Microsoft RSUs & ESPP

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.

Microsoft stock is an integral part of your compensation package and something you need to develop a plan for to help accomplish your financial goals.

What are RSUs?

Stock awards make up a large portion of total compensation for many employees at Microsoft. Stock awards may be distributed as part of a hiring package, as part of annual compensation, or merit based and are given as what are called Restricted Stock Units.

If you’re looking for a basic foundation on RSUs at Microsoft and elsewhere, consult our blog post on RSU fundamentals and FAQs.

When do Microsoft employees receive RSUs and when do they vest?

On-hire stock awards – these typically vest 25% per year over four years, with one vest annually on your employment anniversary. Generally, your on-hire stock award shares will not vest until one year after employment starts.

Annual stock awards – each August, Microsoft employees are also eligible to receive new stock awards. If you started early in the year, you could receive your first stock award in August, with the first tranche of that award vesting in November.  These stock awards vest over five years (20% per year), on a quarterly basis. An easy way to remember when your annual stock awards are vesting is to use an acronym called FMAN (February, May, August, and November).

There are also special and leadership stock awards that are typically offered to exceptional employees or those in management positions. These awards typically have a different vest schedule than the regular annual review awards.

At the point when RSUs vest, your custodian, sells some of the stock to mitigate the taxes you would regularly owe on the new compensation. This is at least 22% (which is the federal default minimum) and can be as high as 37% in 2021.

Typically, employees let their stock grants accumulate in their investment accounts while covering expenses through their salary. We encourage you to flip this thinking. By living off of vesting shares of stock, you gain cash-flow flexibility and can then take advantage of the many tax-preferred benefits available to you through pay check deductions. Restricted Stock Units vest multiple times per year and can vary significantly in amount each time. We can work with you to organize and plan your cash flows in order to implement many of these tax-saving strategies.

What is an ESPP?

Employee Stock Purchase Plans allow employees to have the option of setting aside some of their paycheck for buying Microsoft stock. If you’re learning about ESPPs for the first time, you can read more in our in-depth article on whether or not to participate in your company’s ESPP.

The ESPP benefit allows Microsoft employees to purchase shares of Microsoft stock at a discount to its stock price. Your contributions to this program, come from payroll deductions, much like your 401(k) contributions. However, unlike pre-tax 401(k) contributions, ESPP contributions are taken out on an after-tax basis. At Microsoft, you can defer up to 15% of your salary and let the cash build up during the course of each calendar quarter. At the end of the quarter, these funds purchase shares of MSFT at a 10% discount to Fair Market Value. It seems straight-forward, and yet each time shares are purchased, they have a different holding period with varying rates of tax and consequences to review. Microsoft employees who do not qualify to contribute to the Deferred Compensation plan might want to consider participating in the program.

When can stock be purchased?

Microsoft determines pre-set dates on which an employee’s funds can be used to purchase stock at a discount from market price.

Let’s Walk Thru an Example of How ESPP Works:

Once the shares are delivered to you, investors are allowed to sell the shares immediately, and we recommend you do so in order to limit your exposure to the fluctuations of Microsoft stock price. If you sell the shares as soon as they are purchased, you can achieve a solid return on the investment each quarter.

For example, if the Microsoft stock price at the end of the quarter is $100 per share, whatever amount you contribute to the ESPP program through payroll deductions, is used to purchase Microsoft shares at a 10% discount, or in this case, $90 per share.

If you contributed the maximum amount you would purchase approximately 63 shares of stock. You could then turn around and sell the shares on the open market for $100 per share. This leaves you an immediate economic gain of over $600 per quarter or about $2,400 per year. You pay tax on this amount at your highest marginal tax rate but you get to keep the remainder.

We prefer that our clients go ahead and sell their shares immediately to recognize that nearly (emphasis on nearly) risk-free return on the investment rather than hold the shares for the long term.

MORE MICROSOFT INSIGHTS

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. If you are a Level 67 or higher employee at Microsoft, visit our Microsoft Deferred Compensation Plan page./p>

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MICROSOFT 401(K)
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