What changed in this filing

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Item 1A. Risk Factors

2022-02-11 compared with 2021-02-12 · 123 added, 84 removed, 211 unchanged (50% of the section changed)

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In addition, during periods of weak economic conditions, current clients may have difficulty meeting their financial obligations to us and may select alternative HR services at more competitive rates than we offer.

Further, our growth is partially dependent on hiring of new employees by our existing clients, which may be restricted during periods of tight labor markets and economic slowdown, such as the current period of high unemployment levels, and resulting reduced hiring within our existing client base.

Further, our growth is partially dependent on hiring of new employees by our existing clients, which may be restricted during periods of tight labor markets and economic slowdown, such as the high unemployment levels experienced during 2020, and resulting reduced hiring within our existing client base.

Such developments could adversely impact our financial condition, results of operations and future growth rates.

The economic impact of the COVID-19 pandemic is adversely affecting our business.

The economic impact of the COVID-19 pandemic has adversely affected our business.

The current pandemic may have, and a future outbreak of other highly infectious or contagious diseases could have, a material and adverse impact on our business, results of operations, financial condition and cash flows.

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• actions taken by government authorities to contain the outbreak or address its impact;

• development, distribution, adoption and cost of safe and effective treatments or vaccines for COVID-19;

• development, distribution, adoption and cost of safe and effective testing, treatments or vaccines for COVID-19;

• direct and indirect economic effects of the pandemic and containment measures;

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• magnitude and extent of business failures among the small and medium-sized businesses that we serve;

• impact of the pandemic on our benefits costs;

• ability of our clients to pay for the outsourced HR services and solutions we provide;

• any resulting impact on the demand for our outsourced HR services and solutions.

While the COVID-19 pandemic is continuing and even after it has subsided, we may experience materially adverse impacts to our business, operations and financial results due to any existing or continuing reduction in economic activity, including a recession or depression.

The COVID-19 pandemic has resulted in a sharp decrease in employment levels throughout the United States.

While the COVID-19 pandemic is continuing and even after it has subsided, we may experience material adverse impacts to our business, operations and financial results due to any existing or continuing reduction in economic activity, including a recession or depression.

The COVID-19 pandemic resulted in a sharp decrease in 2020 employment levels throughout the United States.

During the second quarter of 2020, we began to experience a decline in the number of paid WSEEs due primarily to layoffs and temporary leaves of absence, resulting in a 1.8% year-over-year decline in the average number of paid WSEEs during the second quarter of 2020.

However, for the full year 2020, the average number of paid WSEEs declined 0.6% to 234,223.

Further, if the adverse economic conditions relating to the COVID-19 pandemic persist, we may continue to experience a decline in our paid WSEEs.

Accordingly, such declines in WSEEs would likely have a material adverse effect on our business, financial condition and results of operations.

For the full year 2020 and 2021, the average number of paid WSEEs declined 0.6% to 234,223 and increased 7.1% to 250,745, respectively.

If adverse economic conditions relating to the COVID-19 pandemic reoccur,

2021 Form 10-K

we may experience another decline in our paid WSEEs.

Accordingly, such declines in WSEEs would likely have a material adverse effect on our business, financial condition and results of operations.

The spread of the COVID-19 virus has changed how and when we incur health insurance costs under our health insurance contract with United.

We may experience changes in quarterly levels and timing of both medical and pharmaceutical health insurance claims.

For example, government imposed treatment mandates, restrictions on certain elective healthcare treatments, and changes in treatment delivery options may significantly alter our healthcare claim trends.

Our ability to estimate healthcare claim trends becomes more difficult as participant utilization of healthcare services are deferred or canceled while stay-at-home orders and social distancing requirements are enacted by state and local governments.

Furthermore, predicting the rate at which participants will increase utilization of healthcare services in subsequent periods once stay-at-home orders and social distancing requirements are lifted, is also difficult.

In addition, as the increased number of former WSEEs elect COBRA coverage to continue their benefits, we expect an increase in claim activity levels, resulting in higher benefits costs incurred and decreased profitability.

The Department of Labor and the Department of Treasury released a rule on April 29, 2020 that extends the period during which any former WSEE who became eligible for COBRA coverage in 2020 may elect such coverage and allows any former WSEEs electing COBRA coverage to defer payment of such coverage until a later date.

Depending on the number of participants electing COBRA and the resulting claim activity levels, COBRA-related claims have the potential to increase total plan costs in future periods as well.

The extended period during which former WSEEs may elect COBRA coverage, and their ability to defer payment of related premiums, or any future legislation that increased COBRA participation, may further result in increased costs to us and we may ultimately be unable to collect premiums from those former WSEEs or from our clients.

The recent increase in U.S.

unemployment levels has resulted in a significant increase in unemployment claims with state unemployment agencies.

A continuous increase in unemployment claims is likely to increase state unemployment insurance tax rates.

We have experienced, and may continue to experience, changes in quarterly levels and timing of both medical and pharmaceutical health insurance claims and processing payment patterns.

For example, government imposed testing and/or vaccination and treatment mandates, restrictions on certain elective health care treatments;

costs associated with vaccination administration, testing, and treatment;

and changes in treatment delivery options may continue to significantly alter our health care claim trends as compared to historic norms.

Our ability to estimate health care claim trends became more difficult due to the testing, vaccination and treatment costs and as participant utilization of health care services are deferred or canceled while stay-at-home orders and social distancing requirements are enacted or recommended by state and local governments.

Furthermore, our ability to predict the rate at which participants will increase utilization of health care services in future periods once stay-at-home orders and social distancing requirements or other recommendations are lifted, is also difficult.

The 2020 increase in U.S.

unemployment levels resulted in a significant increase in unemployment claims with state unemployment agencies.

A continuous increase in unemployment claims may increase state and/or federal unemployment insurance tax rates.

In addition, some states have the authority to increase unemployment tax rates retroactively.

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The COVID-19 economic disruptions may cause customers to have difficulty meeting their financial obligations to us or increase business failures.

As a co-employer, we assume the obligation to pay the salaries, wages and related benefits and taxes of the WSEEs.

As a co-employer, we assume the obligation to pay the salaries, wages and related benefits, and related payroll taxes associated with the WSEEs.

An increase in the number of clients unable to pay us would result in an increase in bad debts, which could have a material adverse effect on our financial condition and results of operations.

In addition, we have modified certain business and workforce practices (including those related to employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences) to conform to government restrictions and best practices encouraged by governmental and regulatory authorities.

While most of our operations can be performed remotely, there is no guarantee that we will be as effective while working remotely because our team is dispersed, many employees may have additional personal needs to attend to and employees may become sick themselves and be unable to work.

In addition, we have modified certain business and workforce practices to be more flexible in light of government restrictions and best practices encouraged by governmental and regulatory authorities.

While most of our operations can be performed remotely, there is no guarantee we will be as effective while working remotely because our team is dispersed, many employees may have additional personal needs to attend to and employees may become sick themselves and be unable to work.

The remote work environment that was implemented during the pandemic also has had an impact on the expectations of our employees and, as a result, many of our departments have now switched to a “hybrid” mode in which remote work is permitted one or more days per week.

These changes may also impact productivity or have other impacts on our operations.

Further, our increased reliance on remote access to our information systems as our employees work remotely impacts our control over cybersecurity protection and service stability and performance, which increases our exposure to cybersecurity and privacy issues and to disruptions to employee productivity.

We may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, clients, partners and vendors.

There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19, in which case our ability to perform critical functions could be harmed, and we may be unable to respond to the needs of our business.

The FFCRA, the CARES Act and the Consolidated Appropriations Act, 2021 created various programs and incentives to assist businesses and individuals managing through the COVID-19 pandemic.

Certain of these programs and incentives have required us to make changes to our systems that manage leave, payroll and payroll-related tax calculation and reporting and invoicing and collection of service fees.

In addition, various states and localities and the federal government are considering further legislation that may require further changes to our processes and systems or that may expand the coverage afforded to WSEEs under our health and workers’ compensation programs.

If we are unable to timely make these changes, incur substantial additional costs in doing so, or are otherwise adversely affected by these requirements, then we may face fines, penalties, other regulatory action, or litigation relating to such failure, which could further adversely impact our PEO state licenses or registrations, our certified PEO status, our results of operations and our ability to attract and retain clients.

The COVID-19 pandemic business interruptions and associated economic impact has adversely and disproportionately affected certain industries, including the oil and gas industry.

The substantial decrease in the global demand for oil contributed to a significant decline in its commodity price, which has materially and adversely impacted businesses dependent on oil production, including those with operations in Texas.

While our oil and gas related customers account for approximately 1% of our customer base, our Texas market accounts for approximately 20% of our revenues.

The impact of

There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19 or the changes to the workplace resulting from the pandemic, in which case our ability to perform critical functions could be harmed, and we may be unable to respond to the needs of our business.

The COVID Relief Programs created various programs and incentives to assist businesses and individuals managing through the COVID-19 pandemic.

Certain of these programs and incentives have required us to make changes to our systems that manage leave, payroll and payroll-related tax calculation, and invoicing and collection of service fees, COBRA participation, and client reporting.

The CARES Act allowed companies to defer certain payroll taxes, which were reflected in the payrolls we processed for clients electing deferrals.

Client companies are liable for repaying the deferred amounts to the IRS;

however, the IRS has not yet clarified how such deferred amounts will be properly applied to companies utilizing a PEO and, if and when issued, such guidance may require further revisions to our systems or processes.

In addition, various states and localities and the federal government may enact further legislation that may require further changes to our processes and systems or that may expand the coverage afforded to WSEEs under our health and workers’ compensation programs.

If we are unable to timely make these changes, incur substantial additional costs in doing so, or are otherwise adversely affected by these requirements, then we may face fines, penalties, other regulatory action, or litigation relating to such failure, which could further adversely impact our PEO state licenses or registrations, our CPEO status, our results of operations and our ability to attract and retain clients.

2021 Form 10-K

the COVID-19 pandemic on oil prices and the resulting impact on regional economies with oil-focused businesses could aggravate our risk factors for clients operating in the oil and gas sector as well as other clients who operate in the Texas market.

The impact and evolving nature of the COVID-19 pandemic precludes any prediction as to its full adverse impact.

Nevertheless, the COVID-19 pandemic presents material uncertainty and risk with respect to our business, including as a result of the forgoing reasons, and may have a material adverse effect on our financial condition, results of operations, cash flows and business.

Nevertheless, the COVID-19 pandemic presents material uncertainty and risk with respect to our business, and may have a material adverse effect on our financial condition, results of operations, cash flows and business.

Labor shortages and increasing competition for highly skilled workers could have a material adverse effect on our business, financial condition or results of operations.

The success of our business is heavily dependent on our ability to attract and retain a skilled workforce, including in our service and sales positions.

Several factors may limit the labor force available to us or increase our labor costs, including high employment levels, strong macroeconomic conditions, federal unemployment subsidies, and other governmental regulation.

As macroeconomic conditions improved throughout 2021, the labor market tightened, resulting in increased employee turnover and skilled labor shortages.

Increasing competition for highly skilled and talented workers may make it increasingly difficult and expensive for us to attract and retain a service team capable of supporting our clients or a sales team that is effective in selling our complex service offerings to clients.

An overall or prolonged labor shortage, increased turnover, or labor inflation could have a material adverse impact on our growth plans, client service delivery, results of operations and financial condition.

Inflation may reduce our profitability.

Inflationary pressure could adversely impact our profitability.

Our operating costs have increased, and may continue to increase, due to the recent growth in inflation.

We may not be able to fully offset these cost increases by raising prices for our services, particularly because our client agreements generally fix our pricing for a period of time, which could result in downward pressure on our sales margins.

Further, our clients may choose to reduce their business with us if we increase our pricing.

Geographic market concentration makes our results of operations vulnerable to regional economic factors.

Our New York, California and Texas markets accounted for approximately 10%, 16% and 18% (including 8% in Houston), respectively, of our WSEEs for the year ended December 31, 2021.

Accordingly, while we have a goal of expanding in our current markets and into new markets, for the foreseeable future, a significant portion of our revenues may be subject to economic, statutory, and regulatory factors specific to New York, California and Texas.

Accordingly, unless we are successful in expanding in our current markets and into new markets, which we believe will take additional time, for the foreseeable future, a significant portion of our revenues may be subject to economic, statutory, and regulatory factors specific to New York, California, and Texas.

We are subject to covenants under our credit facility that may restrict our business and financing activities.

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In addition, a default may allow our lenders to accelerate our obligation to repay the outstanding amounts under our credit facility.

If we were unable to repay or refinance the accelerated indebtedness on favorable terms, then our business, financial condition and results of operations would be materially adversely affected.

2021 Form 10-K

were unable to repay or refinance the accelerated indebtedness on favorable terms, then our business, financial condition and results of operations would be materially adversely affected.

PEO HR Outsourcing Solutions Risks

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We assume such obligations as a principal, not as an agent of the client.

Our obligations include responsibility for:

Our obligations include responsibility for the following even if our costs to provide such benefits exceed the fees the client pays us and the amounts collected from WSEEs:

• payment of the salaries and wages for work performed by WSEEs, regardless of whether the client timely pays us the associated service fee

• withholding and payment of federal and state payroll taxes with respect to wages and salaries reported by Insperity

2020 Form 10-K

• providing benefits to WSEEs even if our costs to provide such benefits exceed the fees the client pays us and the amounts collected from WSEEs

• providing benefits to WSEEs

• providing workers’ compensation coverage to WSEEs

If a client does not pay us, or if the costs of benefits we provide to WSEEs exceed the fees a client pays us, our ultimate liability for WSEE payroll and benefits costs could have a material adverse effect on our financial condition or results of operations.

If a client does not pay us, or if the costs of services we provide to WSEEs exceed the fees a client pays us, our ultimate liability for WSEE payroll, payroll taxes, workers’ compensation and/or benefits costs could have a material adverse effect on our financial condition or results of operations.

Increases in health insurance costs or our inability to secure replacement health insurance coverage on competitive terms could have a material adverse effect on our business, financial condition or results of operations.

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Our ability to accurately anticipate the expenses associated with the plans, including claims costs on a quarterly or annual basis, can impact our results of operations.

If the plans experience an increase in the number or severity of claims, our associated health insurance costs could increase beyond anticipated levels, as we experienced in 2019.

If the plans experience an unexpected increase in the number or severity of claims, our associated health insurance costs could increase beyond anticipated levels, as we experienced in 2019 and 2021.

These costs are further impacted by a number of factors, including coverage options elected by employees, macro-economic changes, proposed and enacted regulatory changes and wide-spread health-related outbreaks.

Contractual arrangements with our clients limit or delay our ability to reflect in our service fees any increases in the overall expense associated with the plans, which could substantially impair our financial condition or results of operations.

Contractual arrangements and competitive market conditions may limit or delay our ability to increase service fees to offset any associated potential increased costs associated with the plans, which could substantially impair our financial condition or results of operations.

Further, if the overall pricing of our services includes cost assumptions based on inaccurate forecasts of plan expenses, our profitability or our ability to attract and retain clients may be adversely impacted.

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Health care reform could affect our health insurance plan and could lead to a significant disruption in our business.

The PPACA was signed into law on March 23, 2010.

The PPACA was subsequently amended on March 30, 2010 by the Reconciliation Act.

The Act entails sweeping health care reforms with original staggered effective dates from 2010 through 2018, some of which were subsequently extended out as far as 2022.

Some provisions in the Act still require the issuance of additional guidance from the U.S.

The Patient Protection and Affordable Care Act (“PPACA”) was signed into law on March 23, 2010.

The PPACA was subsequently amended on March 30, 2010 by the Reconciliation Act (collectively, the “Act”).

The Act entails sweeping

2021 Form 10-K

health care reforms with some provisions in the Act still requiring the issuance of additional guidance from the U.S.

Department of Health and Human Services (“HHS”) and the states.

The future impact of the following provisions or changes to the provisions of the Act, or future legislative actions, is unknown and, if any such developments were to reduce our ability to make health care benefits available to WSEEs or were to make our offerings less attractive to our clients, then our business, financial condition, and results of operations may be materially adversely affected.

Beginning in 2014, a number of key provisions of the Act took effect, including the Exchanges, insurance market reforms and the imposition of excise taxes on the health insurance industry and reinsurance taxes on insurers and third-party administrators.

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As part of the Tax Cuts and Jobs Act enacted in December 2017, the requirements that individuals maintain health insurance coverage or pay a federal tax penalty, which was known as the individual mandate, was effectively eliminated beginning in 2019.

In addition, supporters in various states are advocating for adoption of healthcare-related reforms at the state level, including those states that have enacted individual mandates.

In addition, supporters in various states are advocating for adoption of health care-related reforms at the state level, including those states that have enacted individual mandates.

Collectively, these items have the potential to significantly change the insurance marketplace for small and medium-sized businesses and how employers provide insurance to employees.

Generally, the Act and subsequently issued guidance by the IRS and HHS have not addressed or in some instances are unclear as to their application in the PEO relationship or whether such provisions should be applied at the PEO or client level.

Although we do not believe that the Act has had a material adverse effect on our benefit plans, business model, or operations to date, the elimination of the penalty associated with the individual mandate and subsequent changes resulting from action that may be taken at the federal or state level may impact our benefit plans, business model and future results of

2020 Form 10-K

operations, including repeal or repeal and replacement of the Act as has been advocated by Congressional leaders or as may result from a case pending before the U.S.

Supreme Court.

The Act also ushered in a number of insurance market reforms for the small group and individual markets.

The reforms required guaranteed issue and renewability of coverage, eliminated certain underwriting practices by issuers, consolidated the number of risk pools in each state and restricted the permissible factors and variable ranges of those factors that can be considered in determining health insurance premiums.

Transition relief permitted states to delay the effective date of some of these reforms.

At this time, the insurance market reforms have not had a material adverse impact on our business operations, and if any future changes impact our ability to attract and retain clients, or our ability to increase service fees to offset any increased costs, then our business may be materially adversely affected.

Information contained in the Congressional Record, which specifically references PEOs, indicates that any pay or play penalties should apply separately to clients of a PEO and not at the PEO level.

However, the Act and subsequently issued IRS guidance do not expressly address the issue of whether the pay or play penalties apply only at the client level or whether the penalties can be applied at the PEO level.

If pay or play penalties were assessed against a PEO for coverage provided to WSEEs under a PEO sponsored plan, then our business, financial condition, and results of operations may be materially adversely affected.

As part of the Tax Extenders Act passed in 2019, the rules imposing excise taxes commencing in 2022 on employers and insurers who offer excessive health benefits under so-called “Cadillac plans” have been repealed.

At this time, we are unable to determine the effect that the repeal of these pending excise taxes will have on our business and whether such changes will make it more difficult for us to attract and retain and clients.

The elimination of the penalty associated with the individual mandate and subsequent changes resulting from action that may be taken at the federal or state level may impact our benefit plans, business model and future results of operations, including repeal or repeal and replacement of the Act as has been advocated by some Congressional leaders.

In future periods, changes may result in increased costs to us and could affect our ability to attract and retain clients.

Additionally, contractual arrangements and competitive market conditions may limit or delay our ability to increase service fees to offset any associated potential increased costs.

For additional information related to the Act, please read Item 1.

“Business—Industry Regulations—Patient Protection and Affordable Care Act.” We are currently unable to determine whether potential future changes to the Act or other regulatory action, including at the state level, may adversely affect our business or market conditions.

We are currently unable to determine whether potential future changes to the Act or other regulatory action, including at the state level, may adversely affect our business or market conditions.

A determination that we are not the employer of our WSEEs and an inability to offer alternate benefit plans could have a material adverse effect on our business.

In order to qualify for favorable tax treatment under the Code, employee benefit plans must be established and maintained by an employer for the exclusive benefit of its employees.

Generally, an entity is an “employer” of individuals for federal employment tax purposes if an employment relationship exists between the entity and the individuals under the common law test of employment.

In addition, the officers of a corporation are deemed to be employees of that corporation for federal employment tax purposes.

The common law test of employment, as applied by the IRS, involves an examination of approximately 20 factors to ascertain whether an employment relationship exists between a worker and a purported employer.

Generally, the test is applied to determine whether an individual is an independent contractor or an employee for federal employment tax purposes and not to determine whether each of two or more companies is a “co-employer.”

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Substantial weight is typically given to the question of whether the purported employer has the right to direct and control the details of an individual’s work.

Among the factors that appear to have been considered more important by the IRS are:

• the employer’s degree of behavioral control (the extent of instructions, training and the nature of the work)

• the financial control or the economic aspects of the relationship

• the intended relationship of the parties (whether employee benefits are provided, whether any contracts exist, whether services are ongoing or for a project, whether there are any penalties for discharge/termination, and the frequency of the business activity)

Employee retirement and welfare benefit plans are also governed by ERISA.

ERISA defines “employer” as “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan.” ERISA defines the term “employee” as “any individual employed by an employer.” The United States Supreme Court has held that the common law test of employment must be applied to determine whether an individual is an employee or an independent contractor under ERISA.

A definitive judicial interpretation of “employer” in the context of a PEO or employee leasing arrangement has not been established.

If Insperity were found not to be an employer with respect to WSEEs for ERISA purposes, its plans would not comply with ERISA and/or the Code.

Further, as a result of such finding, Insperity and its plans would not enjoy, with respect to WSEEs, the preemption of state laws provided by ERISA and could be subject to varying state laws and regulations as well as to claims based upon state common laws.

In addition, if Insperity were found not to be the employer sponsoring a single-employer plan under ERISA for purposes of its health benefits plan, we could be subject to additional requirements under state and federal laws that could restrict our ability to provide benefits to our WSEEs in the same manner that we do today, which could negatively impact our business.

In the case of any such events, we would endeavor to make available similar benefits at comparable costs in a manner that complied with applicable state laws.

However, if we were unable to promptly transition our benefit plans to a compliant structure with terms that were acceptable to our clients and at a comparable cost to us, then our business, financial condition, and results of operations could be materially adversely affected.

Increases in workers’ compensation costs or inability to secure replacement coverage on competitive terms could lead to a significant disruption to our business.

Our workers’ compensation coverage has been provided through an arrangement with Chubb (formerly ACE American Insurance Company) since 2007.

Our workers’ compensation coverage has been provided through an arrangement with Chubb since 2007.

Under our current arrangement with Chubb for claims incurred on or before September 30, 2019, we have a 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 the first $1 million.

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Workers’ Compensation Costs.”

Workers’ compensation costs are a significant portion of our direct costs and contractual arrangements with our clients limit or delay our ability to reflect in our service fees any increases associated with these costs.

Workers’ compensation costs are a significant portion of our direct costs and contractual arrangements and competitive market conditions may limit or delay our ability to increase service fees to offset any associated potential increased costs.

If we were to experience an unexpected large increase in the number or severity of claims, our workers’ compensation costs could increase, which could have a material adverse effect on our results of operations or financial condition.

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In the event we are unable to secure replacement coverage on competitive terms, significant disruption to our business could occur.

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Our ability to adjust and collect service fees for increases in unemployment tax rates may be limited.

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SUI tax rates vary by state and are determined, in part, based on prior years’ compensation experience in each state.

Certain states have indicated that 2021 unemployment tax rates will exclude COVID-19 related unemployment claims;

however, the determination of which claims qualify for exclusion and the impact of such a determination on future state unemployment rates has not been clarified.

Prior to the receipt of final rate notices, we estimate our expected SUI rate in those states for which rate notices have not yet been received for purposes of budgeting and pricing.

Prior to the receipt of final rate notices, we estimate our expected SUI rate in those states for which rate notices have not yet been received for purposes of forecasting and pricing.

In a period of adverse economic conditions, state unemployment funds may experience a significant increase in the number of unemployment claims.

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Our standard CSA can generally be canceled by us or the client with 30 days’ notice.

Accordingly, the short-term nature of the CSA makes us vulnerable to potential cancellations by existing PEO HR Outsourcing solution clients, which could

2020 Form 10-K

materially and adversely affect our financial condition or results of operations.

During 2020, middle market accounts represented 24.4% of our average paid WSEEs and clients with an average number of WSEEs that exceed 1,000 WSEEs represented 4.7%.

Accordingly, the short-term nature of the CSA makes us vulnerable to potential cancellations by existing PEO HR Outsourcing solution clients, which could materially and adversely affect our financial condition or results of operations.

Our middle market sector, which we generally define as those companies with employees ranging from approximately 150 to 5,000 WSEEs represented 23.8% of our average paid WSEEs and clients with an average number of WSEEs that exceed 1,000 WSEEs represented 1.9% during 2021.

In the event we have large clients that terminate or an increase in terminating clients from our middle market client base, the financial impact of such an event could be significant.

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The failure of any insurance carrier, such as occurred in 2001 with respect to a previous workers’ compensation insurance provider, providing such coverage could leave us exposed to uninsured risk and could have a material adverse effect on our business and results of operations.

In addition, in the event that our primary health carriers in any key market make material changes to their network of healthcare providers or facilities, such as the recent temporary discontinuation of a prominent hospital network in Houston, Texas, by UnitedHealthcare in connection with their ongoing negotiations, then our ability to attract and retain clients in that market may be adversely affected, which could have a material adverse effect on our business and results of operations.

In addition, in the event that our primary health carriers in any key market make material changes to their network of health care providers or facilities, such as the discontinuation of prominent hospital networks in key markets on occasion by United in connection with their ongoing negotiations with those networks, then our ability to attract and retain clients in that market may be adversely affected, which could have a material adverse effect on our business and results of operations.

Further, we have experienced an increase in insurance premiums for our corporate policies as well as an increase in the deductible amounts for which we retain liability and a decrease in coverage limits.

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A determination that a client is liable for employment taxes not paid by a PEO may discourage clients from contracting with us in the future.

Under the CSA, we assume sole responsibility and liability for paying federal employment taxes imposed under the Code with respect to wages and salaries we pay our WSEEs.

Under the CSA, we assume sole responsibility and liability for paying federal employment taxes imposed under the Code

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with respect to wages and salaries we pay our WSEEs.

There are essentially three types of federal employment tax obligations:

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In times of economic slowdowns, the federal government and states and municipalities in which we operate may experience reductions in tax revenues and corresponding budget deficits.

In response to budget shortfalls, such as those being experienced as a result of the COVID-19 pandemic, the federal government and many states and municipalities have in the

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past and may in the future increase or enact new taxes on businesses operating within their tax jurisdiction, including business activity taxes and income taxes.

In response to budget shortfalls, such as those being experienced as a result of the COVID-19 pandemic, the federal government and many states and municipalities have in the past and may in the future increase or enact new taxes on businesses operating within their tax jurisdiction, including business activity taxes and income taxes.

In addition, federal, state and local taxing agencies may increase their audit activity in an effort to identify additional tax revenues.

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A number of legal issues remain unresolved with respect to the co-employment arrangement between a PEO and its WSEEs, including questions concerning the ultimate liability for violations of employment, payroll, discrimination, and workplace safety laws.

Our CSA establishes the contractual division of responsibilities between Insperity and our clients for various personnel management matters, including compliance with and liability under various governmental regulations.

Our CSA establishes the contractual division of responsibilities between Insperity and our clients for various human capital management matters, including compliance with and liability under various governmental regulations.

Because we act as a co-employer, we may be subject to liability for violations of various employment, payroll, discrimination, and workplace safety laws despite these contractual provisions, even if we do not participate in such violations.

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By entering into a co-employer relationship with employees assigned to work at client locations, we assume certain obligations and responsibilities of an employer under these laws.

However, many of these current laws (such as the Act, ERISA and federal and state employment tax laws) do not specifically address the obligations and responsibilities of non-traditional employers such as PEOs, and the definition of “employer” under these laws is not uniform despite the SBEA having provided clarification under federal employment tax laws for CPEOs.

In addition, many of the states in which we operate have not addressed the PEO relationship for purposes of compliance with applicable state laws governing the employer/employee relationship or PEO health insurance plans.

However, many of these current laws (such as the Act, ERISA, and some state insurance codes and employment tax laws) do not specifically address the obligations and responsibilities of non-traditional employers such as PEOs, and the definition of “employer” under these laws is not uniform despite the SBEA having provided clarification under federal employment tax laws for CPEOs.

In addition, many of the states in which we operate have not addressed the PEO relationship for purposes of compliance with applicable state laws governing the employer/employee relationship or PEO

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health insurance plans.

Any adverse application of, or adverse legislative/regulatory response to, new or existing federal or state laws to the PEO relationship with our WSEEs and client companies could have a material adverse effect on our results of operations or financial condition.

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In addition, should any state or federal regulators make a determination that we have operated as an unlicensed money services business or money transmitter, we could be subject to civil and criminal fines, penalties, costs, legal fees, reputational damage or other negative consequences, which could be material.

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Competition and other developments in the HR services industry may impact our growth and/or profitability.

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The HR services industry is experiencing rapid technological advances to meet client expectations and expanding regulations.

As new regulations are adopted, we must modify our systems to address these changes in the law, such as our recent efforts to implement the assistance provided to businesses and employees under the FFCRA and CARES Act.

In order to make these types of modifications, we may be required to reallocate resources, potentially resulting in delays to planned competitive improvements to our systems.

If we do not successfully or timely deploy these types of modifications, we may be unable to comply with regulations, which could subject us to penalties, damage our reputation or result in decreased sales.

If we do not successfully or timely deploy these types of modifications, we may be unable to comply with regulations, which could subject us to penalties, damage our reputation or result in

2021 Form 10-K

decreased sales.

Further, in order to effectively compete in this environment, we must identify and predict trends, and adapt our technology and service offerings accordingly.

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These efforts require us to devote substantial resources to develop new functionality, or to integrate third-party solutions, into our offerings.

If we fail to respond successfully to these developments or we may make investments in enhancements that are not accepted by the market, then the demand for our solutions and services may diminish.

If we fail to respond successfully to these developments or we make investments in enhancements that are not accepted by the market, then the demand for our solutions and services may diminish.

Disruptions of our information technology systems could damage our reputation and materially disrupt our business operations.

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We must manage all of these systems, including any upgrades, replacements or enhancements, to ensure that they continue to support our services.

For example, we are currently finalizing a modernization of key portions of our proprietary system for our PEO HR Outsourcing solutions as well as commencing a project to replace our customer relationship management (CRM) system.

For example, we are currently working on a multi-year project to replace our sales force automation system and our customer relationship management (“CRM”) system with a single CRM solution to be used widely across the company.

We continue to monitor and make changes to our proprietary system for our PEO HR Outsourcing solutions for compliance and modernization.

Any delays or failures resulting from network outages;

planned upgrades, enhancements, or replacements of software, hardware, or other systems, including in connection with our PEO Outsourcing solutions modernization project or our CRM replacement project;

planned upgrades, enhancements, or replacements of software, hardware, or other systems, including in connection with our our CRM replacement project or any updated for compliance and modernization of systems;

or other data processing disruptions, even for a brief period of time, could result in our inability to timely process transactions.

If such failures cause us to not meet client service expectations or to breach our obligations to our clients, we may lose existing clients, have difficulty attracting new clients, incur regulatory penalties or liability to our clients, or suffer other financial losses, which may have a material adverse effect on our business and financial condition.

2020 Form 10-K

We could be subject to reduced revenues, increased costs, liability claims, or harm to our competitive position as a result of data theft, cyberattacks or other security vulnerabilities.

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As these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities.

While our technology infrastructure is designed to safeguard and protect personal and business information, we have limited ability to monitor the implementation of similar safeguards by our vendors and do not have the ability to monitor such implementation by our clients or WSEEs.

We have limited ability to monitor the implementation of similar safeguards by our vendors and do not have the ability to monitor such implementation by our clients or WSEEs.

In addition, our services also involve the use and disclosure of personal and business information to us that could be used by a malicious party to commit identity theft or otherwise gain access to the data or funds of our clients or WSEEs.

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Accordingly, the impact of a data security incident could have a material adverse effect on our business, results of operations and financial condition.

2021 Form 10-K

Failure to comply with privacy, data protection and cybersecurity laws and regulations could have a material adverse effect on our reputation, results of operations or financial condition, or have other adverse consequences.

We are subject to various federal and state laws, rules and regulations relating to the collection, use, transmission and security and privacy of personal and business information.

We are subject to various laws, rules and regulations relating to the collection, use, transmission and security and privacy of personal and business information.

Most states and the District of Columbia have enacted notification rules that may require notification to regulators, clients or employees in the event of a privacy breach.

In addition, new laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate our costs.

It is possible that these federal and state laws may be interpreted and applied in a manner that is inconsistent with our data practices.

It is possible that these laws and regulations may be interpreted and applied in a manner that is inconsistent with our data practices.

If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which could have a material adverse effect on our business.

Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

Complying with these various laws and regulations could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

For example, we incurred additional costs and reallocated internal resources in order to comply with the requirements of the California Consumer Privacy Act of 2018 (“CCPA”), which became effective on January 1, 2020, and we expect to incur additional costs and reallocate additional resources when the final regulations under the CCPA are released.

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Communication failures or other failures involving these financial institutions, for any reason, could cause material interruptions to our operations, impact client retention, and result in significant penalties or liabilities to us.

2020 Form 10-K

We lease hosting facilities for our data centers at two separate facilities, located in Bryan, Texas and The Woodlands, Texas, with the Bryan facility acting as our primary data center.

We lease hosting facilities for our data centers at two separate facilities with one facility acting as our primary data center.

These facilities host the majority of our business applications, telecommunications equipment, information security infrastructure and network equipment.

If our data centers experience any interruptions or outages, and our business continuity plan fails, then our operations may be materially impacted, which could result in our failure to meet our obligations to our clients, WSEEs and tax authorities, and could damage our reputation, subject us to liability and have a material adverse effect on our business and financial condition.

In addition, some of our systems and services rely upon third-party technology, such as the human capital management system on which our Workforce Acceleration solution is based, the data analytics solution on which our Insperity People Analytics solution is based, and the payroll tax calculation tool that provides the rates used to calculate payroll taxes for our PEO HR Outsourcing solutions.

If our data centers experience any interruptions or outages, and our business continuity plan fails, then our operations may be materially impacted, which could result in our failure to meet our obligations to our clients, WSEEs, tax authorities, and/or other vendors, which could damage our reputation, subject us to liability and have a material adverse effect on our business and financial condition.

In addition, some of our systems and services rely upon third-party technology.

Examples include, the human capital management system on which our Workforce Acceleration solution is based, the data analytics solution on which our Insperity People Analytics solution is based, and the payroll tax calculation and reporting tools that provide the rates used to calculate payroll taxes for our PEO HR Outsourcing solutions, among others.

Any failure by these service providers to deliver their services in a timely manner and in compliance with applicable laws could result in material interruptions to our operations, damage our reputation, and result in a loss of clients.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors