Microsoft (MSFT) provides generous company benefits which can help employees build wealth, manage risk and secure their future. It’s important to consider how to best integrate the additional compensation, retirement and health benefits into your financial plan.
Your annual grants of Microsoft shares can support short-term cash flow needs or long-term goals, such as saving for college or retirement. Either way, it’s important to estimate the impact on your taxes and to adjust your withholding amount accordingly, especially if your income is growing or if your vested share amount is increasing. You can elect a specific tax rate withholding on stock award vests. If you are subject to trading windows, a 10b5-1 trading plan can automatically sell shares upon vest, reducing the hassle while ensuring you meet trading guidelines. Note also that any outstanding MSFT stock award grants would vest immediately in the event of death or total disability. And for an employee who reaches age 55 and 15 years of service, all stocks grants more than one year old continue to vest, even if you leave the company.
Start by contributing the maximum allowable $19,500 a year in pre-tax earnings to your 401(k) account. Microsoft will match 50 percent of that total. Think of this as a $9,750 annual raise. You can also contribute up to $27,750 a year in after-tax dollars to your 401k and then convert that amount to your Roth IRA (with little to no tax impact), where it will grow tax-free. Employees over age 50 can also make annual catch-up contributions to their retirement accounts up to $6,500.
MSFT EMPLOYEE STOCK PURCHASE PROGRAM (ESPP)
Each quarter, Microsoft employees can buy company stock at a 10% discount from the market price through the ESPP. You can sell your shares immediately to meet current cash flow needs or savings goals. This helps avoid building concentrated exposure to Microsoft stock and ensures you take advantage of the discounted purchase price.
Microsoft senior executives and certain other employees – generally U.S. employees at level 67 or above — are allowed to delay receiving a portion of their salary or bonus. Shifting funds to a deferred compensation account can bring tax savings and flexibility in financial planning, especially for employees who will be in a lower tax bracket in future years. Note that deferred compensation also carries some risk related to the company’s long-term health.
HEALTH SAVINGS ACCOUNT (HSA)
An HSA is a medical savings account available to anyone enrolled in a high-deductible health plan (HDHP). Account funds grow tax-free, and withdrawals to pay for qualified expenses are also tax-free. We recommend contributing the maximum allowable amount, which in 2020 is $3,550 for an individual and $7,100 for a family. Any contributions made by Microsoft on your behalf will count towards this limit. Individuals over age 55 may contribute an additional $1,000 per year. Given their unique tax treatment, and the option to invest contributions, HSAs can also be used to supplement your retirement savings.
FLEXIBLE SPENDING ACCOUNT (FSA)
An FSA allows you to save for health and dependent care costs using pre-tax income. You may contribute up to $5,000 a year to a Dependent Care FSA, which can be used for certain child care expenses, or to care for senior citizens who live with you and are claimed as a dependent on your federal tax return. If you do not have an HSA, you may also contribute up to $2,750 per year to a general purpose Health Care FSA in 2020. If you do have an HSA, you can contribute up to $2,700 to a limited purpose Dental and Vision FSA.
Unlike an HSA, FSA funds must be spent during the calendar year in which you contribute. You may carry over $500 in unused funds to the following year. An FSA is best used for large pre-planned medical or dental expenses, such as orthodontics.
Microsoft offers a life insurance benefit of twice an employee’s annual salary at no cost. Employees can purchase additional coverage for themselves of up to 10 times their salary, with a maximum of $2.5 million. Additional coverage is available for spouses and children up to age 26. Premiums are age-based. Typically, health exams are not required for basic coverage, but the insurance company may require an exam for higher levels of coverage. The coverage is not portable, so you might consider buying a separate policy if you think you may leave the company.
Microsoft provides coverage for 60% of an employee’s salary up to $15,000 a month in the event of a disability. Employees pay only the taxes on the value of the premiums that Microsoft pays on your behalf. Short-term benefits cover 100% of pay for seven weeks, and then 75% for 18 weeks (25 weeks total). Benefits could be paid out tax-free potentially to age 65 (maybe longer if disability began after age 60). Note that the disability plan covers bonuses and commissions, but does not cover stock awards. Employees might consider purchasing a supplemental disability policy to cover a higher percentage of their income.
Employees can purchase basic legal coverage from ARAG for a small monthly fee. The policy covers writing simple wills and services such as resolving a dispute with a neighbor or challenging a parking ticket and provides access to Life Lock Credit Monitoring Services, including $1M in identity theft insurance. It is not sufficient for managing more complex legal matters or detailed estate planning services.
VOLUNTEER AND GIFT MATCHING
Microsoft will match your charitable donations of cash, stock or products. Microsoft will also match grants from a Charitable Gift Fund. If you perform any volunteer work, Microsoft will donate $25 per hour to eligible organizations. These are great options for maximizing your support for the causes that are important to you.
As you can see, Microsoft employees enjoy a wide range of financial benefits. If you have questions about which options are right for you, or how they best fit with your tax and financial planning, your Paracle advisor can help.