Building Identity Federation with SAML Azure AD

Overview

Identity federation enables users authenticated by one identity provider to access resources managed by another without maintaining separate credentials. This skill covers establishing SAML 2.0 federation between an organization's on-premises Active Directory (via AD FS or third-party IdP) and Microsoft Entra ID (formerly Azure AD), as well as configuring federated SSO for third-party SaaS applications. Federation eliminates password synchronization concerns and keeps authentication authority on-premises while extending SSO to cloud resources.

Prerequisites

On-premises Active Directory domain
AD FS 2019+ or third-party SAML IdP (Okta, Ping, etc.)
Microsoft Entra ID tenant (P1 or P2 license recommended)
Azure AD Connect (if using hybrid identity with password hash sync as backup)
Public TLS certificate for federation endpoint
DNS records for federation service name

Core Concepts

Federation Models

Model	Authentication Authority	Use Case
Federated (AD FS)	On-premises AD FS	Regulatory requirement to keep auth on-prem
Managed (PHS)	Azure AD with password hash sync	Simplest cloud auth, AD FS not needed
Managed (PTA)	On-premises via pass-through agent	Cloud auth validated against on-prem AD
Third-Party Federation	External IdP (Okta, Ping)	Multi-IdP environment

SAML Federation Architecture

User → Cloud App (SP)
   │
   └── Redirect to Azure AD
          │
          ├── Azure AD checks federated domain
          │
          └── Redirect to on-premises AD FS
                 │
                 ├── AD FS authenticates against Active Directory
                 │
                 ├── AD FS issues SAML token
                 │
                 └── Token posted back to Azure AD
                        │
                        ├── Azure AD validates federation trust
                        │
                        ├── Azure AD issues its own token
                        │
                        └── User receives access token for cloud app

Federation Trust Components

Component	Description
Token-Signing Certificate	X.509 certificate used by IdP to sign SAML assertions
Federation Metadata	XML document describing IdP endpoints and capabilities
Relying Party Trust	Configuration in AD FS for each SP (Azure AD)
Claims Rules	Transform AD attributes into SAML claims
Issuer URI	Unique identifier for the IdP (entity ID)

Implementation Steps

Step 1: Prepare AD FS Infrastructure

# Install AD FS role
Install-WindowsFeature ADFS-Federation -IncludeManagementTools

# Configure AD FS farm
Install-AdfsFarm `
    -CertificateThumbprint $certThumbprint `
    -FederationServiceDisplayName "Corp Federation Service" `
    -FederationServiceName "fs.corp.example.com" `
    -ServiceAccountCredential $gmsaCredential

# Verify AD FS is operational
Get-AdfsProperties | Select-Object HostName, Identifier, FederationPassiveAddress

Step 2: Configure Azure AD Federated Domain

# Install Microsoft Graph PowerShell module
Install-Module Microsoft.Graph -Scope CurrentUser

# Connect to Microsoft Graph
Connect-MgGraph -Scopes "Domain.ReadWrite.All"

# Convert managed domain to federated
# Using AD FS federation metadata URL
$domainId = "corp.example.com"
$federationConfig = @{
    issuerUri = "http://fs.corp.example.com/adfs/services/trust"
    metadataExchangeUri = "https://fs.corp.example.com/adfs/services/trust/mex"
    passiveSignInUri = "https://fs.corp.example.com/adfs/ls/"
    signOutUri = "https://fs.corp.example.com/adfs/ls/?wa=wsignout1.0"
    signingCertificate = $base64Cert
    preferredAuthenticationProtocol = "saml"
}

# Apply federation settings to domain
New-MgDomainFederationConfiguration -DomainId $domainId -BodyParameter $federationConfig

Step 3: Configure AD FS Claims Rules

# Add Relying Party Trust for Azure AD
Add-AdfsRelyingPartyTrust `
    -Name "Microsoft Office 365 Identity Platform" `
    -MetadataUrl "https://nexus.microsoftonline-p.com/federationmetadata/2007-06/federationmetadata.xml"

# Configure claim rules
$rules = @"
@RuleTemplate = "LdapClaims"
@RuleName = "Extract AD Attributes"
c:[Type == "http://schemas.microsoft.com/ws/2008/06/identity/claims/windowsaccountname",
   Issuer == "AD AUTHORITY"]
=> issue(store = "Active Directory",
   types = ("http://schemas.xmlsoap.org/claims/UPN",
            "http://schemas.xmlsoap.org/ws/2005/05/identity/claims/emailaddress",
            "http://schemas.xmlsoap.org/ws/2005/05/identity/claims/givenname",
            "http://schemas.xmlsoap.org/ws/2005/05/identity/claims/surname"),
   query = ";userPrincipalName,mail,givenName,sn;{0}",
   param = c.Value);

@RuleTemplate = "PassThroughClaims"
@RuleName = "Pass Through UPN as NameID"
c:[Type == "http://schemas.xmlsoap.org/claims/UPN"]
=> issue(Type = "http://schemas.xmlsoap.org/ws/2005/05/identity/claims/nameidentifier",
   Issuer = c.Issuer, OriginalIssuer = c.OriginalIssuer,
   Value = c.Value,
   ValueType = c.ValueType,
   Properties["http://schemas.xmlsoap.org/ws/2005/05/identity/claimproperties/format"]
       = "urn:oasis:names:tc:SAML:2.0:nameid-format:persistent");
"@

Set-AdfsRelyingPartyTrust `
    -TargetName "Microsoft Office 365 Identity Platform" `
    -IssuanceTransformRules $rules

Step 4: Configure Third-Party SaaS Federation

For each SaaS application that supports SAML SSO via Azure AD:

Navigate to Microsoft Entra Admin Center > Enterprise Applications
Add the application from the gallery (or create custom SAML)
Configure Single Sign-On > SAML:
- Identifier (Entity ID): Application's entity ID
- Reply URL (ACS): Application's assertion consumer service URL
- Sign-on URL: Application's login URL
Map user attributes/claims:
- NameID: user.userprincipalname (email format)
- Additional claims as required by the application
Download the Federation Metadata XML or certificate
Configure the SaaS app with Azure AD's federation details

Step 5: Certificate Lifecycle Management

AD FS token-signing certificates expire and must be renewed:

# Check current certificate expiration
Get-AdfsCertificate -CertificateType Token-Signing | Select-Object Thumbprint, NotAfter

# AD FS supports auto-rollover (enabled by default)
Get-AdfsProperties | Select-Object AutoCertificateRollover

# If manual rotation is needed:
# 1. Add new certificate as secondary
Set-AdfsCertificate -CertificateType Token-Signing -Thumbprint $newThumbprint -IsPrimary $false
# 2. Update Azure AD with new certificate
# 3. Promote to primary
Set-AdfsCertificate -CertificateType Token-Signing -Thumbprint $newThumbprint -IsPrimary $true
# 4. Remove old certificate
Remove-AdfsCertificate -CertificateType Token-Signing -Thumbprint $oldThumbprint

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