- Pre-tax spending has been around for decades, but many Americans don’t take advantage of it.
- The startup Alice is trying to help Americans get money back into their bank accounts, and the average annual savings are $US583.
- Alice connects to participating employers’ payroll systems, and it monitors employees’ expenses for pre-tax eligible items.
- Employees can save money on expenses related to childcare, ride-sharing, parking, prescriptions, and more.
A New York-based startup trying to help American employees keep track of pre-tax eligible expenses is bringing an average of $US583 back into their bank accounts each year.
Pre-tax spending – money that is not taxed on paychecks, such as childcare costs and parking expenses – has been around for decades, but many employees have stayed away from monitoring it, citing the pain of navigating Flexible Spending Accounts, Health Savings Accounts, and other employee savings plans.
The startup, called Alice, is automating pre-tax spending for hundreds of employers in the United States.
Alice connects to the payrolls of participating employers in a process that takes less than 15 minutes, Alice co-founder Avi Karnani told Business Insider. After an employee connects a credit or debit card to the system, they receive messages anytime Alice flags a purchase as pre-tax eligible. The software then adjusts payrolls based on employees’ responses.
All the money that the employee saves by labelling the right items as pre-tax goes to the employee. Karnani said Alice only makes money off the employer’s savings. Alice and the employer each receive half of the money saved when an employer does not pay taxes on pre-tax eligible items.
Karnani’s efforts to tackle commuter benefits go back to 2014, when he worked with Alice co-founder Paul Barnes-Hoggett in New York as part of a Robin Hood Foundation fellowship. Karnani and Barnes-Hogett interviewed hundreds of New Yorkers to learn what kind of new technology could help low- and middle-income people.
The two fellows focused on commuter experiences and found that 1.5 million people in New York use seven-day subway cards instead of monthly cards – a 15% increase in cost.
“They make it cheaper if you buy more of it, but unlike a jar of mayonnaise, which should be cheaper if it’s bigger … it’s still a yellow plastic MetroCard,” Karnani said. “That shouldn’t cost working people hundreds of extra dollars a year for their entire lives.”
Barnes-Hoggett and Karnani began lending people money to purchase monthly MetroCards. They bought $US120,000 of MetroCards and mailed them to New Yorkers who applied via text message for loans that they would pay back each week. Eventually, though, the two colleagues turned to automated commuter benefits in an effort to better help people save money.
“We realised commuter benefits were this sort of dumpster fire of forms and maths and terms that no one was using,” Karnani said.
Then, in 2016, New York City implemented a law that required companies with 20 or more full-time, non-union employees to offer commuter benefits. Karnani and Barnes-Hoggett, after speaking with several employers, began building an automated system for commuter benefits and later broadened the idea to pre-tax spending in general. About 10 categories apply to pre-tax spending, including ride-sharing, prescriptions, daycare, and dentist visits.
Since its launch, Alice has expanded to San Francisco, Seattle, Portland, Chicago, and other cities.
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