Microsoft Corporation Deferred Compensation Plan

Understand The Capability Of The Microsoft Deferred Compensation Plan

A beneficial tax planning strategy is available for high-income earners Level 67 or higher at Microsoft through Microsoft’s Deferred Compensation Plan (DCP). This plan allows high-income earners to shift income earned in years where they might be in higher tax brackets to years when they will hopefully be in lower tax brackets. The DCP can be very complex, and it is advised that you talk to a financial planner to discuss all of the benefits and options available to you.

The funds you elect to defer in Microsoft’s DCP differ from those you contribute to your 401(k). These fund contribution elections cannot be made at any time as a Microsoft employee can do with their 401(k). Instead, there are two windows that Level 67 and above employees must make a DCP election. The first widow is May 1-31. During this window, a Microsoft employee may elect to defer up to 100% of their next year’s September cash bonus. The second window is November 1-30. During this window, a Microsoft employee may elect to defer up to 75% of their salary. Once funds are placed into the Deferred Compensation Plan, they can be invested and grow tax-deferred. Microsoft gives several different investment options for the Deferred Compensation Plan similar to those found in Microsoft’s 401(k). While the funds are not actually invested, Microsoft tracks the performance of the investment options as if the funds were invested and assumes the risk of paying out the DCP contributions and earnings (known as a “deemed investment”). With these funds out of your annual income, you will pay less in taxes in the current year and shift the income to later years when you are taxed at lower rates. This will decrease your lifetime tax bill and keep more of your hard-earned cash in your pocket.

Before making elections during this window, Microsoft employees will want to look at their family’s cash flows and expenses to ensure they are not deferring too much or too little to the Deferred Compensation Plan. You can supplement your cash flow with different methods, such as cashing out your RSUs when they vest or drawing on after-tax investment assets to keep your tax bill down. Again, we recommend sitting down with a financial planner to prioritize these tax benefits and cash flow needs before making your Deferred Compensation Plan election.

Once you have stored money in your Deferred Compensation Plan, Microsoft gives you several methods to pull the funds out. The most common methods are either to take a lump sum distribution of your Deferred Compensation contributions or to receive the funds over a 3-to-15-year installment plan. Money that is distributed from the Deferred Compensation Plan is taxed as ordinary income. If the lump sum method is chosen, the funds can be rolled into a Traditional IRA account and continue to grow tax-deferred until the funds are withdrawn. This method allows for even more tax planning solutions focused on distribution timing, RMDs, and QCDs.