Microsoft's Deferred Compensation Plan lets employees at stock level 67 and above defer up to 75% of base salary and 100% of annual bonus into a future year. It pays off when the money comes back in a lower bracket than it left, and the salary election for next year closes at the end of November.

Key takeaways

The Microsoft DCP is open to US employees at stock level 67 and above, and an eligible employee can elect to defer up to 75% of annual base salary and up to 100% of annual bonus, in 1% increments, under the plan document filed with the SEC.
Deferred pay comes back as ordinary income, either as a lump sum or in 3 to 15 annual installments, at a date you pick or at separation from service, and that choice is locked unless you push it out at least five years with twelve months' notice.
The account is an unfunded, unsecured promise: the plan document states that participants have “an unsecured claim against the general assets of the Company,” which is the price of deferring without a 401(k)-style limit.

Who is eligible for the Microsoft DCP and what can be deferred?

US employees at stock level 67 and above, and the plan takes base salary and bonus. Microsoft's benefits page describes the DCP as “a non-qualified supplemental savings plan for U.S. employees at stock level 67 and above only.”

The plan document, filed as Exhibit 10.5 to Microsoft's annual report and amended and restated effective April 1, 2024, sets the limits: up to 75% of annual base salary and up to 100% of an annual bonus, elected in 1% increments. Compare that with the 2026 401(k) limit of $24,500, or $32,500 at age 50 and above. A Principal deferring half of a $300,000 salary moves $150,000 of this year's wages into a later year. That scale is the whole appeal.

I see the same misunderstanding every November: people treat the DCP as a bigger 401(k). It is not. A 401(k) is your money in a trust. The DCP is Microsoft's promise to pay you later.

When do I have to decide, and can I undo it?

Before the year the pay is earned, and no. Federal tax law (Section 409A) requires a deferral election to be made “not later than the close of the service provider's taxable year next preceding the service year.” Microsoft's plan follows that rule: elections are made “during an Open Enrollment period that occurs in the Plan Year preceding the Plan Year in which the Regular Enrollment Compensation begins to be earned,” and the election is irrevocable.

In practice, advisors who work with Microsoft employees describe two windows: November 1 to 30 for next year's salary, and May 1 to 31 for the bonus paid the following September. Miss November and the next chance to defer salary is a year away.

The law is strict because the deferral is the tax benefit. If a plan fails the 409A rules, all deferred amounts become taxable at once, plus an additional tax equal to 20% of that income, plus interest. That is why nothing about your election is flexible.

How much can deferring actually save?

The saving is the difference between your bracket now and your bracket when the money is paid. For 2026, the 37% federal bracket starts at $640,600 for single filers and $768,700 for married couples filing jointly. The 24% bracket runs up to $211,400 for married couples, and the 32% bracket up to $403,550.

Take Robert, 61, a Principal at Microsoft in Seattle, married, two years from retirement. His household income lands in the 37% bracket. He defers $150,000 of 2027 salary and elects ten annual installments starting the year after he separates. In the deferral year, that $150,000 would have cost $55,500 in federal income tax at 37%. In retirement, with household income around $300,000 before the installments, each $15,000 installment is taxed at 24%: $3,600 a year, $36,000 over the ten years. One year's deferral saves about $19,500 in federal tax, before growth.

One year of deferral, illustrative

Take the $150,000 now

Marginal federal bracket when taxed: 37%
Federal income tax on the $150,000: $55,500
When the tax is paid: 2027
Who holds the money meanwhile: you

Defer, 10 installments in retirement

Marginal federal bracket when taxed: 24%
Federal income tax on the $150,000: $36,000
When the tax is paid: spread over ten years after separation
Who holds the money meanwhile: Microsoft, as an unsecured promise

Repeat that for five working years and the cumulative difference is six figures. Washington has no state income tax on wages, so for a Seattle employee the federal arbitrage is the whole story, unless the retirement address changes (more on that below).

What do I give up by deferring?

Four things, and each one has caught someone I know.

Security. The plan document says it plainly: “The Company's obligation under this Plan shall be that of an unfunded and unsecured promise to pay money in the future,” and participants have “an unsecured claim against the general assets of the Company.” If the employer that already pays your salary and issued your RSUs cannot pay, you stand in line with its other creditors. The risk feels remote. It is still the risk you are being paid for.

Control of the payout. You pick the schedule when you defer, and changing it is deliberately hard: a new election cannot take effect for twelve months, and it must push the first payment at least five years later than it would otherwise have been. “I'll decide later” is not an option the plan offers.

Bracket certainty. The honest reply to “is DCP worth it?” on Blind was this: unless you actually retire, you will likely still be in a high bracket when you leave, and the deferred comp lands on top of your next salary. A separation-from-service payout that arrives while you are earning at a competitor is deferral with no arbitrage. Growth inside the account is also taxed at your ordinary rate when paid, not at long-term capital gains rates, the trade you make against investing the same dollars in a taxable account after paying tax now.

Your address. Washington taxes no wages. If the installments arrive while you are a resident of California or another income-tax state, that state taxes them as resident income under its own rules. The $19,500 federal saving in the example can shrink fast once a state rate is added to the payout years.

How does the DCP fit with Roth conversions and RSU sales?

Think of the DCP as the mirror image of a Roth conversion. A conversion moves income earlier, into a low-bracket year, because the money will be taxed at a higher rate later. A deferral moves income later, out of a high-bracket year, because it will be taxed at a lower rate then. Both only work if the low-bracket years actually exist and are not already spoken for.

That is where I see plans collide. Someone defers five years of salary into the first ten years of retirement, then plans Roth conversions for those same years, then sells down the RSU position across them too. Together they fill the 24% bracket three times over, and the low-bracket window that justified all three never shows up. We wrote about a Microsoft sabbatical that became a Roth conversion window and about how a Microsoft manager turned RSUs into retirement at 50; the common thread is that the bracket is a shared resource, and the payout schedule you choose in November is one of the claims on it. Where the money lands afterward matters as well; see which account your RSU proceeds should live in.

What should a level 67 employee check before November 30?

Project the payout years, not just the deferral year. Write down the household income you expect in each year the installments would arrive, including RSU sales, Roth conversions, a spouse's salary and, later, Social Security and required distributions. The deferral is worth the gap between your bracket now and your bracket then, and only that gap.
Choose the schedule as if you cannot change it. You effectively cannot, short of the twelve-month, five-year redeferral rule. A specified date works for people with a clear retirement year. Separation from service works for people who may leave sooner than planned, as long as they can afford the payout landing on a new salary.
Size the deferral against cash flow and concentration. Deferring 50% of salary while RSUs vest means living on the vest, and it ties more of your net worth to one employer's stock and credit at the same time.
Check the state you expect to live in when the payments arrive. If it has an income tax, add that rate to the payout-year math before deciding.

The bottom line

The Microsoft DCP is a bracket play. It wins when a large, irrevocable slice of today's 37% income is paid out in years you have reason to believe will be taxed at 24% or less, and it loses when those years turn out to be full. The November window decides next year's salary; the payout schedule you attach to it decides the next decade.

If you are at level 67 or above and want the payout years modeled against your RSU and Roth plans before the window closes, that is exactly the kind of analysis we do, and then we file the elections with you. Alphanso Inc is a flat-fee fiduciary wealth advisory for employees with equity compensation (RSUs, ISOs, NSOs and ESPP); advisors are paid a flat annual fee, never a percentage of assets or commissions. Book a call or see the flat annual fee.

FAQ

Can I take money out of the Microsoft DCP early if I need it? Only for an “Unforeseeable Emergency” as the plan defines it, and only the amount needed to meet the emergency plus the tax on it. A withdrawal of that kind also cancels your deferrals for the rest of that plan year. There is no loan feature and no ordinary early withdrawal.

What happens to my deferred compensation if I leave Microsoft for another company? It is paid on the schedule you elected. If you chose separation from service, the installments or lump sum start after you leave (for certain key employees, no earlier than six months after separation) and land on top of whatever you earn next. If you chose a specified date, that date still governs.

Is deferred compensation taxed as ordinary income or capital gains? Ordinary income, in the year each payment is made, including any growth credited to the account. The deemed investment menu determines how the balance grows, but it does not change the character of the income when it is paid.

Does the 3.8% net investment income tax apply to DCP payouts? Generally no. The payouts are wages for tax purposes rather than investment income, so they are not themselves subject to the 3.8% tax, although they raise your income for the year, which can push other investment income over the thresholds.

How is the DCP different from the Microsoft 401(k)? The 401(k) is a qualified plan: your contributions sit in a trust that is yours regardless of what happens to Microsoft, and the 2026 limit is $24,500 plus catch-up. The DCP has no comparable dollar cap, but the balance is an unsecured promise from Microsoft and the payout schedule is fixed when you elect it.

This content is for educational purposes and does not constitute personalized financial, tax or legal advice. Tax services are for educational purposes and do not constitute legal advice. Registration does not imply a certain level of skill. Alphanso Inc.