Microsoft Deferred Compensation Plan

Avier Wealth Advisors is not affiliated with Microsoft. While Avier communicates with its clients regarding their Microsoft employee benefits, and educates itself on the Microsoft Benefits, there is no guarantee that the information we have provided is accurate. Microsoft employees are encouraged to contact their employer should they have any questions regarding their specific employee benefits.

The information about the Microsoft Deferred Compensation Plan has been updated for 2023.

What is the Microsoft Deferred Compensation Plan?

The Microsoft Deferred Compensation Plan (DCP) is only available to employees who are Level 67 or higher. Your DCP contributions reduce taxable income in the year of the deferral. Similar to your Microsoft 401(k), DCP enables you to save and invest dollars on a pre-tax basis.

Important DCP Enrollment Dates

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

Microsoft DCP Can Help Reduce Your Tax Bill

We will walk through an example of DCP to demonstrate how it works. In this scenario our example employee has the following income sources:

  • Salary: $250,000
  • Cash Bonus: $112,500
  • Vesting MSFT shares: $400,000

If our example employee were to receive all of this income in a single year, their marginal dollars will be taxed in the highest income bracket. It could cause them to have a projected tax bill of $200,000 to $250,000. By maxing out their 401(k) contribution and using DCP to defer $150,000 – a combined percentage of their salary and cash bonus, they will pay approximately $55,000  less in taxes for the year. (This calculation is based on “married filing jointly”. If you file your taxes as an individual, the amount would be more.)

Many DCP participants reduce their tax bill by tens of thousands of dollars.

Schedule a Deferred Compensation Consultation

DCP is a powerful and complex benefit. It requires a significant amount of planning.  During this 30-minute call with one of our advisors, we will discuss:

  • Strategies for reducing your taxable income.
  • Maintaining cashflow to cover monthly expenses.
  • Developing a comprehensive payout strategy.

Lead Advisor | Partner

Lead Advisor | Director of Financial Planning

How Does the Microsoft Deferred Compensation Plan (DCP) Work?

First, it’s important to understand how you are compensated. As a Microsoft employee, you receive a salary, earn cash bonuses, and are given stock awards.

Salary and Cash Bonuses
With DCP, you can control the percentage of salary and cash bonus that you receive, and therefore taxed each year. This significantly reduces your total taxable income.

You decide when these deferrals are paid out to you. You can maximize the benefit by having payouts occur when you are in a lower marginal tax bracket, most often in retirement.

Stock Awards
You have no control, from a timing or tax perspective, when it comes to your vesting shares. On the day of the vest the market value is recorded as income and taxed at ordinary income rates – just like your cash compensation. This can mean a huge increase to your annual tax bill.

Decide How Much to Defer

We encourage you to defer as much of your salary and bonus as possible. Deferring some of this income will help reduce taxable income – it also means you will reduce your cash flow stream. We recommend you sell your RSUs as they vest and use the proceeds to supplement your cash flow.

There are a couple of reasons we encourage this strategy:

You can use the proceeds in place of the salary and bonus deferrals made with DCP. This helps maximize your ability to reduce taxable income.

Your deferrals can be invested in diversified investments, so rather than keeping your money tied up in Microsoft stock, you can reduce your concentration risk and diversify your portfolio exposure.

Cash Flow Planning

Living off the proceeds of your RSUs means that you’ll have several very large “pay days” throughout the year – you’ll need to manage your cash flow in between those “pay days” to ensure you have enough money to pay your bills.

Developing a custom plan that looks at your RSU vesting schedule and factors in the range of prices that your shares could vest at can help ensure you have the income you need now and in retirement.

Investment Options Within DCP

There are 24 different investment options available with DCP, the options are very similar to what you have with your 401(k). You will select your investment allocation each time you make a deferral election and have the flexibility to make changes to the allocation at any time. BrokerageLink is not an option 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. Known as “deemed-investment”.

Set Your DCP Distributions

You decide when you want to receive your payouts and can plan for that to occur when you’re in a lower marginal tax bracket (typically retirement).

Every time you make a deferral you must:

Decide when you want to receive your money and over what time frame.

Choose to receive money as a lump sum or over a 3 – 15-year installment plan.

Tax Planning for Your DCP Distributions

As money is distributed, the dollars are taxed as ordinary income. It’s important that you consider how much in taxes you’re willing to pay each year after your withdrawal begins and to structure the payouts accordingly.

When planning to receive your distributions, you need to consider future sources of retirement income:

The Microsoft 55/15 rule applies to employees who are at least 55 years old with at least 15 years of continuous service at the company (or are age 65).

When you meet these criteria, all stock grants, more than one year old, will continue to vest. You should try and avoid having your DCP distributions paid during this time because it will increase your taxable income.

Additional income from consulting or part-time employment.

Timing of your Social Security distributions.

Required Minimum Distributions from your IRA and 401(k).

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. There are some key differences to be aware of:

DECISION TO CONTRIBUTE Able to contribute any time. There are only 2 enrollment periods a year, May and November.
CHANGE YOUR DECISION Contribution changes can be made at any time. Deferrals are irrevocable once the enrollment period ends.
CONSUMER PROTECTION Money invested is governed by a federal law known as ERISA. If Microsoft were to go bankrupt, the funds in your DCP are an unsecured liability of the company.
PAY OUT FUNDS Able to receive funds at any time.

Must set DCP distributions at the time you make your election.

Changes are restricted to 5-year re-deferral rule.

$22,500 if you’re under 50
$30,000 if you’re 50 or older

Defer up to 75% of next year’s salary.

Defer up to 100% of next September’s cash bonus.


Schedule a Deferred Compensation Consultation

There is a significant amount of planning that is needed when deciding to enroll in DCP. You need to ensure your money comes out on time, at the right time, and in amounts that make sense for you.

During this 30-minute call with one of our advisors, we will discuss:

  • Strategies for reducing your taxable income.
  • Maintaining cashflow to cover monthly expenses.
  • Developing a comprehensive payout strategy.

Lead Advisor | Partner

Lead Advisor | Director of Financial Planning


For more information and advice from our Microsoft-focused advisors visit our main Microsoft page, or other pages focused on Microsoft Compensation and Miscellaneous Benefits , or Microsoft 401(k) & Retirement, or Microsoft RSUs and ESPP.






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