connecting ms office 365 to icloud

Yes. When you save the file, select an iCloud Drive location rather than a OneDrive location. You can do that in the Office File Save dialog (note that it includes iCloud Drive in the "On My Mac" locations).

You will need to have iCloud Drive turned on in your Mac. See: Set up iCloud Drive - Apple Support and Access and manage your files in iCloud Drive - Apple Support

I don't know if it might be related to whatever free option you may have.

The following is how it looks with my Microsoft 365 subscription:

If the Save dialog looks like this one, click the "On May Mac" button:

Then it should look like the following (or may have looked like this to begin with):

If there is no iCloud Drive option in the sidebar, either iCloud Drive is not setup or else go to Finder > Settings > Sidebar and put a check mark in front of iCloud Drive there.