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•	the focus on growth and productivity of the small and medium-sized business community in the United States, utilizing outsourcing to concentrate on core competencies

•	the need to provide competitive health care and related benefits to attract and retain employees

•	the increasing costs associated with health and workers’ compensation insurance coverage, workplace safety programs, employee-related complaints and litigation

•	complex regulation of employment issues and the related costs of compliance, including the allocation of time and effort to such functions by owners and key executives

•	the significant costs, time and specialized knowledge required to purchase or develop the technology infrastructure to administer benefits, HR and payroll processing on an integrated basis

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•	benefits and payroll administration

•	health and workers’ compensation insurance programs

•	personnel records management

•	employer liability management

•	assistance with government compliance

•	general HR advice

•	access to Insperity Premier for employees, managers and client owners

•	401(k) retirement plan sponsored by us

•	employee recruiting and support

•	employee performance management

•	training and development services

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•	payroll processing

•	payroll tax deposits

•	payroll tax reporting

•	employee file maintenance

•	unemployment claims processing

•	workers’ compensation claims reporting and monitoring

•	a group health plan

•	a health savings account program

•	a health care flexible spending account plan

•	a 401(k) retirement plan

•	cafeteria plans for group health and health savings account contributions

•	short-term and long-term disability insurance

•	an educational assistance program

•	an adoption assistance program

•	group term life insurance

•	group universal life insurance

•	accidental death and dismemberment insurance

•	paid family leave, where required by law

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•	WebPayroll for the submission, approval and reporting of payroll data

•	mobile access to review and approve payroll transactions and employee time entry

•	tools to manage the onboarding of new employees

•	employee administration functions such as viewing or changing information about employees

•	access to client-specific compliance-related information relevant to many HR areas

•	reporting and analytics tools to create, view, save and export reports and data about employees and, for our mid-market customers, to do more complex analysis and visualization of their workforce data with the Insperity People Analytics solution

•	ability to manage employee time and attendance information, absences and paid time off

•	access to talent management tools in the areas of recruiting, performance management and learning management

•	access to a library of online human resources forms

•	access to a wide range of best-practices human resources management content

•	access to view, edit and change a range of employee profile information

•	online check stubs, pay history, W-2s, update W-4 forms and other state forms

•	employee-specific benefits content, including summary plan descriptions, enrollment status and tools to assist with benefits selection

•	access to 401(k) retirement plan information, if offered by client

•	e-Learning web-based training

•	links to benefits providers and other key vendors

•	performance management tools including self-reviews and review history, if offered by client

•	ability to submit time and attendance information, absences and paid time off requests

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•	mobile access to perform a wide range of employee-specific activities such as reporting time and attendance and paid time off, view pay stubs, insurance coverage and ID cards, view 401(k) balances and other commonly accessed data

•	drafting and reviewing personnel policies and employee handbooks

•	designing job descriptions

•	performing prospective employee screening and background investigations

•	designing performance appraisal processes and forms

•	professional development and issues-oriented training

•	employee counseling

•	substance abuse awareness training

•	outplacement services

•	compensation guidance

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•	Payment of wages and salaries as reported by the client and related tax reporting and remittance (local, state and federal withholding, FICA, FUTA, state unemployment)

•	Workers’ compensation compliance, procurement, management and reporting

•	Compliance with the Code, COBRA, HIPAA and ERISA for Insperity-sponsored employee benefit plans , as well as monitoring changes in other governmental laws and regulations governing the employer/employee relationship and updating the client when necessary

•	Offering benefits under Insperity-sponsored employee benefit plans that comply with PPACA requirements

•	Employee benefits administration of plans sponsored solely by Insperity

•	Payment, through Insperity, of commissions, bonuses, vacations, paid time off, sick pay, paid leaves of absence, and severance payments

•	Payment and related tax reporting and remittance of non-qualified deferred compensation and equity-based compensation

•	Products produced and/or services provided

•	Compliance with OSHA regulations, EPA regulations, FLSA, FMLA, WARN, USERRA, and state and local equivalents and compliance with government contracting provisions

•	Compliance with federal, state, and local pay or play health care mandates and all such other similar federal, state and local legislation

•	Compliance with the National Labor Relations Act (“NLRA”), including all organizing efforts and expenses related to a collective bargaining agreement and related benefits

•	Professional licensing requirements, fidelity bonding, and professional liability insurance

•	Ownership and protection of all client intellectual property rights

•	COBRA, HIPAA, PPACA, the Code and ERISA compliance for client-sponsored employee benefit plans

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•	Implementation of policies and practices relating to the employee/employer relationship

•	Internal compliance with all federal, state and local employment laws, including Title VII of the Civil Rights Act of 1964, ADEA, Title I of ADA, the Consumer Credit Protection Act and immigration laws and regulations

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•	market size, in terms of small and medium-sized businesses engaged in selected industries that meet our risk profile

•	market receptivity to PEO services, including the regulatory environment and relevant history with other PEO providers

•	existing relationships within a given market, such as vendor or client relationships

•	expansion cost issues, such as advertising and overhead costs

•	direct cost issues that bear on our effectiveness in controlling and managing the cost of our services, such as workers’ compensation and health insurance costs, unemployment risks, and various legal and other factors

•	a comparison of the services we offer to alternatives available to small and medium-sized businesses in the relevant market, such as the cost to the target clients of procuring services directly or through other PEOs

•	long-term strategy issues, such as the general perception of markets and our estimate of the long-term revenue growth potential of the market

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•	WSEE enrollment

•	human resources management and employee administration

•	benefits and defined contribution plan administration

•	time and attendance collection and administration

•	payroll processing

•	client invoicing and collection

•	management information and reporting

•	sales bid calculations

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•	a group health plan, which includes medical, dental, vision and prescription drug coverage, as well as a work-life program

•	a 401(k) retirement plan

•	cafeteria plans under Code Section 125

•	a health savings account program

•	a welfare benefits plan, which includes life, disability, and accidental death and dismemberment coverage

•	a health care flexible spending account plan

•	an educational assistance program

•	an adoption assistance program

•	a commuter benefits program

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•	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)

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•	withholding of income tax requirements governed by Code Section 3401, et seq.

•	obligations under FICA, governed by Code Section 3101, et seq.

•	obligations under FUTA, governed by Code Section 3301, et seq.

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•	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

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

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•	income tax withholding requirements

•	FICA

•	FUTA

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(1)

Our Board has approved a program to repurchase shares of our outstanding common stock, including an additional 700,000 shares authorized for repurchase in August 2019. During the three months ended December 31, 2019, 643,112 shares were repurchased under the program. As of December 31, 2019, we were authorized to repurchase an additional 413,833 shares under the program. Unless terminated earlier by resolution of the Board, the repurchase program will expire when we have repurchased all the shares authorized for repurchase under the repurchase program.

(2)

During the three months ended December 31, 2019, 49 shares of restricted stock were withheld to satisfy tax-withholding obligations arising in conjunction with the vesting of restricted stock. The required withholding is calculated using the closing sales price reported by the New York Stock Exchange on the date prior to the applicable vesting date. These shares are not subject to the repurchase program described above.

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(1)	Revenues are comprised of gross billings less WSEE payroll costs as follows:

(2)	Includes non-cash impairment and other charges of $9.8 million and $1.3 million, respectively, partially offset by a reduction of $0.6 million in 2015.

(3)	Adjusted to reflect the two-for-one split of our common stock effected on December 18, 2017 as a stock dividend.

(4)	These are non-GAAP measures used by management to analyze Insperity’s performance. Please read Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a reconciliation of the non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.

(5)	Includes a $1.00 per share special dividend paid in 2017.

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(6)	Revenues per WSEE per month are comprised of gross billings per WSEE per month less WSEE payroll costs per WSEE per month as follows:

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•	Average number of WSEEs paid per month increased 12.6% to 235,547, driving a 7.5% gross profit increase

•	Net income and diluted earnings per share (“Diluted EPS”) increased 11.6% and 14.9% to $151.1 million and $3.70, respectively

•	Adjusted EBITDA increased 4.3% to $250.0 million

•	Adjusted net income increased 7.6% to $169.4 million

•	Adjusted EPS increased 10.7% to $4.15

•	Approximately 25.7% and 24.6% of our average paid WSEEs were in our middle market sector for the years ended December 31, 2019 and 2018, respectively, which is generally defined as companies with 150 to 5,000 WSEEs.

•	Our average gross profit per WSEE per month was $259 in 2019 and $272 in 2018, due in part to an increase in the number of large individual healthcare claimants.

•	Operating expenses increased 8.6% in 2019 to $546.3 million. On a per WSEE per month basis, operating expenses decreased from $201 in 2018 to $193 in 2019.

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•	Adjusted operating expenses increased 10.7% in 2019 to $546.3 million. On a per WSEE per month basis, adjusted operating expenses decreased from $197 in 2018 to $193 in 2019.

•	Our adjusted EBITDA per WSEE per month decreased 7.4% from $95 in 2018 to $88 in 2019.

•	We ended 2019 with working capital of $105.7 million.

•	During 2019, we paid $48.6 million in dividends, repurchased 2.1 million shares of our common stock at a cost of $203.0 million, paid $56.3 million on capital expenditures partially offset by borrowings of $125.0 million under our credit facility.

•	employment-related taxes (“payroll taxes”)

•	costs of employee benefit plans

•	workers’ compensation costs

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Salaries, wages and payroll taxes – Salaries, wages and payroll taxes (“Salaries”) are primarily a function of the number of corporate employees, their associated average pay and any additional incentive compensation. Our corporate employees include client services, sales and marketing, benefits, legal, finance, information technology, administrative support personnel and those associated with our other products and services.

•	Stock-based compensation – Our stock-based compensation relates to the recognition of non-cash compensation expense over the vesting period of restricted stock and long-term incentive plan awards.

•	Commissions – Commissions expense consists primarily of amounts paid to sales managers and BPAs as well as channel referral fees. Commissions are based on new accounts sold and a percentage of revenue generated by such personnel.

•	Advertising – Advertising expense primarily consists of media advertising and other business promotions in our current and anticipated sales markets, including the Insperity Invitational™ presented by UnitedHealthcare® sponsorship.

•	General and administrative expenses – Our general and administrative expenses primarily include:

•	rent expenses related to our service centers and sales offices

•	outside professional service fees related to legal, consulting, and accounting services

•	administrative costs, such as postage, printing, and supplies

•	employee travel and training expenses

•	technology expenses

•	facility repairs and maintenance costs

•	Depreciation and amortization – Depreciation and amortization expense is primarily a function of our capital investments in corporate facilities, service centers, sales offices, software development and technology infrastructure.

•	Impairment charges and other – Impairment charges and other consist of non-cash expense associated with the decline in fair value of long-lived and intangible assets, including goodwill. Please read Note 1 “Accounting Policies,” to the Consolidated Financial Statements for additional information.

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•	Benefits costs – We provide group health insurance coverage to our WSEEs through a national network of carriers including 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.

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Workers’ compensation costs – Since 2007, our workers’ compensation coverage has been provided through an arrangement with Chubb. 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. 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.

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Contingent liabilities – We accrue and disclose contingent liabilities in our Consolidated Financial Statements in accordance with ASC 450-10, Contingencies. GAAP requires accrual of contingent liabilities that are considered probable to occur and that can be reasonably estimated. For contingent liabilities that are considered reasonably possible to occur, financial statement disclosure is required, including the range of possible loss if it can be reasonably determined. From time to time, we disclose in our financial statements issues that we believe are reasonably possible to occur, although we cannot determine the range of possible loss in all cases. As issues develop, we evaluate the probability of future loss and the potential range of such losses. If such evaluation were to determine that a loss was probable and the loss could be reasonably estimated, we would be required to accrue our estimated loss, which would reduce net income in the period that such determination was made.

•	Allowance for doubtful accounts – We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our clients to pay their comprehensive service fees. We believe that the success of our business is heavily dependent on our ability to collect these comprehensive service fees for several reasons, including:

•	the fact that we are at risk for the payment of our direct costs and WSEE payroll costs regardless of whether our clients pay their comprehensive service fees

•	the large volume and dollar amount of transactions we process

•	the periodic and recurring nature of payroll, upon which the comprehensive service fees are based

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(2)	Adjusted to reflect the two-for-one split of our common stock effected on December 18, 2017 in the form of a stock dividend.

(3)	Please read “—Non-GAAP Financial Measures” for a reconciliation of the non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with GAAP.

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•	WSEEs

•	Adjusted EBITDA

•	Adjusted EPS

•	During 2019, the number of WSEEs paid from new client sales decreased over 2018. In addition, the net change in existing clients and client retention also decreased compared to 2018.

•	During 2018, the number of WSEEs paid from new client sales increased over 2017. In addition, the net change in existing clients and client retention improved compared to 2017.

•	Average WSEEs paid increased 12.6%

•	Revenues per WSEE per month increased 0.1%, or $1

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•	Average WSEEs paid increased 14.5%

•	Revenues per WSEE per month increased 1.4%, or $21

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•	The cost of group health insurance and related employee benefits increased $12 per WSEE per month, or 4.0%, on a per covered employee basis due primarily to an increase in the number of large individual healthcare claimants in 2019.

•	The percentage of WSEEs covered under our health insurance plan was 66.5% in 2019 and 68.0% in 2018.

•	Reported results include changes in estimated claims run-off related to prior periods and an increase in costs of $2.3 million, or $1 per WSEE per month, in 2019 compared to a decrease in costs of $1.3 million, or $1 per WSEE per month, in 2018.

•	Workers’ compensation costs decreased 4.7%, or $5 per WSEE per month, in 2019 compared to 2018.

•	As a percentage of non-bonus payroll cost, workers’ compensation costs in 2019 were 0.41% compared to 0.49% in 2018.

•	As a result of closing out claims incurred in prior periods at lower than expected costs, we recorded a reduction in workers’ compensation costs of $31.7 million, or 0.16% of non-bonus payroll costs, in 2019 compared to a reduction of $18.8 million, or 0.11% of non-bonus payroll costs, in 2018. The 2019 period costs include the impact of a 1.9%

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•	Payroll taxes increased 14.2%, or $8 per WSEE per month, due primarily to a 14.5% increase in payroll costs partially offset by lower unemployment tax rates in 2019.

•	Payroll taxes as a percentage of payroll cost were 6.7% in both 2019 and 2018.

•	The cost of group health insurance and related employee benefits increased $6 per WSEE per month, or 2.2%, on a per covered employee basis.

•	The percentage of WSEEs covered under our health insurance plan was 68.0% in 2018 and 68.8% in 2017.

•	Reported results include changes in estimated claims run-off related to prior periods and was a decrease in costs of $1.3 million, or $1 per WSEE per month, in 2018 compared to an increase in costs of $1.2 million, or $1 per WSEE per month, in 2017.

•	Workers’ compensation costs increased 6.2%, but decreased $3 on a per WSEE per month basis, in 2018 compared to 2017.

•	As a percentage of non-bonus payroll cost, workers’ compensation costs in 2018 were 0.49% compared to 0.54% in 2017.

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As a result of closing out claims incurred in prior periods at lower than expected costs, we recorded a reduction in workers’ compensation costs of $18.8 million, or 0.11% of non-bonus payroll costs, in 2018 compared to a reduction of $16.3 million, or 0.11% of non-bonus payroll costs, in 2017. The 2018 period costs include the impact of a 2.6% discount rate used to accrue workers’ compensation loss claims, compared to a 1.6% discount rate used in the 2017 period.

•	Payroll taxes increased 15.8%, or $6 per WSEE per month, due primarily to an 18.5% increase in payroll costs partially offset by lower unemployment tax rates in 2018.

•	Payroll taxes as a percentage of payroll cost were 6.7% in 2018 compared to 6.9% in 2017.

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Salaries of corporate and sales staff increased 5.3% to $317.1 million, but decreased $8 on a per WSEE per month basis, compared to 2018. The increase was primarily due to an 11.4% increase in headcount, including a 12.8% increase in total BPAs in 2019, partially offset by the non-recurrence of a $9.3 million one-time tax reform bonus paid in the first quarter of 2018 and lower incentive compensation expense during 2019.

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Stock-based compensation increased 17.5% to $24.0 million, but remained flat on a per WSEE per month basis, compared to 2018. This increase was primarily due to the acceleration of restricted stock awards and associated expense into the fourth quarter of 2017 that were originally scheduled to vest in the first quarter of 2018. Please read Note 1 “Accounting Policies” and Note 9 “Incentive Plans,” to the Consolidated Financial Statements for additional information.

•	Commissions expense increased 8.5% to $31.4 million, but decreased $1 on a per WSEE per month basis, compared to 2018. Commissions are primarily due to commissions associated with the growth in our PEO HR Outsourcing solutions, including an increase in the amount of sales channel referral fees paid during 2019.

•	Advertising expense increased 16.4% to $21.6 million, or $1 per WSEE per month, compared to 2018. The increase was primarily due to an increase in advertising and business promotions.

•	General and administrative expenses increased 11.1% to $123.4 million, but decreased $1 on a per WSEE per month basis, compared to 2018. The increase was primarily due to increased travel and training expenses associated with the increase in BPAs and technology licensing and maintenance costs.

•	Depreciation and amortization expense increased 25.7% to $28.7 million, or $1 per WSEE per month, compared to 2018. The increase was primarily due to increased capital expenditures related to software development costs and sales office expansions.

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Salaries of corporate and sales staff increased 16.0% to $301.0 million, or $2 per WSEE per month, compared to 2017. The increase was primarily due to a $9.3 million charge related to a one-time tax reform bonus paid to corporate employees, a 10.7% increase in headcount, including a 16.2% increase in BPAs in 2018, and additional incentive compensation expense as a result of stronger operating results.

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Stock-based compensation decreased 16.1% to $20.4 million, or $3 per WSEE per month, compared to 2017. This decrease was primarily due to the acceleration of restricted stock awards and associated expense into the fourth quarter of 2017 that were originally scheduled to vest in the first quarter of 2018. Please read Note 1 “Accounting Policies” and Note 9 “Incentive Plans,” to the Consolidated Financial Statements for additional information.

•	Commissions expense increased 27.2% to $29.0 million, or $2 per WSEE per month, compared to 2017. Commissions are primarily due to commissions associated with the growth in our PEO HR Outsourcing solutions including an increase in the amount of sales channel referral fees paid in 2018.

•	Advertising expense increased 11.2% to $18.6 million, but decreased $1 on a per WSEE per month basis, compared to 2017. The increase was due to additional spending on sponsorships, promotional items and billboard advertising.

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General and administrative expenses increased 9.7% to $111.1 million, but decreased $1 on a per WSEE per month basis, compared to 2017. The increase was due to increased travel and training expenses associated with the increase in BPAs, professional services, technology costs, rent and office expenses, partially offset by the non-recurrence of charitable contributions made in 2017 related to Hurricane Harvey relief efforts.

•	Depreciation and amortization expense increased 25.6% to $22.8 million, but remained flat on a per WSEE per month basis, compared to 2017. The increase was primarily due to increased capital expenditures related to software development costs.

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(1)	Includes impairment and other charges of $10.5 million related to the sale of two aircraft in 2015.

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(1)	Per share amounts for the years 2017, 2016 and 2015 have been adjusted to reflect the two-for-one split of our common stock effected on December 18, 2017 as a stock dividend.

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Timing of client payments / payroll taxes – We typically collect our comprehensive service fee, along with the client’s payroll funding, from clients at least one day prior to the payment of WSEE payrolls and associated payroll taxes. Therefore, the last business day of a reporting period has a substantial impact on our reporting of operating cash flows. For example, many WSEEs are paid on Fridays and at month-end; therefore, operating cash flows decrease in the reporting periods that end on a Friday. In the year ended December 31, 2019, the last business day of the reporting period ended on a Tuesday, client prepayments were $59.6 million and amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions was $234.6 million. In the period ended December 31, 2018, which ended on a Monday, client prepayments were $34.2 million and amounts payable for withheld federal and state income taxes, employment taxes and other payroll deductions was $224.5 million.

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Medical plan funding – Our health care contract with United establishes participant cash funding rates 90 days in advance of the beginning of a reporting quarter. Therefore, changes in the participation level of the United plan have a direct impact on our operating cash flows. In addition, changes to the funding rates, which are determined solely by United based primarily upon recent claim history and anticipated cost trends, also have a significant impact on our operating cash flows. As of December 31, 2019, Plan Costs were less than the net premiums paid and owed to United by $2.6 million, which is $6.4 million less than our agreed-upon $9.0 million surplus maintenance level. The $6.4 million difference is therefore reflected as a current liability and $9.0 million is reflected as a long-term asset on our Consolidated Balance Sheets at December 31, 2019. In addition, the premiums owed to United at December 31, 2019, were $9.3 million, which is included in accrued health insurance costs, a current liability, on our Consolidated Balance Sheets.

•	Operating results – Our net income has a significant impact on our operating cash flows. Our net income increased 11.6% to $151.1 million in 2019 from $135.4 million in 2018. Please read “Results of Operations.”

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(1)	The table includes purchase obligations associated with non-cancelable contracts individually greater than $100,000 and one year.

(2)	Includes $56.5 million related to the construction of a new facility on our corporate campus. For more information please read Item 2. “Properties—Corporate Facilities.”

(3)	Accrued workers’ compensation claim costs include the short and long-term amounts. For more information, please read, “—Critical Accounting Policies and Estimates—Workers’ Compensation Costs.”

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(1)	Revenues are comprised of gross billings less worksite employee (“WSEE”) payroll costs as follows:

	Year ended December 31,
(in thousands)	2019			2018			2017
Gross billings	$	27,212,010		$	23,830,731		$	20,173,812
Less: WSEE payroll cost	22,897,206			20,002,182			16,873,589
Revenues	$	4,314,804		$	3,828,549		$	3,300,223

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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 Time and Attendance, Performance Management, Organizational Planning, Recruiting Services, Employment Screening, Expense Management Services, 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 its 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 its 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.

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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)	2019			2018			2017
Northeast	$	1,135,771		$	996,541		$	854,629
Southeast	499,201			447,584			379,874
Central	743,514			637,779			543,486
Southwest	1,001,845			895,243			767,207
West	880,434			797,942			702,619
	4,260,765			3,775,089			3,247,815
Other revenue	54,039			53,460			52,408
Total revenue	$	4,314,804		$	3,828,549		$	3,300,223

Our PEO HR Outsourcing solutions revenues are primarily derived from our gross billings, which are based on (1) the payroll cost of its WSEEs; and (2) a markup computed as a percentage of the payroll cost. The gross billings are invoiced concurrently with each periodic payroll of its 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.

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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, 2019 and 2018, 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, 2019			December 31, 2018
Land	$	6,215		$	6,215
Buildings and improvements	119,635			112,308
Computer hardware and software	123,232			115,259
Software development costs	85,252			71,332
Furniture, fixtures and other	48,082			45,694
Construction in progress	20,885			—
	403,301			350,808
Accumulated depreciation and amortization	(255,595		)	(233,595		)
Total property and equipment, net	$	147,706		$	117,213

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The estimated useful lives of property and equipment for purposes of computing depreciation are as follows:

	Useful Life
Buildings and improvements	5	—	30	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 $7.8 million, $6.0 million and $4.1 million in amortization of capitalized computer software costs in 2019, 2018 and 2017, respectively. Unamortized software development costs were $25.8 million and $19.6 million in 2019 and 2018, 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 discounted 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.

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

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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 2019, 2018 or 2017.

At December 31, 2019 and 2018, 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, 2019 and 2018 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. 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, 2019, and is reported as a long-term asset. As of December 31, 2019, Plan Costs were less than the net premiums paid and owed to United by $2.6 million. As this amount is less than the agreed-upon $9.0 million surplus maintenance level, the $6.4 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, 2019, were $9.3 million, which is included in accrued health insurance costs, a current liability in our Consolidated Balance Sheets. Our benefits costs incurred included an increase of $2.3 million in 2019, a reduction of $1.3 million in 2018 and an increase of $1.2 million in 2017 for changes in estimated run-off related to prior periods.

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

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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, 2019, 2018 and 2017, we reduced accrued workers’ compensation costs by $31.7 million, $18.8 million and $16.3 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 1.9% in 2019 and 2.6% in 2018) 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)	2019			2018
Beginning balance	$	229,639		$	207,630
Accrued claims	63,538			72,066
Present value discount	(4,629		)	(7,829		)
Paid claims	(45,644		)	(42,228		)
Ending balance	$	242,904		$	229,639
Current portion of accrued claims	$	49,295		$	42,227
Long-term portion of accrued claims	193,609			187,412
Total accrued claims	$	242,904		$	229,639

The current portion of accrued workers’ compensation costs on the Consolidated Balance Sheets at December 31, 2019 and 2018 includes $3.6 million and $3.6 million, respectively, of workers’ compensation administrative fees.

The undiscounted accrued workers’ compensation costs were $262.9 million as of December 31, 2019 and $247.4 million as of December 31, 2018.

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 2019, we received $18.8 million for the return of excess claim funds related to the workers’ compensation program, which decreased deposits. As of December 31, 2019, we had restricted cash of $49.3 million and deposits of $175.9 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, 2019, 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.

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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. Restricted stock grants to officers and other management generally vest over a period of three years from the date of grant. Shares of restricted stock are valued based on the fair value on date of grant and the associated expense, net of estimated forfeitures, is recognized over the vesting period. Stock grants issued to non-employee directors are 100% vested on the grant date.

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 2019, 2018 and 2017. Matching contributions under the Corporate Plan are immediately vested. During 2019, 2018 and 2017, we made matching contributions on behalf of corporate employees to the Corporate Plan of $11.4 million, $10.3 million and $8.7 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 2019, 2018 and 2017, we made matching contributions on behalf of WSEEs to the Worksite Employee Plan of $198.2 million, $165.5 million and $129.0 million, respectively.

Advertising

We expense all advertising costs as incurred.

Income Taxes

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 changes 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 2019 presentation.

New Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The new standard defines a current expected credit loss model which requires us to measure all expected credit loss for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. This replaced the existing incurred loss model and is applicable to the measurement of credit losses on financial assets, including trade receivables. The guidance is effective for interim periods and fiscal years beginning after December 15, 2019. We do not expect the new standard to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new standard requires a customer in a cloud computing arrangement that is a service contract to follow the

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internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. The guidance is effective for fiscal years beginning after December 15, 2019. We do not expect the new standard to have a material impact on our consolidated financial statements.

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,
	2019										2018
(in thousands)	Cash & Cash Equivalents			Marketable Securities			Total				Cash & Cash Equivalents			Marketable Securities			Total
Overnight holdings	$	349,857		$	—		$	349,857			$	311,158		$	—		$	311,158
Investments holdings	13,218			34,728			47,946				16,711			60,781			77,492
Cash in demand accounts	36,521			—			36,521				33,207			—			33,207
Outstanding checks	(32,254		)	—			(32,254		)		(34,303		)	—			(34,303		)
Total	$	367,342		$	34,728		$	402,070			$	326,773		$	60,781		$	387,554

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, 2019 and December 31, 2018, are $234.6 million and $224.5 million, respectively, in withholdings associated with federal and state income taxes, employment taxes and other payroll deductions, as well as $59.6 million and $34.2 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

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, 2019										December 31, 2018
(in thousands)	Total			Level 1			Level 2				Total			Level 1			Level 2
Money market funds	$	363,075		$	363,075		$	—			$	325,819		$	325,819		$	—
U.S. Treasury bills	34,728			34,728			—				52,197			52,197			—
Municipal bonds	—			—			—				10,634			—			10,634
Total	$	397,803		$	397,803		$	—			$	388,650		$	378,016		$	10,634

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

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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, 2019
U.S. Treasury bills	$	34,716		$	13		$	(1	)	$	34,728
December 31, 2018
U.S. Treasury bills	$	50,150		$	—		$	(3	)	$	50,147
Municipal bonds	10,640			1			(7		)	10,634

As of December 31, 2019, 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, 2019, 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)	2019				2018
Trade, net	$	12,731			$	10,015
Unbilled	448,088				385,567
Other	4,960				5,041
Accounts receivable, net	$	465,779			$	400,623

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 $0.9 million and $1.0 million as of December 31, 2019 and 2018, 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.

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 one day prior to the applicable payroll date. As such, we generally do not require collateral. Client prepayments directly attributable to unbilled accounts receivable have been netted against such receivables as the gross billings have been earned and the payroll cost has been incurred, thus we have the legal right of offset for these amounts. Unbilled accounts receivable consisted of the following:

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	December 31,
(in thousands)	2019				2018
Accrued worksite employee payroll cost	$	401,859			$	329,979
Unbilled revenues	105,841				89,765
Customer prepayments	(59,612		)		(34,177		)
Unbilled accounts receivable	$	448,088			$	385,567

5.	Deposits and prepaid health insurance

Deposits and prepaid health insurance consisted of the following:

	December 31,
(in thousands)	2019				2018
Prepaid health insurance	$	9,000			$	9,000
Deposits – health insurance	8,100				6,200
Deposits – workers’ compensation	175,913				166,474
Deposits and prepaid health insurance	$	193,013			$	181,674

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 long-term 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 revolving credit facility which is available for working capital and general corporate purposes, including acquisitions, stock repurchases and issuances of letters of credit. In September 2019, the revolving credit facility was increased from $350 million to $500 million (the “Facility”). 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, 2019, we had an outstanding $1.0 million letter of credit issued under the Facility. As of December 31, 2019, our outstanding balance on the Facility was $269.4 million.

The Facility matures on September 13, 2024. Borrowings under the Facility bear interest at 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 2019 was 3.8%. 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 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, 2019.

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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)	2019			2018
Deferred tax liabilities
Prepaid assets	$	(4,252	)	$	(3,306	)
Depreciation	(4,564		)	(3,918		)
Software development costs	(6,475		)	(4,950		)
Tenant improvements	(3,209		)	—
Right-of-use leased assets	(15,949		)	—
Intangibles	(955		)	(474		)
Total deferred tax liabilities	(35,404		)	(12,648		)
Deferred tax assets
Accrued incentive compensation	5,946			8,612
Net operating loss carryforward	632			709
Workers’ compensation accruals	5,404			4,739
Accrued rent	1,223			918
Stock-based compensation	6,712			6,183
Operating lease liabilities	19,158			—
Minority investment impairment	673			676
Other	287			305
Total deferred tax assets	40,035			22,142
Valuation allowance	(675		)	(678		)
Total net deferred tax assets	39,360			21,464
Net deferred tax assets	$	3,956		$	8,816

The components of income tax expense are as follows:

	Year Ended December 31,
(in thousands)	2019			2018			2017
Current income tax expense
Federal	$	27,385		$	40,347		$	30,009
State	6,299			11,133			5,988
Total current income tax expense	33,684			51,480			35,997
Deferred income tax (benefit) expense
Federal	4,016			(3,398		)	9,549
State	844			(1,135		)	193
Total deferred income tax (benefit) expense	4,860			(4,533		)	9,742
Total income tax expense	$	38,544		$	46,947		$	45,739

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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 $14.6 million in 2019, $3.9 million in 2018 and $6.8 million in 2017 related to excess tax benefits from the vesting of long-term incentive awards and restricted stock awards.

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)	2019			2018			2017
Expected income tax expense at 21%, 21% and 35%, respectively	$	39,825		$	38,296		$	45,549
State income taxes, net of federal benefit	5,821			7,660			4,085
Nondeductible expenses	5,959			4,831			2,649
Section 199 benefits	—			—			(875		)
Equity compensation	(12,120		)	(2,737		)	(6,218		)
Research and development credit	(1,069		)	(856		)	(634		)
Disaster employee retention credit	—			—			(669		)
Enactment of the 2017 Tax Reform Act	—			—			2,559
Other, net	128			(247		)	(707		)
Reported total income tax expense	$	38,544		$	46,947		$	45,739

At December 31, 2019, we have net operating loss carryforwards totaling $2.5 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, 2019, 2018 and 2017, we made no provisions for interest or penalties related to uncertain tax positions. The tax years 2016 through 2018 remain open to examination by the Internal Revenue Service of the United States. The tax years 2015 through 2018 remain open to examination by various state tax authorities.

8.	Stockholders’ Equity

Two-for-One Stock Split

On December 18, 2017, we effected a two-for-one stock split in the form of a 100% stock dividend. Share and per share amounts for 2017 presented in these financial statements have been retroactively restated to reflect this change in our capital structure.

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 1,897,322 shares under the Repurchase Program during 2019. In addition, 227,208 shares were withheld during 2019 to satisfy minimum tax withholding obligations for the vesting of long-term incentive and restricted stock awards, which are not subject to the Repurchase Program. In 2019, the Board authorized an increase of 700,000 shares that may be repurchased under the Repurchase Program. During 2018, we repurchased 1,066,409 shares under the Repurchase Program and 132,021 shares were withheld to satisfy minimum tax withholding obligations for the vesting of long-term incentive and restricted stock awards. At December 31, 2019, we were authorized to repurchase an additional 413,833 shares under the Repurchase Program. Shares repurchased under the Repurchase Program are recorded in treasury.

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Dividends

The Board declared quarterly dividends as follows:

(amounts per share)	2019				2018
First quarter	$	0.30			$	0.20
Second quarter	0.30				0.20
Third quarter	0.30				0.20
Fourth quarter	0.30				0.20

During 2019 and 2018, we paid a total of $48.6 million and $33.4 million, respectively, in dividends.

Preferred Stock

At December 31, 2019, 20 million shares of preferred stock were authorized.

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 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 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. At December 31, 2019, 2,615,253 shares of common stock were available for future grants under the 2012 Incentive Plan. 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.

We also maintain the Insperity, Inc. 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 2017, 2018 and 2019.

We recognized $24.0 million, $20.4 million and $24.3 million of compensation expense associated with the restricted stock and the LTIP awards in 2019, 2018 and 2017, respectively. Included in 2017, is $2.3 million of stock-based compensation associated with the acceleration of restricted stock awards from the first quarter of 2018 to December 2017 in order to maximize our tax deduction, which would have been limited under the 2017 Tax Reform Act. We recognized $4.9 million, $5.3 million and $8.5 million of tax benefits associated with stock-based compensation in 2019, 2018 and 2017, respectively.

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Restricted Stock Awards

Restricted common shares, 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, three years to five years for our shares currently outstanding. The total fair value of shares vested during the years ended December 31, 2019, 2018, and 2017 was $39.7 million, $1.2 million and $46.0 million, respectively. The weighted average grant date fair value of restricted stock awards granted during the years ended December 31, 2019, 2018 and 2017 was $124.04, $65.98 and $42.15, respectively. As of December 31, 2019, unrecognized compensation expense associated with the unvested shares outstanding was $23.9 million and is expected to be recognized over a weighted average period of 22 months.

The following is a summary of restricted stock award activity for 2019:

	Shares (in thousands)			Weighted Average Grant Date Fair Value
Non-vested - December 31, 2018	582			$	49.48
Granted	200			124.04
Vested	(320	)		43.75
Canceled	(19	)		77.83
Non-vested - December 31, 2019	443			$	86.10

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 2019:

	Number of Performance Units (in thousands)			Weighted Average Grant Date Fair Value
Unvested at December 31, 2018	426			$	46.35
Granted	59			139.71
Vested	(207	)		29.57
Canceled	(6	)		61.47
Unvested at December 31, 2019	272			$	79.95

The determination of achievement results and corresponding vesting of the 2016 LTIP awards occurred in February 2019 resulting in the recipients receiving approximately 352,000 shares of common stock with a fair value $45.1 million. As of December 31, 2019, we estimate that approximately 211,000, 130,000 and 21,000 shares will vest with $0.3 million, $3.2 million and $1.9 million in unamortized compensation expense related to the 2017, 2018 and 2019 LTIP grants, respectively.

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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 29,000, 30,000 and 38,000 shares were issued from treasury under the ESPP during fiscal years 2019, 2018 and 2017, 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)	2019			2018			2017
Net income	$	151,099		$	135,413		$	84,402
Less distributed and undistributed earnings allocated to participating securities	(1,759		)	(1,875		)	(1,517		)
Net income allocated to common shares	$	149,340		$	133,538		$	82,885
Weighted average common shares outstanding	40,186			41,217			41,067
Incremental shares from assumed LTIP awards and conversions of common stock options	166			289			204
Adjusted weighted average common shares outstanding	40,352			41,506			41,271
Potentially dilutive securities not included in weighted average share calculation due to anti-dilutive effect	—			—			—

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 2019, 2018 and 2017 were $15.9 million, $15.4 million and $15.4 million, respectively, and are included in general and administrative expenses on our Consolidated Statements of Operations. During 2019, cash paid for amounts included in the measurement of operating lease liabilities was $17.1 million.

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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, 2019
Operating lease ROU assets	Right-of-use leased assets	$	56,886
Lease liabilities:
Current operating lease liabilities	Other accrued liabilities	$	15,143
Long-term operating lease liabilities	Operating lease liabilities, net of current	58,863
Total operating lease liabilities		$	74,006
Less:
Landlord funded tenant improvements		$	12,397
Deferred rent		4,723
Operating lease ROU assets		$	56,886
Weighted average remaining lease term (years)		6
Weighted average discount rate		4.5		%

The following presents the maturity of our operating leases liabilities as of December 31, 2019:

(in thousands)	Operating Leases
2020	$	18,087
2021	15,611
2022	14,206
2023	11,682
2024	8,952
Thereafter	15,758
Total remaining obligation	84,296
Less imputed interest	10,290
Present value of lease liabilities	$	74,006

As of December 31, 2019, we have additional operating leases that have not yet commenced of $16.1 million with lease terms ranging from 4 years to 8 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, 2019, future purchase and service obligations greater than $100,000 and one year were as follows (in thousands):

2020	$	79,562		(1)
2021	16,994
2022	8,234
2023	3,188
2024	1,295
Thereafter	678
Total obligations	$	109,951

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(1)	Includes $56.5 million related to the construction of a new facility on our corporate campus.

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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 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 has denied plaintiffs’ request for a jury trial and has set a bench trial for March 2, 2020. With respect to plaintiffs’ remaining claims, plaintiffs allege damages up to $146.0 million against all defendants. We believe we have meritorious defenses, 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.