How to Maximize Your Microsoft ESPP

Our team always aims to maximize the value from the unique employer benefits provided to our clients. This is because employer benefits are low-cost (or free) and can be very tax-efficient, so why not? This article is going to focus on one of the most under-utilized benefits offered to Microsoft employees, the Employee Stock Purchase Program or ESPP.

How Does ESPP Work?

The Microsoft ESPP is an account established through your employer. Every year you’re able to contribute a maximum 15% of your cash compensation, up to an IRS limit of 25k for 2022, via payroll deductions. Those deductions are then deposited into an account, and each quarter the accumulated funds are then used to purchase Microsoft shares. The day this window opens is called the offering date and the day this window closes is called purchase date. 

What are the Benefits? 

Price Discount: The #1 benefit of Microsoft ESPP plan is that you receive a discount on the stock price. Microsoft’s discount is 10% off the fair market value. Meaning, if you purchase the full $25k limit of stock, that is an immediate benefit of $2500/year!

Microsoft ESPP discount example: If MSFT is trading at $280 on the date of purchase. Microsoft will purchase as many shares as they can at $252 with the savings you accumulated over the previous quarter and then immediately deposit the shares into your investment.

Savings Strategy: For those who have trouble budgeting or meeting your annual savings goal, this is a good way to save a substantial amount with a maximum Microsoft ESPP limit of $25k/year. If the money is automatically being deducted from your paycheck and deposited into an investment account for you, it’s one less step for you to make. After all, money out of sight is out of mind.

Considerations

Employer benefits often resemble snowflakes in that each benefit package is one of a kind, designed specifically by the employer to cater to their employees. Some employers do not offer a lookback provision or a discount. Some employers may not offer the ESPP at all. 

Lookback Provision: This doesn’t apply to Microsoft employees; however, some employers will offer what’s called a lookback provision, which means the company will compare the price of the stock on the offering date and the price of the stock on the purchase date. They will then purchase the stock at the lower price of the two, before applying your discount.

Example 10% discount: if MSFT is currently trading at $280 on the purchase date but was trading at $250 on its offering date. The lookback provision means your discount of 10% would be on the $250, not the current $280 price. If you receive a 10% discount on the lower price in this example, that would make your cost $225 when the stock is currently trading at $280; A 24% instant gain simply for saving your money; double win!

Microsoft employees are often compensated in employer stock. Saving in an ESPP can increase the risk of an already concentrated position. It’s generally recommended to sell ESPP stock to diversify your investments. You should have a plan in place before beginning contributions into an ESPP. 

If you plan to take advantage of your Microsoft ESPP, be aware that there are tax consequences based on the ESPP offering window and how long the stock is held. These timelines will determine whether your sale is considered a qualifying or disqualifying disposition as follows:

A qualifying disposition means that the stock sale must meet two pieces of criteria to get favorable tax treatment. 

1) That the stock is held for 1 year from the date the stock is purchased. (Each time your ESPP purchases shares will begin a new countdown for that specific lot.) and…

2) The stock is held for two years from the beginning of the initial offering date.

If your sale meets the qualifying disposition requirements, you will pay income taxes on the spread between the fair market value & purchase price, on the initial offer date. Capital gains tax rates, which are typically more favorable, apply to the remainder of the sale proceeds. 

If your sale is classified as a disqualifying disposition, you will pay ordinary income tax rates on the spread between the fair market value & purchase price, on the purchase date. Similarly, capital gains tax rates will apply to the remainder of the sale proceeds. 

Consult with your tax adviser and financial planner if you have questions. Feel free to contact Consilio Wealth Advisors if you’re looking for a financial planning firm that specializes in working with technology professionals, with unique equity compensation. 

Disclosures: 

Consilio Wealth Advisors, LLC (“CWA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CWA and its representatives are properly licensed or exempt from licensure.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status, or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

The above targets are estimates based on certain assumptions and analyses made by the advisor. There is no guarantee that the estimates will be achieved.

Risk associated with equity investing includes stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions.

For additional information, please visit our website at www.ConsilioWealth.com.