Microsoft Employee Benefits
Microsoft provides employees with an excellent benefits package which creates a lot of financial planning opportunities. The biggest opportunities come in Microsoft’s 401K plan, employee stock purchase plan, deferred compensation program, restricted stock unit grants, health insurance, and charitable donation matching.
Microsoft 401K
Microsoft matches 50% of employee 401K contributions up to the basic IRS deferral limit. If you contribute the 2023 maximum of $22,500 into your 401K, Microsoft will kick in an additional $11,250 on your behalf. That match provides a serious boost to your savings and is why maximizing your match is usually my first recomendation for most employees.
Mega Backdoor Roth Contributions
Microsoft’s 401K plan allows you to make after tax contributions to your 401K and then roll them into a Roth, which makes the mega backdoor Roth strategy possible. This a great planning tool for high earners to get more money into a tax advantaged account. Microsoft employees can contribute up to $32,250 into a Roth 401K account in 2023 by utilizing the Microsoft Mega Backdoor Roth!
Implementing the Microsoft Mega Backdoor Roth
Step 1– Maximize your traditional 401K contribution. The contribution limit for 2023 is $22,500. This contribution can be either a Roth or traditional contribution. Most high earners elect the traditional (tax deferred) contribution.
Step 2- Microsoft will match 50% of your contributions. Thus if you’ve maxed out your contribution Microsoft will contribute $11,250.
Step 3- Make after-tax contributions up to the federal limit. The federal limit for total contributions to a 401K for 2023 is $66K. Thus once you’ve contributed the $22,500 max and receive Microsoft’s match of $11,250, you have another $32,250 you can contribute to reach the overall 401K limit. This contribution will be made on an after-tax basis (meaning you receive no deduction from your taxable income for this contribution).
Step 4– Convert your after-tax contributions to a Roth by utilizing the Roth in plan conversion option in Microsoft’s 401K plan (Convert After-tax to Roth). Then you’ve completed the mega backdoor Roth conversion!
Here’s another graphic showing the Mega Backdoor Roth at Microsoft:
Microsoft Mega Backdoor Roth Conversion for Employees 50 and Over
Those aged 50 and over can make additional catch-up contributions to their 401K plan of $7,500 for 2023. That means the traditional contribution component rises to $30K and the overall 401K limit increases to $73,500.
Microsoft employees can contribute up to 15% of their salary to purchase Microsoft shares. At the end of each quarter the money you set aside into the ESPP program will purchase Microsoft stock at a 10% discount to the stock’s market value at the end of the period. By selling your shares as soon as you receive them you lock in that discount. Taking advantage of this is essentially free money!
I generally recommend selling the shares as soon as you receive them as your financial future is already significantly tied up in your employer and it’s generally not advisable to have significant single stock exposure.
Microsoft employees level 67 and above are generally allowed to participate in Microsoft’s Deferred Compensation Program. This is a great option that can provide massive tax savings. However, it also introduces a lot of planning complexity.
Employees in the plan can defer up to 75% of their salary and 100% of their bonus. Your salary deferral election for the following year is made in November. The bonus deferral election is made in May. Along with choosing how much of your salary to defer, employees need to select the mutual funds that the deferred compensation’s growth will be tied to.
Finally, an employee participating in the plan needs to choose their distribution schedule. This is usually a set number of years or at retirement or leaving the company. Future scheduled distributions can be delayed but they must be extended at least 5 years and the election to do so must be made at least 1 year before the scheduled distribution date.
To optimize your contributions to a deferred compensation plan you’ll want to consider your current vs future earnings and tax rates as well as your cash flow situation. With many employees participating in this program also receiving a large amount of restricted stock compensation it can introduce additional uncertainty in estimating your cash flow.
A final note of caution is that participating in a deferred compensation program makes you an unsecured creditor of your employer. Fortunately, Microsoft is in a strong financial position and their debt is currently rated AAA.
On-hire RSU awards at Microsoft usually vest over 4 years (25% per year). The first vesting date occurs one year after your hire date. Annual stock awards are given out in August and have a 5 year vesting schedule (20% per year) that occurs quarterly.
Typically those at higher levels at Microsoft receive a greater proportion of their income from RSUs.
I advise those receiving RSU compensation to sell their shares as soon as they vest. A 10b5-1 trading plan can be set up to automatically sell shares that have vested for those subject to trading windows. Not selling shares is essentially making the decision to purchase Microsoft stock on the vesting date. If you’re not usually in the business of putting in the time and research to analyze individual securities I wouldn’t recommend you buy individual stocks in any company. It’s even less advisable when it’s your own employer who you’re already heavily exposed to via your employment, unvested RSUs, and other compensation.
Health Insurance
Microsoft offers a number of medical insurance plans for employees. One option is a high deductible health plan that offers a Health Savings Account (HSA).
The 2023 contribution limit to an HSA is $3,850 for an individual and $7,750 for a family. That limit includes employer contributions made on your behalf.
Personally I’m a fan of HSA plans. HSA funds are a great vehicle as they grow tax-free and have no required withdrawals. As long as withdrawals are used for qualified medical expenses any withdrawals are tax free.
Microsoft also offers vision and dental insurance to employees free of charge. For those with large known expenditures coming up the company allows flexible spending accounts (FSAs) as well.
Charitable Donation Matching & Volunteer Time
Microsoft will match gifts to qualified charitable organizations up to $15K. Volunteer work is also matched with a $25 per hour contribution to qualified organizations.
Life & Disability Insurance
Microsoft provides life insurance equal to 2 times an employee’s salary at no cost. Supplemental insurance can be purchased but I’d suggest comparing the cost to outside plans.
Disability insurance is provided equal to 60% of an employee’s salary up to $15K per month. Short-term benefits will cover your total salary/bonus for 7 weeks, followed by 18 weeks of coverage at 75%.
Miscellaneous Benefits
- Gym/Wellness Reimbursement – up to $1,500 per year
- Relocation – Either a lump sum or an assistance package covering various expenses
- Parental Leave – 20 weeks paid time away for birth mothers and 12 weeks for all other new parents (including adoptions and foster placements)
If you want to discuss your benefits or your financial situation, please schedule a complimentary call today.
Scott Caufield, CFA, CPA