Tips for Microsoft Open Enrollment

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, although 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. For 2024, we recommend electing to make a lump sum contribution in January (or the early months of the year) for the maximum amount). Then, we advise paying your medical expenses out-of-pocket to allow the HSA funds to grow tax-free.

Between health coverage, claims, and company HSA funding, more than 90% of health care costs for employees and their families are covered by Microsoft. 100% of the cost of qualified in-network care as well as all covered in-network claims that exceed the out-of-pocket maximum.

The annual family limit for 2024 has increased to $8,300 while individuals can contribute $4,150 (including the employer matching contribution). For more details on the benefits of an HSA, see our article Save More for Retirement with Your Health Saving Account.

Dental and Vision Flexible Spending Account

This type of account can be beneficial if you anticipate some large expenses (e.g., braces or LASIK), otherwise, most people find it to be more hassle than it’s worth for the small expenses. The contribution limit is $3,050 per year, you must incur the expenses before December 31, 2023, and submit your claim no later than March 31, 2024. Up to $610 of unused funds can be carried forward to the following year, but any unused funds over this amount will be forfeited. You should schedule any year-end appointments now if you think you will have more than this left in the account from the previous year.

Life Insurance

During Open Enrollment, you can add or change your group life insurance coverage. Microsoft pays for coverage equal to 3x your annual base salary, and you can elect to add coverage up to 10x your pay. 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 your base salary during Open Enrollment (up to $750,000).

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.

Wellbeing Benefits

Perks+ is one of the many wellness benefits available to Microsoft employees. With this benefit, Microsoft will reimburse up to $1,500 annually for employee-only wellness-related expenses. Qualifying expenses include gym memberships, fitness classes, meditation, weight loss programs, massages, and even financial advising and debt management support.

Additional wellbeing benefits include a 24-Hour nurse line, tobacco cessation programs, mammograms, free on-site flu shots, and more. The Redmond campus even includes services such as preventative care, physical therapy, and a full-service pharmacy.

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. This can also be a 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 $23,000 for 2024, plus an additional $7,500 for those who will be 50 or older by the end of 2024.

After-Tax 401(k)

Your plan offers after-tax contributions for the 401(k).. 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 you maximize your after-tax contributions and convert at least 1x a year once you have reached the annual maximum. Note, balances can be converted as often as 1x per quarter and done automatically. However, we do not recommend the automatic Roth conversion offered by the plan. Note, balances converted automatically keep your funds locked inside the Microsoft plan where you have limited investment choices.

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 you max out the ESPP and sell your shares each quarter. You can then use the proceeds to supplement your lower monthly take-home pay or add to your diversified portfolio.

Note: if you hit the annual maximum and continue contributing during that quarter, Microsoft will continue to withhold for the remainder of the quarter, but will refund the excess after a few months. The exception to this is in the quarter following an annual max out, where 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.

Tip: 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 30^th.

Your Coldstream team can help you determine your optimal contribution percentage to minimize excess ESPP withholding.

Deferred Compensation

Select executives at level 67 or higher are eligible to participate in the Deferred Compensation plan. The month of November is Open Enrollment for next year’s salary (you can elect to defer up to 75%), and next May is Open Enrollment for next September’s 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 review the pros and cons of participation. We can also help you decide on upcoming elections and review your existing payout elections.

Note: 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 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, there are a wide range of financial benefits available to Microsoft employees. 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 is here to help.

What is New?

As the IRS has adjusted their minimum deductibles, the HSP will have a slightly higher deductible and out-of-pocket maximum next year. The IRS has also increased HSA contribution limits, meaning that pre-tax HSA contribution limits are increased for you to contribute.

In late December, Premera HSP members will receive a new ID card that goes into effect in January of 2024.

DISCLOSURES
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.