Pretax Savings Technology Lets Employees Keep More of What They Earn

By Dave Zielinski November 27, 2018
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​Pretax savings accounts—where employees deposit money after they've earned it but before it is taxed—can be a great benefit. Workers can use them to pay for commuting costs, health savings accounts (HSAs) or day care expenses. But the red tape involved in managing these programs and employees' uncertainty about whether they qualify to use such accounts hinder participation and add to HR's already full benefits-administration plate.

Some organizations are turning to technology providers, such as Alice and TransitChek, that offer platforms for automating employees' pretax spending, connecting directly to internal payroll systems and workers' debit or credit cards. The idea is to help employees save money, reduce employers' payroll taxes, and shift HR's enrollment and management duties for these benefits to third-party administrators with modern technology systems.

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Facilitating Pretax Spending

Brooklyn, N.Y.-based provider Alice integrates with a company's payroll system and allows employees to enroll in pretax savings programs via text, e-mail, Slack or even Instagram. Employees make elections for commuting expenses, day care expenses, HSAs and flexible spending accounts (FSAs) by interacting with a conversational chatbot, then connecting a debit, credit or prepaid card to the system. Workers receive texts to confirm their expenses, and Alice processes the deductions in the payroll system.

The platform handles employee enrollment, compliance, eligibility and roster updates, said Avi Karnani, co-founder and CEO of Alice. Because of the reduction in employees' taxable income, employers pay less in Social Security, Medicare, local taxes and unemployment premiums.

"Our brand promise is no forms, no acronyms and no math for users," said Karnani. "Employees don't have to figure out the difference between an FSA, HSA or [Section] 125 plan, since the system determines what they are eligible for, presents them with options, and then manages elections and transactions."

Karnani claims the average Alice user sees an increase in take-home pay of almost $600 annually. He cites as an example an employee who drives to work and pays an average of $250 per month to park at a garage near her office. She pays with a credit card connected to Alice and spends $3,000 pretax per year. With a marginal tax rate of 40 percent, the employee's take-home pay would increase $1,200 per year. Since the employer doesn't have to pay the employee's share of payroll taxes on the pretax $3,000 spent on parking, it means a $240 annual tax savings for the company.

How do businesses pay for Alice? When developing the product, Karnani said HR and benefits leaders said they didn't want to pay upfront for the service. So Karnani decided Alice's fee would be 50 percent of clients' payroll tax savings. He said that method also incentivizes his company to help clients get as many of their employees enrolled in the program as possible.

TransitChek is a commuting-specific platform for employees who use pretax dollars to pay for commuting or parking costs in sums of up to $260 per month. The savings apply to bus, subway, train, car or vanpool costs. Like companies that use Alice, companies that use TransitChek save money by paying less in payroll taxes on employees' pretax pay deductions.

Third-party administrators Further and HRC Total Solutions specialize in managing pretax accounts, including FSAs, HSAs, dependent care programs and transportation reimbursement accounts.

Removing Process Friction

HireArt, a New York City-based staffing agency that specializes in prehire assessments, uses pretax savings technology. Shalom Weberman, people operations manager for the company, said the tool helps further HireArt's goal of offering its employees a modern user experience.

"The platform helps employees get the most out of their pretax benefits in a manner that isn't cumbersome or frustrating to them," Weberman said. "There aren't forms to fill out, the sign-up process is easy, and it gives employees a better understanding of how much they are saving with things like commuting costs."

Weberman said 60 percent of HireArt's employees have enrolled in the program since its implementation more than a year ago, with many using it for HSAs, limited-purpose FSAs and dependent care savings accounts, as well as for transportation costs. The tool integrates with the company's payroll provider and is automatically updated as new hires join the company or any existing employees depart.

Dave Zielinski is a freelance writer and editor in Minneapolis.

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