KELYA Kelly Services Inc

Notes to Financial Statements

(In thousands of dollars)

1.         Plan Description

The following description of Kelly Retirement Plus (the “Plan”) provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan’s provisions.

General

The Plan provides benefits to eligible employees according to the provisions of the Plan Document. All eligible employees, as defined by the Plan, are eligible to participate upon hire and attainment of age 18. Participants are eligible to receive employer contributions after one year of service. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

Contributions

Participants may contribute a percentage of eligible earnings, as defined in the Plan, of no less than 2% and no more than 50%, up to the current IRS maximums (seventeen thousand dollars in 2012) to the Plan each year. Participants who have attained age 50 before the end of the Plan year are eligible to make catch-up contributions not to exceed five thousand five hundred dollars in 2012.

The employer contribution consists of two parts: Employer Discretionary Contributions, under which Kelly Services, Inc. (the “Company”) may make a discretionary contribution on behalf of all participants in an amount to be determined by the Company and Employer Matching Contributions, whereby the Company matches employees’ contributions using a predetermined formula. The Company made an Employer Discretionary Contribution to the Plan for 2012 that represented 2% of participants’ eligible wages for the year and totaled $3,478 before application of forfeitures. The Company made Employer Matching Contributions at $.50 per dollar of participant contributions up to 4% of eligible earnings employees contribute for the year and totaled $1,975. Employer contributions are allocated in the same manner as participant contributions.

Participant Accounts

Each participant’s account is credited with the participant’s contribution, the Employer Matching Contribution, an allocation of the Employer’s Discretionary Contribution, an allocation of investment earnings and an allocation of administrative expenses. Earnings are allocated by fund based on the ratio of a participant’s account invested in a particular fund to all participants’ investments in that fund. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.

Plan Administration

The Plan is administered by a committee appointed by the Board of Directors of the Company. This committee is composed of the Executive Vice President and Chief Financial Officer, the Senior Vice President and General Counsel and the Senior Vice President and Chief Human Resources Officer and serves at the pleasure of the Board.

Investment Options

All contributions are invested by JPMorgan Trust Company, N.A. (the “Trustee”) as directed by the participant among any of the investment options offered by the Plan.

Vesting and Benefits

Beginning with the 2007 Employer Discretionary Contributions, participants become fully vested upon attainment of age sixty-five or completion of three years of service, whichever occurs first. All previous Employer Discretionary Contributions become fully vested upon attainment of age sixty-five or completion of five years of service, whichever occurs first. Participants become fully vested in Employer Matching Contributions upon attainment of age sixty-five or completion of three years of service, whichever comes first. The first year of service begins at the later of age 18 or date of hire. Participant contributions are 100% vested immediately.

Kelly Retirement Plus

Notes to Financial Statements (continued)

(In thousands of dollars)

1.        Plan Description (continued)

Vesting and Benefits (continued)

The value of the vested portion of participants’ accounts is payable to the participant upon retirement, total and permanent disability, death or termination of employment in a lump-sum distribution. If the vested portion of a participant’s account exceeds one thousand dollars (or such other amount to be prescribed in Treasury regulations), the participant may defer receipt of the distribution until any time prior to or upon attaining age 70-1/2. Vested accounts with balances of one thousand dollars or less are paid in an immediate lump-sum distribution.

Participant Forfeitures

Pursuant to the Plan agreement, participant forfeitures can be used by the Plan to (1) restore the participant’s account in the event of rehire or (2) reduce the Employer Discretionary Contribution or Employer Matching Contribution. The Plan Administrator offset the Employer Discretionary Contribution with forfeitures aggregating $84 for the year ended December 31, 2012.

In-Service Withdrawals

Participants may request in-service distributions anytime after the attainment of age 59 1/2 or if experiencing a hardship as defined by the IRS under Safe Harbor Rules.

Participant Notes Receivable

The Plan, as currently designed, does not allow participants to borrow from their accounts.

2.         Summary of Significant Accounting Principles and Practices

Basis of Accounting and Use of Estimates

The financial statements of the Plan have been prepared on the accrual basis in accordance with accounting principles generally accepted in the United States of America. The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 962, Plan Accounting – Defined Contribution Pension Plans, requires the Statement of Net Assets Available for Benefits present the fair value of the investment contracts as well as the adjustment of the fully benefit responsive investment contracts from fair value to contract value. The related activity is presented at contract value in the Statement of Changes in Net Assets Available for Benefits. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

Investment Valuation and Income Recognition

Plan investments are stated at fair value as of the last day of the Plan year, except for the common collective trust fund that primarily invests in benefit-responsive investment contracts (commonly referred to as a stable value fund), which is valued at contract value. Contract value represents investments at cost plus accrued interest income less amounts withdrawn to pay benefits. For the stable value investment, value is based on fair value per share at the measurement date by the issuer of the fund. The issuer determines the valuation using pricing models, where inputs to those models are based on observable market inputs or recent trades of similar securities. Inputs to the valuation techniques vary depending on the type of security being priced but typically include benchmark yields, credit spreads, prepayment speeds, reported trades and broker-dealer quotes, all with reasonable levels of transparency. The Plan’s mutual fund investments are valued based on quoted market prices.

The Kelly Services, Inc. Class “A” Common Stock Fund (the “Fund”) is tracked and valued on a unitized basis which represents the fair value of the underlying investments. The Fund consists of Kelly Services, Inc. Class A non-voting common stock and the Fidelity Cash Portfolio Money Market Fund sufficient to meet the Fund’s daily cash needs. Utilizing the Fund allows for daily trades. The value of the unit reflects the combined market value of Kelly Services, Inc. Class A non-voting common stock and the cash investments held by the Fund.

Kelly Retirement Plus

Notes to Financial Statements (continued)

(In thousands of dollars)

2.         Summary of Significant Accounting Principles and Practices (continued)

Effective August 1, 2012, the Kelly Services, Inc. Class “A” Common Stock Fund was frozen for new Plan contributions or investment transfers into the Fund. At December 31, 2012, 323,349 units were outstanding with a value of $6.574 per unit. At December 31, 2011, 354,072 units were outstanding with a value of $5.638 per unit.

The Plan presents in the statement of changes in net assets, the net appreciation (depreciation) in the fair value of its investments, which consists of the realized gains or losses and the unrealized appreciation (depreciation) on those investments.

Purchases and sales of securities are recorded on a trade-date basis. Dividends are recorded on the ex-dividend date.

Contributions

Participant contributions are recorded in the period during which the Company makes payroll deductions from the Plan participants’ earnings; Employer Matching Contributions are recorded in the same period. Employer Discretionary Contributions are recorded in the period during which they were earned.

Administrative Expenses

Administrative expenses incurred shall be paid by the Plan to the extent not paid by the Company.

Payment of Benefits

Benefits are recorded when paid.

Risks and Uncertainties

The Plan invests in various investment securities. Investment securities are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term, and such changes could materially affect participants’ account balances and the amounts reported in the statement of net assets available for benefits.

Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Under the amendments in this guidance, an entity is required to provide additional disclosures about the valuation processes and sensitivities of Level 3 assets and the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of net assets available for benefits, but for which the fair value is required to be disclosed. The amendments in this guidance also required information about transfers between Level 1 and Level 2. The Plan adopted this guidance on January 1, 2012, and it did not have a material effect on the Plan’s financial statements.  

Kelly Retirement Plus

Notes to Financial Statements (continued)

(In thousands of dollars)

The following table presents individually significant investments of the Plan’s net assets.

During 2012, the Plan’s investments (including investments bought, sold and held during the year) appreciated in value as follows:

Kelly Retirement Plus

Notes to Financial Statements (continued)

(In thousands of dollars)

The following tables present the Plan’s assets carried at fair value as of December 31, 2012 and December 31, 2011 by fair value hierarchy level, as described below. The Plan has no liabilities measured at fair value.

Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 measurements include unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. The Plan’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

The Plan also holds other assets not measured at fair value on a recurring basis, including contributions receivable. The fair value of these assets is equal to the carrying amounts in the accompanying financial statements due to the short maturity of such instruments. Under the fair value hierarchy these financial instruments are valued primarily using Level 2 inputs.

The Plan’s policy is to recognize transfers between levels of the fair value hierarchy as of the actual date of the event of change in circumstances that caused the transfer. There were no transfers between levels of the fair value hierarchy during 2012. However, the fair value level of Kelly Services, Inc. Class “A” Common Stock Fund in the 2011 table above has been reclassified from the prior year presentation to conform to the current year presentation. During 2012, it was determined that the Kelly Services, Inc. Class “A” Common Stock Fund investment previously classified as a Level 2 investment should have been classified as Level 1 in the fair value hierarchy based on its underlying investments. Accordingly, the 2011 fair value disclosure has been updated.

Although the Company has not expressed any intent to do so, it has the right under the Plan to discontinue its contributions and / or terminate the Plan subject to the provisions of ERISA. In the event of termination of the Plan, the accounts of all participants shall become fully vested and shall be distributed to the participants with all participants receiving full value of their accounts on the date of such distribution.

The following is a reconciliation of net assets available for benefits per the financial statements to the Form 5500:

Kelly Retirement Plus

Notes to Financial Statements (continued)

(In thousands of dollars)

6.        Reconciliation of Financial Statements to IRS Form 5500 (continued)

T he following is a reconciliation of changes in net assets available for benefits per the financial statements to net income per the Form 5500:

Amounts allocated to withdrawing participants are recorded on the Form 5500 for benefit claims that have been processed and approved for payment prior to December 31 but not yet paid as of that date.

The Plan has received a determination letter, dated July 8, 2010, from the Internal Revenue Service indicating that the Plan, as designed, is qualified for tax exempt treatment under the applicable section of the Internal Revenue Code. Accordingly, no provision for income tax has been recorded.

In accordance with guidance on accounting for uncertainty in income taxes, management evaluated the Plan's tax position and does not believe the Plan has any uncertain tax positions that require disclosure or adjustment to the financial statements. The plan administrator believes the Plan is no longer subject to tax examinations for years prior to 2009.

A portion of the Plan’s investments is held in mutual funds and collective funds sponsored by the Trustee and all investment transactions are conducted through the Trustee. All transactions with the Trustee are considered party-in-interest transactions; however, these transactions are not considered prohibited transactions under ERISA.

The Company is also a party-in-interest. Certain administrative expenses of the Plan, including salaries, are paid by the Company and qualify as party-in-interest transactions. The Plan also invested in common stock of the Company.

Effective May 11, 2013, the Kelly Services, Inc. Class “A” Common Stock Fund was eliminated as an investment fund option under the Plan and the Administrator of the Plan commenced the sale of remaining shares of stock in the Kelly Services, Inc. Class “A” Common Stock Fund. Any Plan or Trust Agreement provisions relating to qualifying employer securities or Kelly Services, Inc. Class “A” Common Stock Fund shall not be effective or applicable under the Plan or Trust Agreement.

Kelly Retirement Plus