October 29, 2021

Tips for Microsoft Open Enrollment

In Employer-Provided Benefits, Wealth Strategy

Claudina Campbell
Contributions from: Claudina Campbell, CFP®

Open Enrollment at Microsoft begins in early November.  The following is a summary of elections to consider, and as always, please reach out to your Coldstream advisory team if you have questions.

HSA (Health Savings Account)

If you choose an HSA eligible health plan, you can modify your HSA elections at any point during the year, but we recommend that you make your election during Open Enrollment.  You may elect to contribute to your HSA either by a per pay period amount or lump sum amount.  Our recommendation for 2022 is to elect to make a lump sum contribution in January for the maximum amount (~$4,800 for a family, plus an additional $1,000 if you will be turning 55 or older in 2022).  Then, we’d advise paying medical expenses out-of-pocket to allow the HSA funds to grow tax-free.  In January when the funds are deposited to your HSA, we will follow up to confirm they are invested properly.  The annual limit for a family has increased to $7,300 and individuals can contribute $3,650 for 2022 (including the employer matching contribution).  For more details on the benefits of an HSA, see our Perspectives article Save More for Retirement with Your Health Saving Account.

Dental and Vision Flexible Spending Account

We find that this can be beneficial if you anticipate some large expenses such as braces or LASIK.  Otherwise, most people find it to be more hassle than it’s worth for the small expenses.  You are limited to $2,850 per year, must incur the expenses by December 31, 2022, and submit your claim no later than March 31, 2023.  Up to $570 of unused funds can be carried forward to the next year and any unused funds in excess of this are forfeited, so you do not want to risk over-funding.  Also, if you have not used all of your funds from 2021, make sure you plan ahead to ensure you don’t lose those funds.  You can carry over just $550 from 2021 to 2022, so schedule any year-end appointments now if you think you will have more than this left in the account for 2021.

Life Insurance

During Open Enrollment, you can add or change your group life insurance coverage.  Microsoft pays for coverage equal to 2x annual base salary, and you can elect to add coverage up to 10x pay (with a $2.5M maximum).  This is an easy way to obtain life insurance, but it is not always the most cost effective and is not portable if you leave Microsoft.  On the other hand, you will not need to show evidence of insurability if you only request to increase coverage by 1x base salary during Open Enrollment.

Group Legal Plan

While we do not find the group legal plan to be useful for offsetting estate planning costs, it can be useful for other small legal needs.  As an added benefit, it provides you access to the Life Lock credit monitoring services and $1M in identity theft insurance.

401(k) Elections

You can change your 401(k) elections at any time, but Open Enrollment is always a good time to review current elections to make sure they still meet your needs.  Also, there may still be time to make any necessary withholding changes if you are not on-track to max-out the 401(k) by the end of the year.  The Microsoft 401(k) plan allows you to convert any existing pre-tax balances to a Roth within the 401(k) plan.  Unlike after-tax contributions, any Roth conversions on pre-tax contributions will be taxed at your marginal tax rate.  For this reason, we are unlikely to recommend Roth conversions on your pre-tax or employer-matching contributions.

Pre-Tax or Roth 401(k)

In general, we recommend the Pre-Tax 401(k) option versus the Roth 401(k) to lower your current taxes.  The combined annual limit for these plans is expected to increase to $20,500 for 2022, plus an additional $6,500 for those who will be 50 or older by the end of 2022.

After-Tax 401(k)

Your plan offers after-tax contributions for the 401(k) with an annual limit of $30,250 for the 2022 calendar year.  This is in addition to the pre-tax or Roth contribution limits, and is an extremely rare opportunity for you to invest money that could grow tax-free.  This is because the contributions made in the after-tax plan are eligible for conversion to your Roth IRA.  We recommend that you maximize your after-tax contributions and note that these balances can be converted as often as 1x per quarter, but we recommend that you convert at least 1x a year once you have reached the annual maximum.  We do not recommend the automatic Roth conversion offered by the plan because that will keep your funds locked inside the Microsoft plan where you have limited investment choices.  Given that the opportunity to roll after-tax dollars to a Roth IRA could be closed with the next tax laws currently under negotiation in Congress, we recommend completing Roth conversions on any after-tax balances as soon as possible.

ESPP (Employee Stock Purchase Plan)

Microsoft offers you a 10% discount on the purchase of Microsoft shares.  You can contribute up to 15% of total cash compensation subject to the $25,000 annual IRS limit.  By fully participating in the ESPP plan, you are expected to come out ahead by approximately $2,500 per year, before taxes.  We typically recommend that you max out the ESPP and sell your shares each quarter.  You can use the proceeds to supplement your lower monthly take-home pay or add to your diversified portfolio.

Note that if you hit the annual maximum, Microsoft will continue to withhold for the remainder of the quarter, then take a few months to refund the excess.  However, the quarter following an annual max out, your contributions will be temporarily suspended and set to automatically resume in January at the previous contribution percentage.  Therefore, Open Enrollment is a great time to consider whether you want to change your withholding election for Q1 of next year.  Your Coldstream team can help determine your optimal contribution percentage to minimize excess ESPP withholding.  Also, if you have unanticipated cash needs, you are allowed to suspend and withdraw your ESPP contributions if you make the request no later than the last day of the second month of the offering period.  For example, you could suspend and withdraw your ESPP contributions for Q4 if you make your request by November 30th.

Deferred Compensation

Only select executives at level 67 or higher are eligible to participate in the Deferred Compensation plan.  November is Open Enrollment for 2022 salary (you can elect to defer up to 75%), and May 2022 is Open Enrollment for the September 2023 bonus (you can defer up to 100%).  Please let us know if you are eligible for the Deferred Compensation Plan and we can help you to review the pros and cons of participation.  We can help you decide on upcoming elections and also review your existing payout elections.  Scheduled distributions can be delayed, but must be pushed out at least five years and the re-deferral election must be made at least 12 months prior to the scheduled distribution date.  If you participate in Deferred Comp, you should also revisit your elections for the 401(k) and ESPP to make sure that you are maxing out your contributions to all plans.  Withholding elections for 401(k) and ESPP apply only to income that you have not deferred.

Reviewing Your Elections

As you can see, Microsoft employees enjoy a wide range of financial benefits.  If you have questions about which elections are right for you or how they best fit with your tax and financial planning, your Coldstream advisory team can help.

Coldstream analyses are not intended to provide, and should not be construed to constitute, complete accounting, insurance, investment, legal, or tax advice.  None of the information provided constitutes an opinion or recommendation or solicitation of any particular security or account.  The investment strategies and securities shown may not be suitable to you.  Coldstream does not provide any specific tax or legal advice; you should consult your tax, legal, or other advisors before implementing any changes to your current financial situation.

To ensure compliance with requirements imposed by the IRS, we inform you that any federal tax advice contained in this communication (including attachments) is not intended or written to be used and cannot be used for (1) avoiding penalties imposed under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein unless the communication contains explicit language that it is a tax opinion in compliance with IRS requirements.  Please contact your tax advisor for guidance on your individual situation.

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