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Microsoft Employee Benefits

Microsoft provides employees with an excellent benefits package. That creates a lot of financial planning opportunities you can take advantage of. The biggest opportunities come in Microsoft’s 401K plan, employee stock purchase plan, deferred compensation program, restricted stock units, health insurance, and charitable donation matching. Here’s a look at how you can optimize your benefits as a Microsoft employee:

Microsoft 401K 

Microsoft matches 50% of employee 401K contributions up to the IRS limit. If you contribute the IRS 2024 maximum of $23,000 into your 401K, Microsoft will kick in an additional $11,500 on your behalf. Since that match essentially provides free money for employees, maximizing your 401K contribution is usually my first recommendation for most employees looking to get the most out of their benefits at Microsoft.

Microsoft Mega Backdoor Roth

Microsoft’s 401K plan allows you to make after-tax contributions to your 401K and then do an in-plan conversion for that money into a Roth 401K. This makes the Mega Backdoor Roth strategy possible, which allows you to save an extra $34,500 into a Roth in 2024! Here’s an illustration breaking this down:

Here is another illustration providing step-by-step instructions for completing the Mega Backdoor Roth at Microsoft:

Step 1– Maximize your traditional 401K contribution. The contribution limit for 2024 is $23,000. 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 $11,500.

Step 3- Make after-tax contributions up to the federal limit. The federal limit for total contributions to a 401K for 2024 is $69,000. Thus once you’ve contributed the $23,000 max and received Microsoft’s match of $11,500, you have another $34,500 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 contribution 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! 

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 2024. That means the traditional contribution component rises to $30,500K and the overall 401K limit increases to $76,500. 

Employee Stock Purchase Plan

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 purchases 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 to lock in that gain. Your financial future is already significantly tied to Micosoft in your unvested RSUs and future compensation so I am not in favor of having a large portion of your liquid net worth tied into your employer’s stock. However, it’s worth noting that the ordinary income tax you will have to pay on the discount you receive is only taxed in the year in which you sell your shares.

Restricted Stock Units (RSUs)

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. RSUs are taxed as ordinary income as soon they vest. Therefore, you should think of your vested RSUs as a cash bonus that Microsoft has paid you. If you received an envelope full of cash, would you invest 100% of it into Microsoft stock? Given that your future compensation is already heavily tied to Microsoft’s stock performance, from a financial planning standpoint it’s advisable to invest that money into an investment or allocation that better fits your overall financial goals and risk tolerance.

Deferred Compensation

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. 

Health Insurance

Microsoft offers several medical insurance plans for employees. My favorite option for most employees is the high-deductible health plan that offers a Health Savings Account (HSA). HSA plans are the most tax-advantaged accounts out there! Your contributions are excluded from your taxable income. You pay no taxes on the growth in the account. And as long as distributions are made to pay qualified medical expenses, you won’t have to pay any taxes on distributions!

If you go with the HSA plan Microsoft will contribute between $1,000-$4,375 on your behalf. The contribution amount is dependent on your level at Microsoft as well as the number of people in your family covered by the HSA plan.

The 2024 contribution limit to an HSA is $4,150 for an individual and $8,300 for a family. That limit includes employer contributions made on your behalf. Statistically, most people will save money with an HSA plan even without the extra money that Microsoft contributes on your behalf. However, you must always consider the unique healthcare needs of you and your family and review the various health insurance plans Microsoft offers to see what is best for your situation.

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 explore our comprehensive wealth management services and discuss your financial situation, please schedule your free consultation call today.

Scott Caufield, CFA, CPA