The information about the Microsoft Deferred Compensation Plan has been updated for 2022.

The Microsoft Deferred Compensation Plan (DCP) is available to employees who are Level 67 and higher.

Deferred Compensation is an opportunity to save and invest dollars on a pre-tax basis, similar to your 401(k). Contributions to your DCP reduce taxable income in the year of the deferral and can be invested into a selection of investment options.

Eligible Microsoft employees can enroll in Microsoft DCP annually during the months of May and November.

An overview of the Microsoft DCP benefit that discusses important dates for Microsoft employees and walks throughan example of how DCP can potentially reduce your tax bill by thousands.

An overview on important considerations when enrolling in the Microsoft DCP. Gain insight into thinking through how much to defer, establishing a plan for cash-flow needs, your investment options, and structuring your payouts.

When Can You Enroll in Microsoft DCP?

There are only two times a year to enroll in this benefit. Both enrollment windows impact the next calendar year’s compensation.

  • May 1 – 31: Elect to defer up to 100% of next year’s bonus
  • November 1 – 30: Elect to defer up to 75% of next year’s salary

If you choose to defer a portion or all your bonus, you will see this deduction when your bonus is paid out on September 15th following the end of the upcoming fiscal year. This means you make the decision to defer your bonus about 16 months before you will receive it. Salary deferrals will start on January 1st and end on December 31st of the next calendar year. Both enrollment windows impact the next calendar year’s compensation.






What are Key Differences Between Microsoft DCP and Your 401(k)?

Like your 401(k), the Microsoft DCP is a vehicle to help defer taxable income and reduce current tax liabilities. The income you defer is invested over time and disbursed in retirement when you are in a lower tax bracket, if utilized properly.

With that being said, there are some key differences you should be aware of:

Chart showing the difference between the Microsoft 401k and DCP

Can Microsoft DCP Help Reduce Your Tax Bill?

You are compensated in three different ways as an employee of Microsoft: salary, cash bonuses, and stock awards. You have no control, from a timing or tax perspective, when it comes to your vesting shares. The market value on the day of the vest is recorded as income and taxed at ordinary income rates – just like your cash compensation. By utilizing DCP, you can control the percentage of salary and cash bonus that is taxed each year, significantly reducing your total taxable income. You decide when these deferrals are paid out to you and can maximize the benefit by having payouts occur when you are in a lower marginal tax bracket, most often in retirement.

Develop a Cash-Flow Plan for Living Expenses

RSUs vest multiple times per year and typically vary in amount each vest. As your Restricted Stock Units (RSUs) begin to vest, they are treated as income and are taxed, regardless of if you sell or hold on to the shares. Functionally, at the time of vest, it’s as if you were given cash and decided to use every dollar to purchase Microsoft stock.

We recommend you sell these shares immediately after you receive them and instead use the proceeds to help fund your cash flow. The proceeds can then be used to supplement your income stream which is reduced because of the income and cash bonuses you are deferring. Your Deferred Comp is invested in diversified investments, so rather than keeping your money tied up in Microsoft stock, you can broaden your portfolio. Once you’ve cashed out your RSUs, you can use any proceeds to cover living expenses or re-invest these dollars in a regular brokerage account.

What Investment Options are Available Within DCP?

There are 24 different investment options with DCP, the options are very similar to what you have with your 401(k). You will select your investment allocation at the time you make the deferral. You can make changes to how your dollars are invested at any time and have flexibility when deciding how to invest those dollars.

In our opinion, the investment options within DCP are more robust than what you will find within your 401(k). The BrokerageLink option is not available within DCP.

The dollars that you defer are not actually invested into the funds that you choose – Instead, Microsoft tracks the performance of your selected investment options and assumes the risk to pay out your contributions and the assumed earnings.

Should You Enroll in the Microsoft Deferred Compensation Plan?

If you are eligible, the Microsoft Deferred Compensation Plan is a great benefit that can help you reduce your tax bill by thousands, however, it is also one of the most complicated to implement and manage. It requires careful planning and monitoring to ensure current and future cash needs are met with considerations in place to reduce future tax liabilities.

Schedule a complimentary 30-minute Deferred Compensation strategy session.

We will talk through the following:

  • Strategies for reducing your taxes
  • Maintaining your cashflow to cover your lifestyle expenses
  • Developing a comprehensive payout strategy
  • Leveraging Microsoft DCP along with your other compensation benefits