,835 31,420 28,957 Advertising 21,556 21,603 18,554 General and administrative expenses 113,167 123,438 111,068 Depreciation and amortization 31,189 28,723 22,842 Total operating expenses 612,165 546,301 502,873 Operating income 194,689 186,633 179,036 Other income (expense): Interest income 2,597 10,657 7,992 Interest expense ( 8,016 ) ( 7,647 ) ( 4,668 ) Income before income tax expense 189,270 189,643 182,360 Income tax expense 51,033 38,544 46,947 Net income $ 138,237 $ 151,099 $ 135,413 Less distributed and undistributed earnings allocated to participating securities ( 782 ) ( 1,759 ) ( 1,875 ) Net income allocated to common shares $ 137,455 $ 149,340 $ 133,538 Net income per share of common stock Basic $ 3.57 $ 3.72 $ 3.24 Diluted $ 3.54 $ 3.70 $ 3.22 ____________________________________ (1) Revenues are comprised of gross billings less worksite employee (“WSEE”) payroll costs as follows: Year ended December 31, (in thousands) 2020 2019 2018 Gross billings $ 28,168,611 $ 27,212,010 $ 23,830,731 Less: WSEE payroll cost 23,881,607 22,897,206 20,002,182 Revenues $ 4,287,004 $ 4,314,804 $ 3,828,549 See accompanying notes. Insperity F-8 2020 Form 10-K CONSOLIDATED FINANCIAL STATEMENTS INSPERITY, INC. — CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, (in thousands) 2020 2019 2018 Net income $ 138,237 $ 151,099 $ 135,413 Other comprehensive loss: Unrealized gain (loss) on available-for-sale securities, net of tax ( 7 ) 21 ( 4 ) Comprehensive income $ 138,230 $ 151,120 $ 135,409 See accompanying notes. Insperity F-9 2020 Form 10-K CONSOLIDATED FINANCIAL STATEMENTS INSPERITY, INC. — CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Common Stock Issued Additional Paid In Capital Treasury Stock Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Shares Amount Balance at December 31, 2017 55,489 $ 555 $ 25,337 $ ( 256,363 ) $ ( 5 ) $ 296,797 $ 66,321 Purchase of treasury stock, at cost — — — ( 113,327 ) — — ( 113,327 ) Issuance of long-term incentive awards and dividend equivalents — — ( 5,764 ) 6,619 — ( 855 ) — Stock-based compensation expense — — 15,460 4,965 — — 20,425 Other — — 1,719 537 — — 2,256 Dividends paid — — — — — ( 33,408 ) ( 33,408 ) Unrealized loss on marketable securities, net of tax — — — — ( 4 ) — ( 4 ) Net income — — — — — 135,413 135,413 Balance at December 31, 2018 55,489 $ 555 $ 36,752 $ ( 357,569 ) $ ( 9 ) $ 397,947 $ 77,676 Purchase of treasury stock, at cost — — — ( 203,043 ) — — ( 203,043 ) Issuance of long-term incentive awards and dividend equivalents — — ( 7,695 ) 8,646 — ( 951 ) — Stock-based compensation expense — — 16,899 7,094 — — 23,993 Other — — 2,185 770 — — 2,955 Dividends paid — — — — — ( 48,622 ) ( 48,622 ) Unrealized gain on marketable securities, net of tax — — — — 21 — 21 Net income — — — — — 151,099 151,099 Balance at December 31, 2019 55,489 $ 555 $ 48,141 $ ( 544,102 ) $ 12 $ 499,473 $ 4,079 Purchase of treasury stock, at cost — — — ( 99,415 ) — — ( 99,415 ) Issuance of long-term incentive awards and dividend equivalents — — ( 7,140 ) 7,953 — ( 813 ) — Stock-based compensation expense — — 53,561 6,584 — — 60,145 Other — — 966 1,996 — — 2,962 Dividends paid — — — — — ( 61,869 ) ( 61,869 ) Unrealized loss on marketable securities, net of tax — — — — ( 7 ) — ( 7 ) Net income — — — — — 138,237 138,237 Balance at December 31, 2020 55,489 $ 555 $ 95,528 $ ( 626,984 ) $ 5 $ 575,028 $ 44,132 See accompanying notes. Insperity F-10 2020 Form 10-K CONSOLIDATED FINANCIAL STATEMENTS INSPERITY, INC. — CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (in thousands) 2020 2019 2018 Cash flows from operating activities Net income $ 138,237 $ 151,099 $ 135,413 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,189 28,723 22,842 Amortization of marketable securities 783 ( 486 ) 137 Stock-based compensation 60,145 23,993 20,425 Deferred income taxes ( 5,647 ) 4,860 ( 4,533 ) Changes in operating assets and liabilities: Accounts receivable 73,033 ( 65,156 ) ( 66,642 ) Prepaid insurance 254 ( 2,007 ) 2,371 Other current assets 4,032 ( 15,772 ) ( 730 ) Other assets and ROU assets 15,725 9,722 ( 2,005 ) Accounts payable 1,638 ( 6,057 ) 4,175 Payroll taxes and other payroll deductions payable 100,712 16,082 ( 42,081 ) Accrued worksite employee payroll expense ( 67,023 ) 71,880 62,577 Accrued health insurance costs 11,505 ( 13,973 ) 9,078 Accrued workers’ compensation costs ( 3,052 ) 13,247 23,763 Accrued corporate payroll, commissions and other accrued liabilities ( 20,763 ) ( 6,386 ) 8,941 Income taxes payable/receivable 5,585 ( 4,616 ) 10,749 Total adjustments 208,116 54,054 49,067 Net cash provided by operating activities 346,353 205,153 184,480 Cash flows from investing activities Marketable securities: Purchases ( 50,624 ) ( 110,131 ) ( 87,887 ) Proceeds from maturities 49,635 108,380 12,625 Proceeds from dispositions 484 28,313 16,299 Property and equipment: Purchases ( 98,159 ) ( 56,307 ) ( 35,328 ) Proceeds from dispositions 43 21 151 Net cash used in investing activities ( 98,621 ) ( 29,724 ) ( 94,140 ) Cash flows from financing activities Purchase of treasury stock ( 99,415 ) ( 203,043 ) ( 113,327 ) Dividends paid ( 61,869 ) ( 48,622 ) ( 33,408 ) Borrowings under long-term debt agreement 100,000 125,000 40,000 Other 7,701 8,312 2,257 Net cash used in financing activities ( 53,583 ) ( 118,353 ) ( 104,478 ) Net increase (decrease) in cash and cash equivalents 194,149 57,076 ( 14,138 ) Cash, cash equivalents and restricted cash at beginning of year 592,550 535,474 549,612 Cash, cash equivalents and restricted cash at end of year $ 786,699 $ 592,550 $ 535,474 Insperity F-11 2020 Form 10-K CONSOLIDATED FINANCIAL STATEMENTS INSPERITY, INC. — CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Year ended December 31, (in thousands) 2020 2019 2018 Supplemental schedule of cash, cash equivalents and restricted cash Cash and cash equivalents $ 367,342 $ 326,773 $ 354,260 Restricted cash 49,295 42,227 41,137 Deposits - workers’ compensation 175,913 166,474 154,215 Cash, cash equivalents and restricted cash beginning of year $ 592,550 $ 535,474 $ 549,612 Supplemental schedule of cash, cash equivalents and restricted cash Cash and cash equivalents $ 554,846 $ 367,342 $ 326,773 Restricted cash 45,522 49,295 42,227 Deposits - workers’ compensation 186,331 175,913 166,474 Cash, cash equivalents and restricted cash end of year $ 786,699 $ 592,550 $ 535,474 Supplemental disclosures of cash flow information Income taxes, net $ 51,097 $ 38,299 $ 40,730 Cash paid for interest 8,977 7,421 4,006 ROU assets obtained in exchange for lease obligations 22,770 24,474 — See accompanying notes. Insperity F-12 2020 Form 10-K Notes to the Consolidated Financial Statements 1. Accounting Policies Description of Business Insperity, Inc. (“Insperity” or “we”, “our”, and “us”) provides an array of human resources (“HR”) and business solutions designed to help improve business performance. Since our formation in 1986, we have evolved from being solely a professional employer organization (“PEO”), an industry we pioneered, to our current position as a comprehensive business performance solutions provider. We were organized as a corporation in 1986 and have provided PEO services since inception. Our most comprehensive HR services offerings are provided through our Workforce Optimization ® and Workforce Synchronization TM solutions (together, our “PEO HR Outsourcing solutions”), which encompass a broad range of human resources functions, including payroll and employment administration, employee benefits, workers’ compensation, government compliance, performance management and training and development services, along with our cloud-based human capital management platform, Insperity Premier TM . In addition to our PEO HR Outsourcing solutions, we offer a comprehensive traditional payroll and human capital management solution, known as Workforce Acceleration. We also offer a number of other business performance solutions, including Comprehensive Traditional Payroll and Human Capital Management, Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Retirement Services and Insurance Services, many of which are offered as a cloud-based software solution. These other products or services are offered separately or with our other solutions. We provide our PEO HR Outsourcing solutions by entering into a co-employment relationship with our clients, under which Insperity and its clients each take responsibility for certain portions of the employer-employee relationship. Insperity and its clients designate each party’s responsibilities through its Client Service Agreement (“CSA”), under which Insperity becomes an employer of the employees who work at the client’s location (“WSEE”) for most administrative and regulatory purposes. As a co-employer of our WSEEs, we assume many of the rights and obligations associated with being an employer. We enter into an employment agreement with each WSEE, thereby maintaining a variety of employer rights, including the right to hire or terminate employees, the right to evaluate employee qualifications or performance, and the right to establish employee compensation levels. Typically, Insperity only exercises these rights in consultation with its clients or when necessary to ensure regulatory compliance. The responsibilities associated with our role as employer include the following obligations with regard to our WSEEs: (1) to compensate our WSEEs through wages and salaries; (2) to pay the employer portion of payroll-related taxes; (3) to withhold and remit (where applicable) the employee portion of payroll-related taxes; (4) to provide employee benefit programs; and (5) to provide workers’ compensation insurance coverage. In addition to our assumption of employer status for our WSEEs, our PEO HR Outsourcing solutions also include other human resources functions for our clients to support the effective and efficient use of personnel in their business operations. To provide these functions, we maintain a significant staff of professionals trained in a wide variety of human resources functions, including employee training, employee recruiting, employee performance management, employee compensation and employer liability management. These professionals interact and consult with clients on a daily basis to help identify each client’s service requirements and to ensure that we are providing appropriate and timely personnel management services. Revenue and Direct Cost Recognition On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective approach. Under this method, the guidance is applied only to the most current period presented in the financial statements. ASU No. 2014-09 outlines a single comprehensive revenue recognition model for revenue arising from contracts with customers and superseded most of the previous revenue recognition guidance, including industry-specific guidance. Under ASU No. 2014-09, an entity recognizes revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Our revenue recognition policies remained substantially unchanged as a result of the adoption of ASU No. 2014-09 and we did not have any significant changes in our business processes or systems. Insperity F-13 2020 Form 10-K Notes to the Consolidated Financial Statements We enter into contracts with our customers for human resources services based on a stated rate and price in the contract. Our contracts generally have a term of 12 months, but are cancellable at any time by either party with 30-days’ notice. Our performance obligations are satisfied as services are rendered each month. The term between invoicing and when our performance obligations are satisfied is not significant. Payment terms are typically due concurrently with the invoicing of our PEO services. We do not have significant financing components or significant payment terms. Our revenue is generally recognized ratably over the payroll period as WSEEs perform their service at the client worksite. Customers are invoiced concurrently with each periodic payroll of its WSEEs. Revenues that have been recognized but not invoiced represent unbilled accounts receivable included in accounts receivable, net on our Consolidated Balance Sheets. Pursuant to the “practical expedients” provided under ASU No 2014-09, we expense sales commissions when incurred because the terms of our contracts are cancellable by either party with a 30-day notice. These costs are recorded in commissions in our Consolidated Statements of Operations. Our revenue for our PEO HR Outsourcing solutions by geographic region and for our other products and services offerings are as follows: Year Ended December 31, (in thousands) 2020 2019 2018 Northeast $ 1,189,837 $ 1,135,771 $ 996,541 Southeast 509,846 499,201 447,584 Central 761,905 743,514 637,779 Southwest 935,634 1,001,845 895,243 West 839,347 880,434 797,942 4,236,569 4,260,765 3,775,089 Other revenue 50,435 54,039 53,460 Total revenue $ 4,287,004 $ 4,314,804 $ 3,828,549 Our PEO HR Outsourcing solutions revenues are primarily derived from our gross billings, which are based on (1) the payroll cost of our WSEEs; and (2) a markup computed as a percentage of the payroll cost. The gross billings are invoiced concurrently with each periodic payroll of our WSEEs. Revenues, which exclude the payroll cost component of gross billings and therefore consist solely of markup, are recognized ratably over the payroll period as WSEEs perform their service at the client worksite. In determining the pricing of the markup component of our gross billings, we take into consideration our estimates of the costs directly associated with our WSEEs, including payroll taxes, benefits and workers’ compensation costs, plus an acceptable gross profit margin. As a result, our operating results are significantly impacted by our ability to accurately estimate, control and manage our direct costs relative to the revenues derived from the markup component of our gross billings. Consistent with our revenue recognition policy, our direct costs do not include the payroll cost of our WSEEs. Our direct costs associated with our revenue generating activities are primarily comprised of all other costs related to our WSEEs, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance costs. Segment Reporting We operate one reportable segment under Accounting Standards Codification (“ASC”) 280, Segment Reporting . Principles of Consolidation The Consolidated Financial Statements include the accounts of Insperity, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Insperity F-14 2020 Form 10-K Notes to the Consolidated Financial Statements Use of Estimates The preparation of financial statements in conformity with United States Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Concentrations of Credit Risk Financial instruments that could potentially subject us to concentration of credit risk include accounts receivable and marketable securities. Cash, Cash Equivalents and Marketable Securities We invest our excess cash in federal government and municipal-based money market funds and debt instruments of U.S. municipalities. All highly liquid investments with stated maturities of three months or less from date of purchase are classified as cash equivalents. Liquid investments with stated maturities of greater than three months are classified as marketable securities in current assets. We account for marketable securities in accordance with ASC 320, Investments – Debt and Equity Securities . We determine the appropriate classification of all marketable securities as held-to-maturity, available-for-sale or trading at the time of purchase, and re-evaluate such classification as of each balance sheet date. At December 31, 2020 and 2019, all of our investments in marketable securities were classified as available-for-sale, and as a result, were reported at fair value. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts from the date of purchase to maturity. Such amortization is included in interest income as an addition to or deduction from the coupon interest earned on the investments. We use the specific identification method of determining the cost basis in computing realized gains and losses on the sale of our available-for-sale securities. Realized gains and losses are included in other income. Property and Equipment Property and equipment are recorded at cost and are depreciated over the estimated useful lives of the related assets using the straight-line method. Property and equipment, net consisted of the following: (in thousands) December 31, 2020 December 31, 2019 Land $ 6,215 $ 6,215 Buildings and improvements 125,704 119,635 Computer hardware and software 129,213 123,232 Software development costs 100,762 85,252 Furniture, fixtures and other 48,516 48,082 Construction in progress (1) 84,668 20,885 495,078 403,301 Accumulated depreciation and amortization ( 278,822 ) ( 255,595 ) Total property and equipment, net $ 216,256 $ 147,706 ____________________________________ (1) Construction in progress is related to our corporate office expansion. Insperity F-15 2020 Form 10-K Notes to the Consolidated Financial Statements The estimated useful lives of property and equipment for purposes of computing depreciation are as follows: Useful Life Buildings and improvements 5 — 32 years Computer hardware and software 2 — 5 years Software development costs 3 — 3 years Furniture, fixtures and other 5 — 7 years Software development costs relate primarily to software code development, systems integration and testing of our proprietary professional employer information systems and are accounted for in accordance with ASC 350-40, Internal Use Software . Capitalized software development costs are amortized using the straight-line method over the estimated useful lives of the software, generally three years. We recognized $ 8.7 million, $ 7.8 million and $ 6.0 million in amortization of capitalized computer software costs in 2020, 2019 and 2018, respectively. Unamortized software development costs were $ 32.6 million and $ 25.8 million at December 31, 2020 and 2019, respectively. We periodically evaluate our long-lived assets for impairment in accordance with ASC 360-10, Property, Plant, and Equipment. ASC 360-10 requires that an impairment loss be recognized for assets to be disposed of or held-for-use when the carrying amount of an asset is deemed to not be recoverable. If events or circumstances were to indicate that any of our long-lived assets might be impaired, we would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable asset. In addition, we may record an impairment loss to the extent that the carrying value of the asset exceeded the fair value of the asset. Fair value is generally determined using an estimate of undiscounted future net cash flows from operating activities or upon disposal of the asset. Leases In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) , which requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability for all leases with terms greater than 12 months and also requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter, the collection of lease guidance is referred to as “ASC 842.” On January 1, 2019, we adopted ASC 842 using the modified retrospective transition method. Results for the reporting period beginning January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with our historical accounting under ASC 840, Leases. Upon adoption of ASC 842, we increased our total assets and liabilities due to the recording of operating lease ROU assets and operating lease liabilities of approximately $ 50.8 million and $ 63.7 million, respectively, as of January 1, 2019. These increases did not have a material impact on our results of operations or cash flows. For all leases that commenced before the effective date of ASC 842, we elected to apply the permitted “practical expedients” to not reassess the following: (1) whether any expired or existing contracts contain leases; (2) the lease classification for any expired or existing leases; and (3) initial direct costs for any existing leases. We determine if an arrangement is a lease at inception of a contract. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense. We have lease agreements which require payments for lease and non-lease components and have elected to account for these as a single lease component related to our other operating facilities. Please read Note 11, “Leases,” for additional information. Insperity F-16 2020 Form 10-K Notes to the Consolidated Financial Statements Goodwill and Other Intangible Assets Our goodwill is not amortized, but is tested for impairment on an annual basis or when there is an indication that there has been a potential decline in the fair value of a reporting unit. Annually, we perform a qualitative analysis to determine if it is more likely than not that the fair value has declined below its carrying value. This analysis considers various qualitative factors. Due to the nature of our business, all of our goodwill is associated with one reporting unit. We perform our annual impairment testing during the fourth quarter. Based on the results of our analysis, no impairment loss was recognized in 2020, 2019 or 2018. At December 31, 2020 and 2019, we had an aggregate carrying amount of goodwill acquired of $ 21.2 million, which has been reduced by cumulative impairment charges of $ 8.5 million. Accordingly, our goodwill balance at December 31, 2020 and 2019 was $ 12.7 million. Health Insurance Costs We provide group health insurance coverage to our WSEEs in our PEO HR Outsourcing solutions through a national network of carriers, including UnitedHealthcare (“United”), UnitedHealthcare of California, Kaiser Permanente, Blue Shield of California, HMSA BlueCross BlueShield of Hawaii and Tufts, all of which provide fully insured policies or service contracts. The policy with United provides approximately 87 % of our health insurance coverage. While the policy with United is a fully-insured plan, as a result of certain contractual terms, we have accounted for this plan since its inception using a partially self-funded insurance accounting model. Effective January 1, 2020, under the amended agreement with United, we no longer have financial responsibilities for participant’s annual claim costs that exceed $1 million. Accordingly, we record the cost of the United plan, including an estimate of the incurred claims, taxes and administrative fees (collectively the “Plan Costs”) as benefits expense, which is a component of direct costs, in our Consolidated Statements of Operations. The estimated incurred claims are based upon: (1) the level of claims processed during each quarter; (2) estimated completion rates based upon recent claim development patterns under the plan; and (3) the number of participants in the plan, including both active and COBRA enrollees. Each reporting period, changes in the estimated ultimate costs resulting from claim trends, plan design and migration, participant demographics and other factors are incorporated into the benefits costs, which requires a significant level of judgment. Additionally, since the plan’s inception, under the terms of the contract, United establishes cash funding rates 90 days in advance of the beginning of a reporting quarter. If the Plan Costs for a reporting quarter are greater than the premiums paid and owed to United, a deficit in the plan would be incurred and a liability for the excess costs would be accrued in our Consolidated Balance Sheets. On the other hand, if the Plan Costs for the reporting quarter are less than the premiums paid and owed to United, a surplus in the plan would be incurred and we would record an asset for the excess premiums in our Consolidated Balance Sheets. The terms of the arrangement require us to maintain an accumulated cash surplus in the plan of $ 9.0 million, which is reported as long-term prepaid insurance. In addition, United requires a deposit equal to approximately one day of claims funding activity, which was $ 6.5 million as of December 31, 2020, and is reported as a long-term asset. As of December 31, 2020, Plan Costs were more than the net premiums paid and owed to United by $ 6.0 million. As this amount is less than the agreed-upon $ 9.0 million surplus maintenance level, the $ 15.0 million difference is also included in accrued health insurance costs, a current liability, in our Consolidated Balance Sheets. The premiums, including the additional quarterly premiums, owed to United at December 31, 2020, were $ 11.7 million, which is included in accrued health insurance costs, a current liability in our Consolidated Balance Sheets. Our benefits costs incurred included a reduction of $ 0.2 million in 2020, an increase of $ 2.3 million in 2019 and a reduction of $ 1.3 million in 2018 for changes in estimated run-off related to prior periods. Insperity F-17 2020 Form 10-K Notes to the Consolidated Financial Statements Workers’ Compensation Costs Our workers’ compensation coverage for our WSEEs in our PEO HR Outsourcing solutions has been provided through an arrangement with the Chubb Group of Insurance Companies or its predecessors (the “Chubb Program”) since 2007. The Chubb Program is fully insured in that Chubb has the responsibility to pay all claims incurred under the policy regardless of whether we satisfy our responsibilities. Under the Chubb Program, for claims incurred on or before September 30, 2019, we have financial responsibility to Chubb for the first $ 1 million layer of claims per occurrence and, for claims over $ 1 million, up to a maximum aggregate amount of $ 6 million per policy year for claims that exceed $ 1 million. Chubb bears the financial responsibility for all claims in excess of these levels. Effective for claims incurred on or after October 1, 2019, we have financial responsibility to Chubb for the first $ 1.5 million layer of claims per occurrence and, for claims over $ 1.5 million, up to a maximum aggregate amount of $ 6 million per policy year for claims that exceed $ 1.5 million. Because we bear the financial responsibility for claims up to the levels noted above, such claims, which are the primary component of our workers’ compensation costs, are recorded in the period incurred. Workers’ compensation insurance includes ongoing health care and indemnity coverage whereby claims are paid over numerous years following the date of injury. Accordingly, the accrual of related incurred costs in each reporting period includes estimates, which take into account the ongoing development of claims and therefore requires a significant level of judgment. We utilize a third-party actuary to estimate our loss development rate, which is primarily based upon the nature of WSEEs’ job responsibilities, the location of WSEEs, the historical frequency and severity of workers’ compensation claims, and an estimate of future cost trends. Each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers’ compensation claims cost estimates. During the years ended December 31, 2020, 2019 and 2018, we reduced accrued workers’ compensation costs by $ 42.1 million, $ 31.7 million and $ 18.8 million, respectively, for changes in estimated losses related to prior reporting periods. Workers’ compensation cost estimates are discounted to present value at a rate based upon the U.S. Treasury rates that correspond with the weighted average estimated claim payout period (the average discount rate was 0.6 % in 2020 and 1.9 % in 2019) are accreted over the estimated claim payment period and included as a component of direct costs in our Consolidated Statements of Operations. The following table provides the activity and balances related to incurred but not paid workers’ compensation claims: Year Ended December 31, (in thousands) 2020 2019 Beginning balance $ 242,904 $ 229,639 Accrued claims 42,639 62,552 Present value discount, net of accretion 740 ( 3,643 ) Paid claims ( 45,522 ) ( 45,644 ) Ending balance $ 240,761 $ 242,904 Current portion of accrued claims $ 45,522 $ 49,295 Long-term portion of accrued claims 195,239 193,609 Total accrued claims $ 240,761 $ 242,904 The current portion of accrued workers’ compensation costs on the Consolidated Balance Sheets at December 31, 2020 and 2019 includes $ 2.7 million and $ 3.6 million, respectively, of workers’ compensation administrative fees. The undiscounted accrued workers’ compensation costs were $ 257.9 million as of December 31, 2020 and $ 262.9 million as of December 31, 2019. At the beginning of each policy period, the workers’ compensation insurance carrier establishes monthly funding requirements comprised of premium costs and funds to be set aside for payment of future claims (“claim funds”). The level of claim funds is primarily based upon anticipated WSEE payroll levels and expected workers’ compensation loss rates, as determined by the insurance carrier. Monies funded into the program for incurred claims expected to be paid within one year are recorded as restricted cash, a short-term asset, while the remainder of claim funds are included in deposits, a long-term asset in our Consolidated Balance Sheets. In 2020, we received $ 28.2 million for the return of excess claim funds related to Insperity F-18 2020 Form 10-K Notes to the Consolidated Financial Statements the workers’ compensation program, which decreased deposits. As of December 31, 2020, we had restricted cash of $ 45.5 million and deposits of $ 186.3 million. Our estimate of incurred claim costs expected to be paid within one year is included in short-term liabilities, while our estimate of incurred claim costs expected to be paid beyond one year is included in noncurrent liabilities on our Consolidated Balance Sheets. Stock-Based Compensation At December 31, 2020, we have one stock-based employee compensation plan under which we may issue awards. We account for this plan under the recognition and measurement principles of ASC 718, Compensation – Stock Compensation , which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. We generally make annual grants of restricted and unrestricted stock under our stock-based incentive compensation plan to our non-employee directors, officers and other management but changed to restricted stock units for employees in 2020. Restricted stock and restricted stock unit grants to officers and other employees generally vest over a period of three years from the date of grant. Shares of restricted stock and restricted stock units are valued based on the fair value on date of grant and the associated expense, net of estimated forfeitures, is recognized over the requisite service period. Stock grants issued to non-employee directors are 100 % vested on the grant date. During 2020, we also granted performance-based restricted stock units to officers and other management, which vest or expire based on the achievement of various performance metrics. Performance-based restricted stock units have a vesting schedule of one year. The fair value of each performance-based restricted stock unit is the market price of our common stock on the date of grant. The compensation expense for such awards is recognized on a straight line basis over the requisite service period. Over the performance period, the number of shares expected to be issued is adjusted upward or downward based on the probability of achievement of the performance target. Our Insperity Long-Term Incentive Program (the “LTIP”) provides for performance based long-term compensation awards in the form of performance units to certain employees based on the achievement of pre-established performance goals. Each performance unit represents the right to receive one common share at a future date based on our performance against certain targets. Performance units have a vesting schedule of three years . Commencing in 2016, a portion of the LTIP grant to employees was considered a market-based performance award that cliff vests at the end of three years assuming continued employment and achievement of market-based performance goals. The fair value of each performance unit is the market price of our common stock on the date of grant. The fair value of each market-based performance unit was determined through use of the Monte Carlo simulation method. The compensation expense for such awards is recognized on a straight line basis over the vesting term. Over the performance period the number of shares expected to be issued is adjusted upward or downward based on the probability of achievement of the performance target. Company-Sponsored 401(k) Retirement Plans Under our 401(k) retirement plan for corporate employees (the “Corporate Plan”), we matched 100 % of eligible corporate employees’ contributions, up to 6 % of the employees’ eligible compensation in 2020, 2019 and 2018. Matching contributions under the Corporate Plan are immediately vested. During 2020, 2019 and 2018, we made matching contributions on behalf of corporate employees to the Corporate Plan of $ 12.6 million, $ 11.4 million and $ 10.3 million, respectively, and is included in salaries, wages and payroll taxes in our Consolidated Statements of Operations. Under our separate 401(k) retirement plan for WSEEs (the “Worksite Employee Plan”), the match percentage for WSEEs ranges from 0 % to 6 %, as determined by each client company. Matching contributions under the Worksite Employee Plan are immediately vested. During 2020, 2019 and 2018, we made matching contributions on behalf of WSEEs to the Worksite Employee Plan of $ 199.2 million, $ 198.2 million and $ 165.5 million, respectively. Advertising We expense all advertising costs as incurred. Income Taxes Insperity F-19 2020 Form 10-K Notes to the Consolidated Financial Statements We use the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax carrying amounts of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Reform Act”) was signed into law. The 2017 Tax Reform Act significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% beginning in 2018. Please read Note 7, “Income Taxes,” for additional information. Reclassifications Certain immaterial prior year amounts have been reclassified to conform to the 2020 presentation. New Accounting Pronouncements We adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) effective January 1, 2020 with no material impact. Under this standard, we estimate our reserves using information about past events, current conditions and risk characteristics of our client base when assessing risk associated with the collectability of accounts receivables, including unbilled accounts receivables. We require clients to pay invoices for service fees not later than the same day as the applicable payroll date. As such, we generally do not require collateral. As of December 31, 2020, allowance for bad debts was immaterial. 2. Cash, Cash Equivalents and Marketable Securities The following table summarizes our investments in cash equivalents and marketable securities held by investment managers and overnight investments: December 31, 2020 2019 (in thousands) Cash & Cash Equivalents Marketable Securities Total Cash & Cash Equivalents Marketable Securities Total Overnight holdings $ 503,221 $ — $ 503,221 $ 349,857 $ — $ 349,857 Investments holdings 47,992 34,529 82,521 13,218 34,728 47,946 Cash in demand accounts 33,692 — 33,692 36,521 — 36,521 Outstanding checks ( 30,059 ) — ( 30,059 ) ( 32,254 ) — ( 32,254 ) Total $ 554,846 $ 34,529 $ 589,375 $ 367,342 $ 34,728 $ 402,070 Our cash and overnight holdings fluctuate based on the timing of the client’s payroll processing cycle. Included in the cash balance as of December 31, 2020 and December 31, 2019, are $ 342.0 million and $ 234.6 million, respectively, in withholdings associated with federal and state income taxes, employment taxes and other payroll deductions, as well as $ 35.3 million and $ 59.6 million, respectively, in client prepayments. 3. Fair Value Measurements We account for our financial assets in accordance with ASC 820, Fair Value Measurement . This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value measurement disclosures are grouped into three levels based on valuation factors: • Level 1 - quoted prices in active markets using identical assets • Level 2 - significant other observable inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other observable inputs • Level 3 - significant unobservable inputs Insperity F-20 2020 Form 10-K Notes to the Consolidated Financial Statements Fair Value of Instruments Measured and Recognized at Fair Value The following tables summarize the levels of fair value measurements of our financial assets: December 31, 2020 December 31, 2019 (in thousands) Total Level 1 Level 2 Total Level 1 Level 2 Money market funds $ 551,213 $ 551,213 $ — $ 363,075 $ 363,075 $ — U.S. Treasury bills 10,531 10,531 — 34,728 34,728 — Municipal bonds 23,998 — 23,998 — — — Total $ 585,742 $ 561,744 $ 23,998 $ 397,803 $ 397,803 $ — The municipal bond securities valued as Level 2 investments are primarily pre-refunded municipal bonds that are secured by escrow funds containing U.S. Government securities. Our valuation techniques used to measure fair value for these securities during the period consisted primarily of third-party pricing services that utilized actual market data such as trades of comparable bond issues, broker/dealer quotations for the same or similar investments in active markets and other observable inputs. The following is a summary of our available-for-sale marketable securities: (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2020 U.S. Treasury bills $ 10,530 $ 1 $ — $ 10,531 Municipal bonds 23,994 8 ( 4 ) 23,998 December 31, 2019 U.S. Treasury bills $ 34,716 $ 13 $ ( 1 ) $ 34,728 As of December 31, 2020, the contractual maturities of all marketable securities in our portfolio were less than one year. Fair Value of Other Financial Instruments The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair values due to the short-term maturities of these instruments. At December 31, 2020, the carrying value of our borrowings under our revolving credit facility approximates fair value and was classified as Level 2 in the fair value hierarchy. Please read Note 6, "Long-Term Debt," for additional information. 4. Accounts Receivable Accounts receivable, net consisted of the following: December 31, (in thousands) 2020 2019 Trade, net $ 6,559 $ 12,731 Unbilled 380,819 448,088 Other 5,368 4,960 Accounts receivable, net $ 392,746 $ 465,779 Our accounts receivable is primarily composed of trade receivables and unbilled receivables. Our trade receivables, which represent outstanding gross billings to clients, are reported net of allowance for doubtful accounts of $ 1.0 million and $ 0.9 million as of December 31, 2020 and 2019, respectively. We establish an allowance for doubtful accounts based on management’s assessment of the collectability of specific accounts and by making a general provision for other potentially uncollectible amounts. Insperity F-21 2020 Form 10-K Notes to the Consolidated Financial Statements We make an accrual at the end of each accounting period for our obligations associated with the earned but unpaid wages of our WSEEs and for the accrued gross billings associated with such wages. These accruals are included in accrued WSEE payroll cost and unbilled accounts receivable; however, these amounts are presented net in the Consolidated Statements of Operations. We generally require clients to pay invoices for service fees no later than the same day as the applicable payroll date. As such, we generally do not require collateral. Client prepayments directly attributable to accrued worksite employee payroll costs and unbilled revenues have been netted as we have the legal right of offset for these amounts. Unbilled accounts receivable consisted of the following: December 31, (in thousands) 2020 2019 Accrued worksite employee payroll cost $ 334,836 $ 401,859 Unbilled revenues 81,311 105,841 Client prepayments ( 35,328 ) ( 59,612 ) Unbilled accounts receivable $ 380,819 $ 448,088 5. Deposits and prepaid health insurance Deposits and prepaid health insurance consisted of the following: December 31, (in thousands) 2020 2019 Prepaid health insurance $ 9,000 $ 9,000 Deposits – health insurance 7,900 8,100 Deposits – workers’ compensation 186,331 175,913 Deposits and prepaid health insurance $ 203,231 $ 193,013 The contractual arrangement with United for health insurance coverage requires us to maintain an accumulated cash surplus in the plan of $ 9.0 million, which is reported as deposits and prepaid health insurance. Please read Note 1, “Accounting Policies,” for a discussion of our accounting policies for health insurance costs and workers’ compensation costs. 6. Long-Term Debt We have a $ 500 million revolving credit facility (the “Facility”) which is available for working capital and general corporate purposes, including acquisitions, stock repurchases and issuances of letters of credit. Borrowings may be increased to $ 550 million based on the terms and subject to the conditions set forth in the agreement relating to the Facility (the “Credit Agreement”). Our obligations under the Facility are secured by 65 % of the stock of our captive insurance subsidiary and are guaranteed by all of our domestic subsidiaries. In addition, as of December 31, 2020, we had an outstanding $ 1.0 million letter of credit issued under the Facility. As of December 31, 2020, our outstanding balance on the Facility was $ 369.4 million and is due when the Facility matures on September 13, 2024 . Borrowings under the Facility bear interest at an annual rate equal to an alternate base rate or LIBOR , at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin varies (1) in the case of LIBOR loans, from 1.50 % to 2.25 % and (2) in the case of alternate base rate loans, from 0.00 % to 0.50 %. The alternate base rate is the highest of (1) the prime rate most recently published in The Wall Street Journal, (2) the federal funds rate plus 0.50 % and (3) the 30-day LIBOR rate plus 2.00 %. We also pay an unused commitment fee on the average daily unused portion of the Facility at a rate of 0.25 %. The average interest rate during 2020 was 2.4 %. Interest expense and unused commitment fees are recorded in other income (expense). Upon the discontinuation of LIBOR, the Facility provides that we and the agent will negotiate in good faith to amend the agreement to address such discontinuation and to place the parties in substantially the same economic position. The Facility contains both affirmative and negative covenants that we believe are customary for arrangements of this nature. Covenants include, but are not limited to, limitations on our ability to incur additional indebtedness, sell material assets, retire, redeem or otherwise reacquire our capital stock, acquire the capital stock or assets of another business, make investments and pay dividends. In addition, the Credit Agreement requires us to comply with financial covenants limiting our Insperity F-22 2020 Form 10-K Notes to the Consolidated Financial Statements total funded debt, minimum interest coverage ratio and maximum leverage ratio. We were in compliance with all financial covenants under the Credit Agreement at December 31, 2020. 7. Income Taxes Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. Significant components of the net deferred tax assets as reflected on the Consolidated Balance Sheets are as follows: December 31, (in thousands) 2020 2019 Deferred tax liabilities Prepaid assets $ ( 4,207 ) $ ( 4,252 ) Depreciation ( 4,941 ) ( 4,564 ) Software development costs ( 8,230 ) ( 6,475 ) Tenant improvements ( 3,702 ) ( 3,209 ) Right-of-use leased assets ( 17,322 ) ( 15,949 ) Intangibles ( 1,444 ) ( 955 ) Total deferred tax liabilities ( 39,846 ) ( 35,404 ) Deferred tax assets Accrued incentive compensation 5,092 5,946 Net operating loss carryforward 558 632 Workers’ compensation accruals 6,310 5,404 Accrued rent 1,553 1,223 Stock-based compensation 11,383 6,712 Operating lease liabilities 21,024 19,158 Minority investment impairment 676 673 Cares act deferral 3,235 — Other 294 287 Total deferred tax assets 50,125 40,035 Valuation allowance ( 676 ) ( 675 ) Total net deferred tax assets 49,449 39,360 Net deferred tax assets $ 9,603 $ 3,956 Insperity F-23 2020 Form 10-K Notes to the Consolidated Financial Statements The components of income tax expense are as follows: Year Ended December 31, (in thousands) 2020 2019 2018 Current income tax expense Federal $ 45,558 $ 27,385 $ 40,347 State 11,122 6,299 11,133 Total current income tax expense 56,680 33,684 51,480 Deferred income tax (benefit) expense Federal ( 4,678 ) 4,016 ( 3,398 ) State ( 969 ) 844 ( 1,135 ) Total deferred income tax (benefit) expense ( 5,647 ) 4,860 ( 4,533 ) Total income tax expense $ 51,033 $ 38,544 $ 46,947 In 2016, we prospectively adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. We recognized an income tax benefit of $ 2.1 million in 2020, $ 14.6 million in 2019 and $ 3.9 million in 2018 related to excess tax benefits from the vesting of equity compensation. The reconciliation of income tax expense computed at U.S. federal statutory tax rates to the reported income tax expense from continuing operations is as follows: Year Ended December 31, (in thousands) 2020 2019 2018 Expected income tax expense at 21 % $ 39,747 $ 39,825 $ 38,296 State income taxes, net of federal benefit 7,818 5,821 7,660 Nondeductible expenses 3,641 5,959 4,831 Equity compensation, net 1,335 ( 12,120 ) ( 2,737 ) Research and development credit ( 1,479 ) ( 1,069 ) ( 856 ) Other, net ( 29 ) 128 ( 247 ) Reported total income tax expense $ 51,033 $ 38,544 $ 46,947 At December 31, 2020, we have net operating loss carryforwards totaling $ 2.2 million that expire from 2023 to 2030 related to an acquisition that occurred in 2010. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2020, 2019 and 2018, we made no provisions for interest or penalties related to uncertain tax positions. The tax years 2017 through 2019 remain open to examination by the Internal Revenue Service of the United States. The tax years 2016 through 2019 remain open to examination by various state tax authorities. Insperity F-24 2020 Form 10-K Notes to the Consolidated Financial Statements 8. Stockholders’ Equity Repurchase Program Our Board of Directors (the “Board”) has authorized a program to repurchase shares of our outstanding common stock (“Repurchase Program”). The purchases are to be made from time to time in the open market or directly from stockholders at prevailing market prices based on market conditions or other factors. We repurchased 1,285,696 shares under the Repurchase Program during 2020. In addition, 151,332 shares were withheld during 2020 to satisfy minimum tax withholding obligations for the vesting of long-term incentive, restricted stock awards and restricted stock units, which are not subject to the Repurchase Program. In 2020, the Board authorized an increase of 2 million shares that may be repurchased under the Repurchase Program. During 2019, we repurchased 1,897,322 shares under the Repurchase Program and 227,208 shares were withheld to satisfy minimum tax withholding obligations for the vesting of long-term incentive and restricted stock awards. At December 31, 2020, we were authorized to repurchase an additional 1,128,137 shares under the Repurchase Program. Shares repurchased under the Repurchase Program are recorded in treasury. Dividends The Board declared quarterly dividends as follows: (amounts per share) 2020 2019 First quarter $ 0.40 $ 0.30 Second quarter 0.40 0.30 Third quarter 0.40 0.30 Fourth quarter 0.40 0.30 During 2020 and 2019, we paid a total of $ 61.9 million and $ 48.6 million, respectively, in dividends. Preferred Stock At December 31, 2020, 20 million shares of preferred stock were authorized. Rights Plan On May 21, 2020, the Board declared a dividend of one right (“Right”) for each outstanding share of common stock to common stockholders of record at the close of business on June 1, 2020 (the “Rights Plan”). Each Right, if and when it becomes exercisable, entitles the registered holder to purchase from us one unit consisting of one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share. Initially, the Rights are attached to all outstanding shares of our common stock. The Rights are not currently exercisable and the Rights Plan will expire at the close of business on May 20, 2021, unless the Rights are earlier redeemed or exchanged by us. 9. Incentive Plans The Insperity, Inc. 2001 Incentive Plan, as amended, and the 2012 Incentive Plan, as amended, (collectively, the “Incentive Plans”) provide for options and other stock-based awards that have been and may be granted to eligible employees and non-employee directors of Insperity or its subsidiaries. The 2012 Incentive Plan is currently the only plan under which new stock-based awards may be granted.The 2001 Incentive Plan only has outstanding nonqualified stock options. The 2012 Incentive Plan permits stock options, including nonqualified stock options and options intended to qualify as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code, stock awards, phantom stock awards, stock appreciation rights, performance units, and other stock-based awards and cash awards, all of which may or may not be subject to the achievement of one or more performance objectives. The purpose of the Incentive Plan generally is to retain and attract persons of training, experience and ability to serve as employees of Insperity and its subsidiaries and to serve as non-employee directors of Insperity, to encourage the sense of proprietorship of such persons and to stimulate the active interest of such persons in the development and financial success of Insperity and its subsidiaries. The Incentive Plans are administered by the Compensation Committee of the Board (the “Committee”). The Committee has the power to determine which eligible employees will receive awards, the timing and manner of the grant of such awards, the exercise price of stock options (which may not be less than market value on the date of grant), the number of shares and all of the terms of the awards. The Board may at any time amend or terminate the Incentive Plans. However, no Insperity F-25 2020 Form 10-K Notes to the Consolidated Financial Statements amendment that would impair the rights of any participant, with respect to outstanding grants, can be made without the participant’s prior consent. Stockholder approval of amendments to the Incentive Plans is necessary only when required by applicable law or stock exchange rules. Assuming all outstanding awards are paid at max, at December 31, 2020, 1,417,062 shares of common stock were available for future grants under the 2012 Incentive Plan. We also maintain the Insperity, Inc. Long-Term Incentive Plan (“LTIP”) under the 2012 Incentive Plan. The LTIP provides for performance-based long-term compensation awards in the form of performance units to certain employees based on the achievement of pre-established performance goals. We granted performance units under the LTIP to our named executive officers and certain other officers in 2018, 2019 and 2020. Beginning with stock-based awards granted in 2020, employees who attain a minimum age of 62 and have provided 15 years or more of continuous service may continue to vest in awards following a qualifying retirement as defined under the 2012 Incentive Plan award agreement, as though he or she were still an employee, provided the grant date of the award is six months or more before the employee’s last day of employment. For a termination following a qualifying retirement, time-vested awards will continue to vest in the normal course. For a termination following a qualifying retirement, performance-based awards with completed or in-process performance periods are adjusted for achievement of the performance criteria, prorated through the date of termination and paid in the normal course, while performance-based awards for performance periods that have not started are forfeited. Stock-based compensation expense related to time-vested and performance-based awards is accelerated over the requisite service period for employees who meet the requirements for continued vesting. Stock-based compensation expense and other disclosures for stock-based awards follows: Year Ended December 31, (in thousands) 2020 2019 2018 Stock-based compensation expense recognized $ 60,145 $ 23,993 $ 20,425 Income tax benefit realized from stock-based compensation expense 16,217 4,876 5,249 Time-Based Restricted Stock Awards and Time-Based Restricted Stock Units Time-based restricted stock awards (“RSAs”) and time-based restricted stock units (“RSUs”), under equity plan accounting, are generally measured at fair value on the date of grant based on the number of shares granted, estimated forfeitures and the quoted price of the common stock. Such value is recognized as compensation expense over the corresponding vesting period, generally three years to five years for awards currently outstanding. However, for some RSUs currently outstanding, compensation expense is accelerated over the shortened requisite service period for employees who meet the requirements for continued vesting. Following is a summary of time-based RSAs and time-based RSUs award activity for 2020: Total Awards (in thousands) Weighted Average Grant Date Fair Value Non-vested - December 31, 2019 443 $ 86.10 Granted 468 66.32 Vested ( 262 ) 70.65 Canceled ( 13 ) 79.89 Non-vested - December 31, 2020 636 $ 78.04 Additional disclosures for time-based RSAs and time-based RSUs: Year Ended December 31, 2020 2019 2018 Weighted average grant date fair value of awards granted $ 66.32 $ 124.04 $ 65.98 Fair value of awards vested during the year (in millions) 18.1 39.7 1.2 Insperity F-26 2020 Form 10-K Notes to the Consolidated Financial Statements As of December 31, 2020, unrecognized compensation expense associated with the unvested RSAs and RSUs outstanding was $ 26.1 million and is expected to be recognized over a weighted average period of 20 months. Long-Term Incentive Program Awards Each performance unit represents the right to receive common shares at a future date based on our performance against specified targets. The ultimate number of shares issued and the related compensation cost recognized is based on a comparison of the final performance metrics to the specified targets, which can range from 0% to 200% of the targeted amounts. A performance unit may be comprised of either a performance based award or a market-based award. For performance-based awards, performance units have a vesting schedule of three years and compensation expense is recognized based on the number of common shares expected to be issued and the market price per common share on the date of grant. Over the performance period, the number of shares expected to be issued is adjusted upward or downward based upon the probability of achievement of the performance targets. For market-based awards, performance units vest at the end of a three-year period assuming continued employment and achievement of market-based performance goals. The fair value of market-based performance awards was determined through the use of the Monte Carlo simulation method. The compensation expense for the LTIP awards is recognized on a straight-line basis over the vesting terms. The following is a summary of LTIP award activity, at 100% of targeted amount, for 2020: Number of Performance Units (in thousands) Weighted Average Grant Date Fair Value Unvested at December 31, 2019 272 $ 79.95 Granted 113 70.05 Vested ( 115 ) 48.06 Unvested at December 31, 2020 270 $ 89.40 The determination of achievement results and corresponding vesting of the 2017 LTIP awards occurred in February 2020 resulting in the recipients receiving approximately 238,000 shares of common stock with a fair value $ 17.3 million. As of December 31, 2020, we estimate that approximately 167,000 , 21,000 and 89,000 shares will vest with $ 0.3 million, $ 1.0 million and $ 2.4 million in unamortized compensation expense related to the 2018, 2019 and 2020 LTIP grants, respectively. Performance-Based Restricted Stock Units During 2020, we granted performance-based RSUs (“pRSU”) under the 2012 Incentive Plan to our named executive officers and certain other management. The pRSUs are performance-based short-term compensation awards in the form of performance units to certain employees based on the achievement of pre-established performance goals. Each pRSU represents the right to receive common shares at a future date based on our performance against specified targets. The ultimate number of shares issued and the related compensation cost recognized is based on a comparison of the final performance metrics to the specified targets, which can range from 0% to 300% of the targeted amounts. The pRSUs have a vesting schedule of less than one year and compensation expense is recognized based on the number of common shares expected to be issued and the market price per common share on the date of grant. For pRSUs currently outstanding, compensation expense is accelerated over the requisite service period for employees who meet the requirements for continued vesting. Over the performance period, the number of shares expected to be issued is adjusted upward or downward based upon the probability of achievement of the performance targets. During 2020, we granted approximately 221,000 pRSUs (at target) with a weighted average grant date fair value of $ 64.85 and canceled approximately 2,000 pRSUs (at target) with a weighted average grant date fair value of $ 65.19 . At December 31, 2020, we had approximately 219,000 unvested pRSUs (at target) with a weighted average grant date fair value of $ 64.85 . Insperity F-27 2020 Form 10-K Notes to the Consolidated Financial Statements As of December 31, 2020, we estimate that approximately 379,000 pRSUs will vest with $ 1.5 million in unamortized compensation expense related to the 2020 pRSU grants. Employee Stock Purchase Plan Our employee stock purchase plan (the “ESPP”) enables employees to purchase shares of Insperity stock at a 5% discount. The ESPP is a non-compensatory plan under generally accepted accounting principles of stock-based compensation. As a result, no compensation expense is recognized in conjunction with this plan. Approximately 57,000 , 29,000 and 30,000 shares were issued from treasury under the ESPP during fiscal years 2020, 2019 and 2018, respectively. 10. Net Income Per Share We utilize the two-class method to compute net income per share. The two-class method allocates a portion of net income to participating securities, which includes unvested awards of share-based payments with non-forfeitable rights to receive dividends. Net income allocated to unvested share-based payments is excluded from net income allocated to common shares. Any undistributed losses resulting from dividends exceeding net income are not allocated to participating securities. Basic net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options. The following table summarizes the net income allocated to common shares and the basic and diluted shares used in the net income per share computations: Year Ended December 31, (in thousands) 2020 2019 2018 Net income $ 138,237 $ 151,099 $ 135,413 Less distributed and undistributed earnings allocated to participating securities ( 782 ) ( 1,759 ) ( 1,875 ) Net income allocated to common shares $ 137,455 $ 149,340 $ 133,538 Weighted average common shares outstanding 38,503 40,186 41,217 Incremental shares from assumed time-vested and performance-based RSU awards and conversions of common stock options 317 166 289 Adjusted weighted average common shares outstanding 38,820 40,352 41,506 Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect 133 — — 11. Leases In 2019, we adopted ASU No. 2016-02, Leases (Topic 842). We have operating leases for office space, other operating facilities, vehicles and office equipment. Our fixed operating lease costs for 2020, 2019 and 2018 were $ 17.3 million, $ 15.9 million and $ 15.4 million, respectively, and are included in general and administrative expenses on our Consolidated Statements of Operations. During 2020, cash paid for amounts included in the measurement of operating lease liabilities was $ 19.1 million. Insperity F-28 2020 Form 10-K Notes to the Consolidated Financial Statements The following table presents the lease balances within our Consolidated Balance Sheets, weighted average lease term and weighted average discount rates related to our operating leases: (dollars in thousands) Classification in Consolidated Balance Sheets December 31, 2020 Operating lease ROU assets Right-of-use leased assets $ 60,663 Lease liabilities: Current operating lease liabilities Other accrued liabilities 16,518 Long-term operating lease liabilities Operating lease liabilities, net of current 64,289 Total operating lease liabilities 80,807 Less: Landlord funded tenant improvements 14,189 Deferred rent 5,955 Operating lease ROU assets $ 60,663 Weighted average remaining lease term (years) 5 Weighted average discount rate 4.0 % The following presents the maturity of our operating leases liabilities as of December 31, 2020: (in thousands) Operating Leases 2021 $ 19,384 2022 18,444 2023 15,828 2024 12,791 2025 9,237 Thereafter 14,306 Total remaining obligation 89,990 Less imputed interest 9,183 Present value of lease liabilities $ 80,807 As of December 31, 2020, we have additional operating leases that have not yet commenced of $ 16.5 million with lease terms ranging from 4 years to 7 years . 12. Commitments and Contingencies We enter into fixed purchase and service obligations in the ordinary course of business. These arrangements primarily consist of advertising commitments and service contracts. At December 31, 2020, future purchase and service obligations greater than $100,000 and one year were as follows (in thousands): 2021 $ 24,580 (1) 2022 12,792 2023 3,633 2024 1,283 2025 665 Thereafter 329 Total obligations $ 43,282 ____________________________________ (1) Includes $3.4 million related to the construction of a new facility on our corporate campus. Insperity F-29 2020 Form 10-K Notes to the Consolidated Financial Statements Worksite Employee 401(k) Retirement Plan Class Action Litigation In December 2015, a class action lawsuit was filed against us and a third-party who served as the discretionary trustee (the “Co-Defendant”) of the Insperity 401(k) retirement plan that is available to eligible worksite employees (the “Plan”) in the United States District Court for the Northern District of Georgia, Atlanta Division, on behalf of Plan participants. The suit generally alleges the third-party discretionary trustee of the Plan and Insperity breached their fiduciary duties to plan participants by selecting an Insperity subsidiary to serve as the recordkeeper for the Plan, by causing participants in the Plan to pay excessive recordkeeping fees to the Insperity subsidiary, by failing to monitor other fiduciaries, and by making imprudent investment choices. The court certified a class defined as “all participants and beneficiaries of the Insperity 401(k) Plan from December 22, 2009 through September 30, 2017.” The court dismissed the breach of fiduciary duty claims relating to the selection of an Insperity subsidiary to serve as the recordkeeper of the Plan. On March 28, 2019, the court partially granted Insperity’s motion for summary judgment, resulting in the dismissal of the claims concerning allegations of excessive recordkeeping fees. The court denied the plaintiffs’ request for a jury trial and set a bench trial, which was held from March 2, 2020 to March 13, 2020. At trial, the plaintiffs alleged damages up to approximately $ 146.0 million against all defendants. All parties filed proposed findings of fact and conclusions of law on June 15, 2020. On September 18, 2020, the plaintiffs and Co-Defendant informed the court that they reached an agreement in principle to settle the entire case, including a full and final release of all claims against Insperity. Insperity did not participate in the settlement discussions and will make no financial contribution to the settlement. In connection with the settlement, the plaintiffs and Co-Defendant filed a motion to extend the class period to March 31, 2019, which the court granted. The court has also granted preliminary approval of the settlement and has set the final approval hearing on March 5, 2021. As a result of the uncertainty regarding the outcome of this matter and the subsequent settlement agreement that, if approved by the court, will end the case with no financial contribution from Insperity, no provision has been made in the accompanying Consolidated Financial Statements. Securities Class Action Lawsuit In July 2020, a federal securities class action was filed against us and certain of our officers in the United States District Court for the Southern District of New York. The name of the case is Building Trades Pension Fund of Western Pennsylvania v. Insperity, Inc., et al., Case No. 1:20-cv-05635-NRB. On October 23, 2020, the court issued an order appointing Oakland County Employees’ Retirement System and Oakland County Voluntary Employees’ Beneficiary Association Trust as lead plaintiff. On December 22, 2020, the lead plaintiff filed its consolidated complaint alleging that we made materially false and misleading statements regarding our business and operations in violation of the federal securities laws and seeking unspecified damages, attorneys’ fees, costs, equitable/injunctive relief, and such other relief that may be deemed proper. We believe the allegations in the action are without merit, and we intend to vigorously defend this litigation. As a result of uncertainty regarding the outcome of this matter, no provision has been made in the accompanying Consolidated Financial Statements. Other Litigation We are a defendant in various other lawsuits and claims arising in the normal course of business. Management believes it has valid defenses in these cases and is defending them vigorously. While the results of litigation cannot be predicted with certainty, management believes the final outcome of such litigation will not have a material adverse effect on our financial position or results of operations. Insperity F-30 2020 Form 10-K