Eric - if you didn't fix this already, did you try using your "onmicrosoft" userid? I was having the same problem/error msg as you. Then I used my dan@<domain>.onmicrosoft.com as the userid with the same settings you have above, and it worked. I had initially been using the default gmail-populated "pop.<domain>.onmicrosoft.com" address as the POP server, but your post got me past that one.
Just thought I'd share.