Open Enrollment at Microsoft will begin on November 2nd. The following is a summary of elections to consider, and as always, please reach out to your Paracle advisor if you have questions.
HSA (Health Savings Account)
If you choose an HSA eligible health plan, you can modify your HSA elections at any point during the year, but we recommend that you make your election in Open Enrollment. You may elect to contribute to your HSA either by a per pay period amount or lump sum amount. Our recommendation for 2021 is to elect to make a lump sum contribution in January for the maximum amount (~$4,700 for a family, plus an additional $1,000 if you will be turning 55 or older in 2021). Then, we’d advise paying medical expenses out of pocket to allow the HSA funds to grow tax-free. In January when the funds are deposited to your HSA, we will follow up to confirm they are invested properly. The annual limit for a family has increased to $7,200 and individuals can contribute $3,600 for 2021 (including the employer matching contribution). For more details on the benefits of an HSA, see our Perspectives article Save More For Retirement With Your Health Saving Account.
Dental and Vision Flexible Spending Account
We find that this can be beneficial if you anticipate some large expenses such as braces or LASIK. Otherwise, most people find it to be more hassle than its worth for the small expenses. You are limited to $2,600 per year, must incur the expenses by December 31, 2021, and submit your claim no later than March 31, 2022. Up to $550 of unused funds can be carried forward to the next year and any unused funds in excess of this are forfeited, so you do not want to risk over-funding. Also, if you have not used all the funds from 2020, make sure you plan ahead to ensure you don’t lose those funds. You can carry over just $500 from 2020 to 2021, so be sure to schedule any year-end appointments now if you think you will still have more than this left in the account for 2020.
During Open Enrollment, you can add or change your group life insurance coverage. Microsoft pays for coverage equal to 2x annual base salary, and you can elect to add coverage up to 10x pay (with $2.5M maximum). This is an easy way to obtain life insurance, but it is not always the most cost effective and is not portable if you leave Microsoft. You will not need to show evidence of insurability if you only request to increase coverage by 1x base salary during Open Enrollment.
Group Legal Plan
While we do not find the group legal plan to be useful for offsetting estate planning costs, it can be useful for other small legal needs. As an added benefit, it provides you access to the Life Lock credit monitoring services and $1M in identity theft insurance.
You can change your 401(k) elections at any time, but Open Enrollment is always a good time to review current elections to make sure they still meet your needs. Also, there may still be time to make any necessary withholding changes if you are not on-track to max-out the 401(k) by the end of the year. Microsoft recently announced a change that allows you to convert any existing pre-tax balances to a Roth within the 401(k) plan. Unlike after-tax contributions, any Roth conversions on pre-tax contributions will be taxed at your marginal tax rate. For this reason, we are unlikely to recommend Roth conversions on your pre-tax or employer matching contributions.
Pre-Tax or Roth 401(k)
In general, we recommend the Pre-Tax 401(k) option versus the Roth 401(k) to lower your current taxes. It looks like the annual limit will remain at $19,500 for 2021, plus an additional $6,500 for those who will be 50 or older by the end of 2021.
Your plan offers after-tax contributions for the 401(k) with an annual limit of $27,750. This is in addition to the pre-tax or Roth contribution limits, and is an extremely rare opportunity for you to invest money that could grow tax-free. This is because the contributions made in the after-tax plan are eligible for conversion to your Roth IRA. We recommend that you maximize your after-tax contributions and note that these balances can be converted as often as 1x per quarter, but we recommend that you convert at least 1x a year once you have reached the annual maximum. We do not recommend the automatic Roth conversion offered by the plan because that will keep your funds locked inside the Microsoft plan where you have limited investment choices.
ESPP (Employee Stock Purchase Plan)
Microsoft offers you a 10% discount on the purchase of Microsoft shares. You can update your elections quarterly, with a maximum purchase amount of $25,000 each calendar year up to 15% of total cash compensation. By fully participating in the ESPP plan, you are expected to come out ahead by approximately $2,500 per year, before taxes. We typically recommend that you max out the ESPP and sell your shares each quarter. You can use the proceeds to supplement your lower monthly take-home pay or add to your diversified portfolio. If you reach the annual maximum in a previous quarter, your contributions will be temporarily suspended and automatically resume in January at the previous contribution percentage. Therefore, Open Enrollment is a great time to consider whether you want to change your withholding election for Q1 of next year. Your Paracle team can help to determine your optimal withholding elections to minimize excess ESPP contributions, which delays your receipt of income that was not used to purchase ESPP shares. Also, if you have unanticipated cash needs, you are allowed to suspend and withdraw your ESPP contributions if you make the request no later than the last day of the second month of the offering period. For example, you could suspend and withdraw your ESPP contributions for Q4 if you make your request by November 30th.
Only select executives are eligible to participate in the Deferred Compensation plan. December is Open Enrollment for 2021 salary (you can elect to defer up to 75%), and June 2021 is Open Enrollment for the September 2022 bonus (you can defer up to 100%). Please let us know if you are eligible for the Deferred Compensation Plan, and we can help you to review the pros and cons of participation. We can help you to decide on upcoming elections and also review your existing payout elections. Scheduled distributions can be delayed, but it must be pushed out at least five years and the re-deferral election must be made at least 12 months prior to the scheduled distribution date. If you participate in Deferred Comp, you should also revisit your elections for the 401(k) and ESPP to make sure that you are maxing out your contributions to all plans. Withholding elections for 401(k) and ESPP apply only to income that you have not deferred.
Reviewing Your Elections
As you can see, Microsoft employees enjoy a wide range of financial benefits. If you have questions about which elections are right for you or how they best fit with your tax and financial planning, your Paracle advisor can help.
Paracle Personal Financial Management is an independent financial planning firm founded in 2004 with an honest desire to help people optimize their finances by providing unbiased financial planning and investment advice that puts their clients first. Paracle specializes in delivering expert, comprehensive wealth management services to busy families. Their expertise integrates financial planning with investment management to ensure their clients experience confidence in every aspect of their plan so they can focus on what matters most. To learn more about Paracle, connect with them on LinkedIn.