At Avier, we often receive questions from Microsoft employees about the Microsoft Deferred Compensation Plan (DCP). This plan can be a powerful tool for higher-level employees to maximize retirement savings, reduce taxes, and strategically manage income. Below, we’ll break down the key questions we hear most often and what they mean for your financial future.

What is the Microsoft Deferred Compensation Plan? 

Think of the DCP as a “401(k) on steroids.” Eligible employees (typically level 67 and above) can defer a significant portion of salary and bonus into this plan. These dollars are invested, and distributed back to you in the future on a timeline of your choosing, while benefiting from tax deferral. Unlike a 401(k), which has strict annual contribution limits, the DCP allows you to defer up to 75% of your salary and 100% of your bonus, making it an attractive option for those seeking additional tax-advantaged savings. 

Is DCP Worth It? 

For many, the answer is yes. The ability to defer large amounts of income not only lowers your tax bill in the near term but also allows for long-term growth in a tax-deferred environment. If you’re eligible, it’s worth a serious look, especially as part of a broader tax and retirement strategy. 

Key Rules to Understand 

The 15/55 Rule 

If you’ve been at Microsoft for at least 15 years and are age 55 or older, you may be able to continue receiving unvested stock awards after retirement or departure (with some restrictions). This rule plays a major role in planning, as those additional stock awards represent income you’ll need to consider alongside DCP distributions. 

The Five-Year Rule 

You can adjust (or “re-defer”) your elections, but each change must push distributions out at least five years. For example, if you were scheduled to receive payments starting in 2030, you’d need to push them to 2035 or later. This flexibility is helpful if you anticipate still working or receiving other income when distributions were originally set to begin. 

What Happens If You Leave Microsoft? 

Deferred compensation elections remain intact when you leave the company. If you chose to receive distributions at specific times, they’ll still be paid according to that schedule. If you elected to receive them at termination, however, you’ll receive them all at once, which can create a tax spike. Thoughtful planning is key to avoiding unintended consequences. 

Risks and Limitations 

While the DCP has many advantages, it isn’t without risk: 

• Lack of liquidity: Once funds are deferred, you cannot access them early.  
• Unsecured liability: Deferred compensation is not protected like a 401(k). It is technically an unsecured promise by Microsoft. While the likelihood of a company like Microsoft failing is low, it’s not zero.  

Because of these factors, we generally advise against putting an outsized portion of your net worth into deferred compensation. Diversification – both in investments and tax strategies – is essential. 

DCP vs. 401(k): Which is Better? 

They serve different purposes: 

• 401(k): Provides company match, flexibility in withdrawals during retirement, and ERISA protections. Always max this out first.  
• DCP: Allows significantly higher contribution limits, which can create larger tax savings but comes with more restrictions and risks.  

In practice, the best strategy is often to fully fund your 401(k) first, then use the DCP as an additional tax planning tool. 

Can You Avoid Taxes with the DCP? 

Not entirely. The plan doesn’t eliminate taxes – it defers them. The advantage is paying them later, ideally in years when you’re in a lower tax bracket. For example, deferring $300,000 in income today could reduce your tax bill by more than $100,000, and if withdrawn in retirement at a lower bracket, you may pay substantially less in taxes than you would have otherwise. 

Final Thoughts 

The Microsoft Deferred Compensation Plan is a powerful benefit, but also a complex one. Rules like the 15/55 provision, the five-year rule, and the risks associated with unsecured liabilities make it essential to approach the DCP within the context of your overall financial plan. 

At Avier, we specialize in helping Microsoft employees navigate these decisions and design strategies that align with both immediate tax goals and long-term wealth-building. 

To see what kind of tax savings the DCP could provide for you, schedule a 30-minute call with one of our advisors below.